The hollow ring of tech earnings reports: Eric Auchard

July 17, 2009

By Eric Auchard

Morgan Stanley Hi-Tech Index year-to-dateLONDON, July 17 (Reuters) – For technology investors looking for clues to how the sector is faring, Intel Corp sent a false positive signal with its upbeat quarterly report this week. Subsequent reports from IBM, Nokia and Google show how hollow any recovery for growth stocks is proving to be. Even though the growth sector has defied the broader market sell-off in recent weeks, all the signs point to weak trading in months ahead.

Nokia, the world’s largest mobile phone maker, offered a harrowing reminder of what life is like for companies exposed to the wider vicissitudes of consumer demand. It is struggling in a handset market set to decline around 10 percent this year, even though Nokia signalled the industry may be stabilising.   

Intent on keeping its dominant handset market share, the company said it was prepared to sacrifice profit margins in the second half of the year as it engaged in a price war with rivals. Meanwhile, its networks joint venture, Nokia Siemens, will lose market share instead of remaining flat as previously expected. Nokia_N97_launch

Adding to its woes is a shortage of components for its phones that will hurt its third quarter performance. Revenues are likely to fall a massive 25 percent for the full year. Any recovery in margins next year will depend on it showing improvement in the competitiveness of phone designs.

Or take IBM. Second-quarter revenues slumped 13 percent from a year ago, but record improvements in margins helped it top earnings expectations thanks to years of financial engineering efforts in which it has exited PCs, storage and memory chips.

Once the world’s largest computer maker, IBM has transformed itself into a supplier of technical services and niche software, from which it derives 90 percent of its profits and massive operating leverage. What is missing is much improvement in demand.

Recent difficult earnings reports by rivals Hewlett-Packard in hardware and Accenture in services say far more of what is going on across their respective sectors.

Meanwhile, Google’s results reflected flat revenue growth quarter over quarter. Increased earnings depended on the internet giant’s new-found religion about expense control. Capital spending on new network services capacity plunged to $139 million from nearly $700 million a year ago. But it was an unexpected low tax rate of 20 percent that led it to significantly outperform analysts’ expectations.

Google said the worst of the economic crisis appeared behind it and that sales had stabilised, thanks in part to resumption in advertising by retailers and travel, even though financial services advertising remained weak. But year-to-year growth in paid search advertising — its main source of revenues — was a paltry 3 percent. This business was thought to be more recession-proof than online corporate brand and banner advertising, which bodes poorly for companies such as Yahoo and Microsoft.

Intel’s quarterly report showed a steep rebound and better things in store later in the year. But it sent the wrong message to investors looking to sustain a four-month rally in technology stocks that have driven indexes up 50 percent. (Read related column here).

Don’t let the exceptions fool you — companies like Apple Inc and Blackberry maker Research in Motion should perform well in coming weeks. But this late, great rally will run out of steam as the latest round of earnings reports show the extent of on-going economic weakness.

— At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can read some of Eric’s recent columns here —

(Editing by Martin Langfield)

(Photo: Reuters/Vivek Prakash)

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