A perfect storm of tech financials

IT bellwethers face the worst quarter for IT since the dot-com bust

With IT bellwethers like IBM, Microsoft, Advanced Micro Devices, AT&T and Apple reporting earnings results for the worst quarter for IT since the dot-com bust, and Oracle announcing it will buy Sun Microsystems, this has been one of the most significant weeks of the decade for IT investors.

The first quarter was about as bad as everyone had feared. But in a sign of what passes for good news these days, the quarter was not, on the whole, worse than expected, and there were pockets of good news that bode well for the rest of the year.

In a watershed moment for the biggest software company in the world, Microsoft said today that quarterly revenue dropped for the first time ever as a public company. Revenue declined by 5.6% from the year-earlier period, to US$13.65 billion. Net income, hit by $710 million in special charges, plunged 32% to $3 billion. But excluding the one-time charges, which included write-downs of investments, earnings per share matched expectations of analysts. Within an hour of the announcement, in after-market trading, Microsoft shares jumped by $0.96 to $19.90.

IBM, the second-biggest IT company in the world after Hewlett-Packard, said on Monday that quarterly revenue declined 11% from a year earlier, to $21.7 billion. This was less than the $22.5 billion that analysts polled by Thomson Reuters had forecast. Thanks to cost cuts, net income fell by only 1% to $2.30 billion from $2.32 billion, and was higher than expectations. The most worrying news was that its services units were hit hard, with both Global Technology Services and Global Business Services revenue declining by 10%.

Nevertheless, the company said it is sticking to its earlier forecast for full-year 2009 of $9.20 per share and said it is actually ahead of schedule to hit $10 to $11 per share next year.

AMD's report confirmed that 2009 is turning out to be an annus horribilis for components as consumers and businesses rein in spending on hardware. AMD reported a net loss of $416 million, compared to a loss of $364 million in the first quarter of 2008. Revenue declined by 21% compared to the first quarter of 2008 to $1.18 billion. But there was good news amid the bad: both revenue and earnings were better than analyst expectations, and the company claimed that microprocessor revenue grew sequentially during the first quarter from the end of 2008.

Apple on Wednesday had mainly good news to report. Though Mac sales declined, the iPhone boosted both revenue and profit. Apple said revenue amounted to $8.16 billion for the quarter, up from $7.51 billion a year earlier, while net income was $1.21 billion, up from $1.05 billion. Both sales and profit were better than expected by analysts.

The bad news lurking in the report was that Mac sales are declining, and iPhone sales, while strong, are slowing. Ultimately, since Apple can't count on the sort of maintenance and upgrade revenue that larger companies can bank on, it needs to continually come up with hit products to get users excited. The pressure is mounting on the company to come up with a new version of the iPhone that can beat back increasing competition from the likes of Research in Motion and Nokia as well as other companies diving into the smartphone market.

In the internet realm, Yahoo's report on Tuesday confirmed what market watchers already knew from Google's results earlier this month: the online ad market has gone south. Yahoo declared revenue of $1.58 billion, down 13% from a year earlier, while net income fell 78% to $118 million. The results are spurring a new round of layoffs at the company — the first worker cutbacks under the company's new CEO, Carol Bartz.

AT&T, reporting on Wednesday, confirmed the major trend in telecom — declining fixed-line sales, but a healthy mobile sector. Revenue for the quarter was $30.57 billion, essentially flat compared to a year ago, while income declined by 9% to $3.1 billion. AT&T's wireless unit, though, was up 9.8% with $11.64 billion in revenue, a boost to the idea that mobile communication will be an engine of growth for IT and the telecom industry.

The biggest IT news story of the week, however, was the announcement Monday that Oracle signed a deal to buy Sun Microsystems for $7.4 billion. This too confirmed a trend. Increasingly, the big IT companies are getting bigger, spurred on by the desire of big customers to rein in complexity by fulfilling much, if not most, of their technology supply needs by doing business with one-stop shops. Oracle's purchase of Sun will allow the heretofore software-only shop to start competing in a league with HP and IBM as a one-stop supplier for enterprise customers. Though absorbing a company with a big portfolio of products is a huge task, Oracle has had plenty of experience gobbling up large companies this decade, and many industry watchers applauded the move.

Though the week confirmed expectations that the quarter was going to be tough, it appears many investors had already prepared for the bad news and in fact have already discounted it. The tech-laden Nasdaq ended Thursday at 1652, up by six points and well into positive territory for the year.

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