Wall Street Beat: Software a bright spot as tech results bring gloom

Tech titans including IBM, SAP, Microsoft, Nokia, Google and Yahoo weighed in with quarterly earnings

Though software sales provided a ray of light in otherwise mixed results this week, gloom settled over the tech sector Friday in the wake of bellwether IT quarterly earnings reports.

The broad Standard & Poor's 500 Index managed to close Friday at a record high of 1,692.09, but the tech-heavy Nasdaq dropped 23.66 points to 3,587.61, and the Dow Jones industrial average declined 4.65 points to 15,543.89. Of the five tech stocks on the Dow, only Intel traded up slightly, while Microsoft, IBM, Cisco Systems and Hewlett-Packard were down.

"Overall I'd say the earnings confirmed some common themes -- software is going to do better than hardware and services," said Forrester chief economist Andrew Bartels.

In Forrester's latest forecast for the global tech market, issued last week, Bartels lowered expectations for spending on IT goods and services to 2.3 percent growth measured in U.S. dollars, from the January estimate of 3.3 percent. Calculated in local currencies, the forecast looks better, at a 4.6 percent increase, but recession in Europe and slower growth in China is putting a damper on tech purchases by any measure.

IBM's earnings report on Wednesday was a good window into business tech spending and largely conformed to the big themes of the year, Bartels noted. IBM is considered a bellwether for the tech industry due to its geographic reach and giant portfolio of software, hardware and services. It is also the most heavily weighted stock on the Dow.

The company said second-quarter net income declined 17 percent from the year earlier to US$3.2 billion, while revenue dropped 3 percent to $24.9 billion. Though services and overall hardware sales declined during the second quarter, company officials stressed strength in software and big systems.

Software sales totaled $6.4 billion, an increase of 4 percent year over year. Middleware, including WebSphere, information management, Tivoli and Social Workforce Solutions (formerly Lotus), generated $4.3 billion in revenue, up 9 percent.

The company's Global Technology Services segment, however, suffered a 5 percent decline in revenue to $9.5 billion. Revenue for the Systems and Technology unit, which includes hardware products, was $3.8 billion, down 12 percent.

The big disappointment of the week was Microsoft, which Thursday said it took a whopping $900 million charge in the quarter to reflect unsold inventory of its Surface RT tablets. As the sagging PC market curbs sales of Windows, Microsoft is having trouble making headway in the booming markets for tablets and smartphones.

Overall revenue for the company was $19.9 billion, up 10 percent year over year. Net income was $4.97 billion, or $0.59 per share, compared with a net loss last year of $492 million, or a loss per share of $0.06.

In keeping with the global trend for a strong software market this year, Microsoft's application sales were strong. The Microsoft Business Division, which includes Office, had a revenue increase of 14 percent year over year, while sales for the Server & Tools unit increased 9 percent, boosted by demand for SQL Server and System Center.

In a departure from the good news for software, however, SAP reported some sales weakness. The business applications giant said Thursday that quarterly revenue increased 4 percent to a!4 billion (US$5.3 billion) year over year, while profit rose 10 percent to a!724 million. But while software and software-related service revenue rose 6 percent year on year to a!3.3 billion overall, revenue from software alone dropped 7 percent to a!982 million.

One problem for SAP is that while it is pushing its HANA in-memory database platform as a market leader for new types of analytics and data-processing, some customers may not be ready to embrace it yet, noted Forrester's Bartels.

On the components front, Intel reported a decline in earnings and revenue as the slumping PC market continued to hurt sales. Intel net earnings for the quarter plunged 29 percent from last year to US$2 billion, while revenue fell 5 percent to $12.8 billion.

The chip maker lowered its expectations for the year, forecasting sales to be flat, compared to its prior guidance for single-digit percentage growth.

Other tech giants reporting results this week included:

--Google, which said second-quarter net revenue, excluding payments to ad partners, was $11.1 billion, up year over year from $9.2 billion, while net income rose about 16 percent to $3.23 billion, or $9.56 a share. The results missed analyst expectations of $11.33 billion in revenue and $10.78 earnings per share. While the company is working mobile ads into its offerings, growth in its desktop advertising business is slowing.

--Yahoo, which reported a 46 percent increase in profit to $331 million. Revenue, however, was $1.14 billion, a 7 percent decline from last year. Though under CEO Marissa Mayer the company has tried to reinvent itself through acquisitions and has made efforts to control costs, it ultimately needs to boost sales to achieve real growth.

--Nokia, which despite reporting strong sales of its Lumia smartphones, suffered a 24 percent decline in revenue to a!5.70 billion (US$7.48 billion). The company's net loss, however, was a!278 million, smaller than the year-earlier loss of a!1.53 billion.

Copyright © 2013 IDG Communications, Inc.

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