Wall Street Beat: Bad news rolls in for tech

IDC says the software market will slow down, as Nokia faces tough times ahead

With market forecasts looking dour and companies including Nokia and Texas Instruments trimming expectations this week, concerns for the tech sector are mounting.

The causes for anxiety are the usual culprits, including weak growth in Europe and Asia and the possibility that debt-laden Greece or Spain may leave the euro zone.

IDC's latest Worldwide Software Market Forecaster, released Thursday, offered a disappointing analysis for software, which is usually considered to be a bright spot for tech. While 2011 delivered nearly double-digit growth in the worldwide software market, the highest growth rate since the 2008 implosion of the banking sector, the future looks bleaker, IDC said.

"IDC expects the overall software market to return to more conservative growth in the years to come," said Patrick Melgarejo, director of IDC's software trackers, in the report. "The major driver behind this decelerating growth is the forecast for close to flat performance in EMEA, due to the economic difficulties in that region."

The survey monitors more than 1,000 software vendors in 49 countries. IDC said the fastest growing software applications are enterprise social software, virtual machine software and team collaborative applications.

In 2011, the Asia/Pacific and Japan area experienced the highest growth rate of all regions, as it has over the past three years, expanding from 15 percent share in 2008 to 16.5 percent. However, the region is expect to slow down and more closely match growth in other regions in the next year or so.

The good news for the Western Hemisphere is that North America and Latin America are together expected to maintain a stable market share of almost 53 percent over the next several years.

IDC also had some troubling news for the storage market. IDC's Worldwide Storage Software QView, released Monday, showed that worldwide storage software market revenue during the first quarter this year increased 3.3 percent year over year to US$3.5 billion. However, the growth rate has slowed to 2009 levels, IDC said.

"The first quarter saw decidedly mixed results," said Eric Sheppard, research director of Storage Software at IDC, in the report. "Incremental spending attributable to recent product refreshes have run their course within some functional markets, such as storage infrastructure software. "

On the hardware and components side of tech, TI and Nokia gave fresh cause for worry. TI on Monday narrowed its expected ranges for revenue and earnings per share (EPS). The top end of TI's forecast for revenue is now $3.42 billion compared with the prior high end estimate of $3.48 billion. For EPS, TI brought down the top end of its forecast from $0.38 to $0.36.

Far worse, however, was Nokia's announcement Thursday that it will lay off 10,000 workers by the end of next year to cut annual operating costs by €1.6 billion (US$2 billion). In its last full financial report in April, Nokia said that first quarter sales were €7.4 billion, down 29 percent year-on-year, making a net loss of €929 million. It grappled with poor sales of low-cost phones and its Symbian-based phones, while the share of its new Windows Phone sales was still small.

On Friday, Moody's ratings agency downgraded Nokia's debt grade to junk status, noting greater-than-expected pressure on the company's earnings.

Nokia's shares on the New York Stock Exchange are in the gutter for a company of its size. However the market appeared to react favorably to plans to resize the company, with investors pushing up its share price by $0.13 in late afternoon trading, to $2.48.

Major exchanges and indexes in the U.S. as well as tech stocks rose in late afternoon trading despite fears that Greece's elections on Sunday could put into power politicians who will call for an exit from the euro zone, leading to a collapse of the monetary union. Some analysts noted that investors may have been heartened by media reports that central banks have been working hard to prepare to take coordinated, protective action in response to the elections.

In late afternoon trading, Nasdaq computer stocks were up 1.39 percent in aggregate. However, they are still about 10 percent lower than their high point of the year. Meanwhile, tech investors are hoping for Red Hat and Oracle to provide some good news on the enterprise front when they release their quarterly earnings reports next week.

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Marc Ferranti

IDG News Service
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