Wall Street Beat: Vendors Brace for the Worst

Despite strong third-quarter performances from some vendors, cautious forecasts from companies as diverse as Microsoft, Apple, Amazon, EMC, Texas Instruments and Yahoo focused attention on what are bound to be rough waters over the next few months.

There is no longer any doubt that the failure of Wall Street investment banks and the resulting credit crunch is putting a damper on consumer and business IT spending. While market researchers like Gartner and Forrester still maintain that the downturn will probably not lead to the type of absolute decline suffered in the dot-com bust, increases in global IT spending could slow to just 1 percent or 2 percent, or bottom out at zero growth if credit markets don't loosen up soon.

Microsoft on Thursday beat expectations, reporting net income of US$4.37 billion, or $0.48 per share, up from $4.29 billion in 2007, while revenue increased 9 percent to $15.06 billion. Analysts polled by Thomson Reuters had expected $0.47 EPS and $14.8 billion in revenue. After-hour traders pushed shares up by $0.75 to $23.07 within a few minutes of the report.

Analysts have remained hopeful about the company's prospects for next year, as well. "While Vista and Office 2007 are compelling upgrades on the consumer side, we believe that the majority of the financial impact on the enterprise side from these product release cycles will occur in fiscal 2009," said Citigroup analyst Brent Thill in a research report earlier in the week.

Microsoft's outlook for the current quarter was disappointing though -- a common theme for the week. The software giant expects revenue to be in the range of $17.3 billion to $17.8 billion, and EPS to be in the range of $0.51 to $0.53. Analysts were forecasting EPS of $0.55 and revenue of $17.9 billion.

On Monday, chip maker Texas Instruments captured the prevailing mood when CEO Rich Templeton said in the company's earnings statement that "our outlook for the fourth quarter is for revenue to decline substantially based on weak order trends over the past few months." TI reported an 8 percent decline in revenue, to 3.4 billion, and a 26 percent decline in earnings, to $563 million. Investors swiftly punished TI, whose share price declined to $16.85 Tuesday after Monday's close of $17.98.

Apple's story in its Tuesday report was very different, but even so the company, very closely watched because its products straddle the consumer and business markets, was very careful about the next few months. Apple CEO Steve Jobs declined to comment on the state of the economy, and company officials estimated its next quarter earnings in the range of $1.06 to $1.35 a share on revenue of $9 billion to $10 billion. Analysts at Thomson Reuters were expecting the company to earn $1.65 a share on revenue of $10.6 billion.

Apple's share price did get a nice lift, though, after the company reported that record sales of Macs and iPhones lifted revenue 27 percent from last year and profit by 26 percent to $1.14 billion. Apple shares closed Wednesday at $96.87, up by $5.38.

One of the big disappointments of the week was Yahoo's report on Tuesday, accompanied by its announcement that it will lay off at least 10 percent of its global staff before the end of the year. Revenue for the quarter increased 1 percent to $1.768 billion, while earnings plunged to $54 million from $151 million one year earlier. Yahoo this week is trading at the $12 level, down from its 52-week high of $34 in the second quarter, when investors were excited by Microsoft's acquisition attempt.

For its part, Internet commerce giant Amazon on Wednesday reported a 48 percent increase in profit, to $118 million, and a 31 percent rise in revenue, to $4.26 billion, but hedged its forecast for the last quarter of the year. It forecast revenue to be from $6 billion to $7 billion, which many analysts pointed out is such a huge range as to be almost useless in terms of guidance.

Storage bellwether EMC also announced double-digit revenue growth on Wednesday and, excluding one-time items, reported a 14 percent earnings increase, to $528 million. Though EMC forecast revenue for the next quarter to rise to $4 billion, that's short of analyst estimates of $4.16 billion.

EMC Chairman, President and CEO Joe Tucci said on a conference call that "we are seeing some signs of a slowdown in IT spending in many parts of the world."

Companies in Europe and Asia, meanwhile, reported disappointing results this week. Ericsson on Monday posted a 28 percent decline in third-quarter net profit, to 2.84 billion Swedish kronor ($383.5 million), though sales rose 13 percent to 49.2 billion kronor. One weak spot was Western Europe, where sales fell 6 percent. Consumer electronics giant Sony on Thursday slashed its forecast to ¥150 billion (US$1.5 billion) for the year ending in March, down from its previous forecast of a ¥240 billion profit.


Copyright © 2008 IDG Communications, Inc.

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