Wall Street Beat: Outlook good for IT earnings

Despite intense price competition, earnings results this quarter point to a healthy IT market

With shares of major technology companies trading as high as they have ever done in the post dot-com era, IT investors this week are scrutinising quarterly results from the world's biggest vendors to judge how the market will hold up for the rest of the year.

Market analysis firms started off the year predicting an overall global annual IT spending increase of about 6.5 per cent, so nobody was expecting technology vendors to experience growth at the heady rates of the late 1990s. But even as competition squeezes profit margins, results overall point to a healthy 2007.

In the hard-fought Internet services arena, product development and customer acquisition costs remain high, but Google continues to show skyrocketing growth. It has reported that second quarter net income rose 28 per cent from a year earlier to hit $US925.1 million as revenue, minus traffic acquisition costs, surged by 63 per cent to reach $US2.72 billion, above the average forecast of $US2.68 billion by analysts polled by Thomson Financial.

In the chip sector, Intel has reported that even though gross margins on product sales shrank, profit for the second quarter increased 44 per cent from last year to $1.3 billion. Company officials said that revenue for the third quarter would be $9.0 billion to $9.6 billion, beating its previous forecast.

IBM also raised its earnings forecast for the rest of the year and reported that second quarter results were its best in six years. Net profit was $US2.3 billion, up 11.8 per cent increase from a year earlier, on revenue of $US23.8 billion, up 9 per cent.

In software, Microsoft was upbeat about its core business. Though it faced a mature market for its cash-cow products, it said sales of operating systems, server software and tools fuelled a 7.3 per cent rise in net income as revenue rose 13 per cent to $US13.38 billion. Both profit and sales beat Wall Street estimates.

However, companies such as Motorola reminded investors that in an era of moderate growth, not everyone can win big. Two days after announcing it would restructure operations, the handset maker reported that disappointing sales of mobile devices led to a second-quarter loss of $US28 million, down from net income of $US1.38 million a year earlier. Product design has become a crucial issue as the North American and European markets mature.

Yahoo, meanwhile suffered in the Internet services market, reporting that net income for the quarter was $US161 million, down from $US164 million a year earlier. Yahoo also lowered its earnings guidance for the rest of the year.

Despite disappointing results in some of the harder-fought areas of IT, overall earnings news and guidance for the rest of the year, coupled with the latest reports on customer spending, suggest that 2007 could end up being one of the brightest years in the wake of the dot-com bust.

The tech-heavy Nasdaq stock market index hit six-and-half year highs this week and last, and customer spending seems to be exceeding forecasts. Results of the quarterly CIO Magazine Tech Poll published earlier this month, for example, indicate improved IT spending forecasts, with respondents predicting increases of 7.2 per cent over the next 12 months, versus estimates earlier this year of an average 5.1 per cent increase.

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