Tech's Spring Harvest

The first rash of earnings reports paints a mostly upbeat picture. The biggest names face a fight to stay in the lead

Investors eager for a glimpse of how 2006 will shape up for tech's biggest players got plenty to pore over on Apr. 18. That's when Yahoo! (YHOO), IBM (IBM), Motorola (MOT), and Texas Instruments (TXN) released first-quarter results. After a first glance, many shareholders appeared to like what they saw. Shares of all but Motorola gained in extended trading after the results were released.

But the frenzied high-tech earnings season is just getting under way, with results due Apr. 19 from Apple (AAPL), Intel (INTC), eBay (EBAY) and Cingular (owned by AT&T (T)), and BellSouth (BLS). Mammoth players Google (GOOG), Nokia (NOK), and SAP (SAP) report the following day. While it's too early to draw conclusions, results from Apr. 18 and expectations for reports in the coming days point to some common themes -- not all of them quite so bullish for tech's titans.


  It's tough to be the king. Yes, Yahoo! nailed Wall Street expectations, and growth in multimedia display ads fueled a 34% increase in revenue. Shares even jumped 6.1% in extended trading. Yet Yahoo! continues to lose share to Google in the lucrative Web-search market. A six-point margin separating the two leaders has ballooned to 12 points in the past year, according to data tracker comScore, and Yahoo!'s shares have lost 20% since the beginning of the year. Google will show how it's managing its own gains when it reports on Apr. 20.

Another industry leader under pressure: Intel. The chipmaker's stock is hovering near a 52-week low of $18.99 amid concern it suffered a dismal first quarter. On Mar.3, Intel cut its sales forecast to between $8.7 billion and $9.1 billion, from $9.1 billion to $9.7 billion. It cited weaker-than-expected sales and a loss in market share to rival Advanced Micro Devices (AMD). Thanks to some AMD victory lap-like announcements citing gains in nearly all market segments, analysts fear Intel will do well to hit the low end of its reduced expectations.

Analysts are all over the map on expectations for online-auction giant eBay. The company is expected to report earnings of 24 cents a share, up from 20 cents a year ago, as sales increased a respectable 35%, to $1.4 billion. But eBay's core U.S. auction business appears to be slowing, worrying some, like Derek L. Brown from Pacific Growth Equities, who advises that investors sell. Others argue that with the stock down 13% already this year, there's scope for gains. "It's not like eBay hasn't had competition," notes Mark S. Mahaney of Citigroup (C).

IBM bucked the trend with a report showing that income from continuing operations increased 21% to $1.7 billion, beating analysts' expectations. IBM's closely watched global services business came in at $11.6 billion, an increase of 3%, when currency fluctuations are taken into account. The year-ago period had been weak. "IBM is on a slow improvement path," says Bob Djurdjevic, principal analyst at Annex Research Inc. "This is just one more step along the journey."


  Consumer electronics are a mixed blessing. Just ask Motorola, the world's No. 2 maker of mobile phones. The company shipped a record 46.1 million handsets and gained global handset market share, lifting revenue 23%. But thanks to sales of lower-priced phones in emerging markets, profit margins narrowed, and Motorola's shares slipped 5.3% after the results were released.

The big kahuna of all consumer devices is, of course, Apple's iPod. The company's stockholders will scour earnings for any sign of demand slowdown. It should be another strong quarter, but analysts at Merrill Lynch (MER)and Banc of America Securities have been trimming growth estimates in recent days.

Investors also want to know how much of a lift Apple is getting from using Intel chips in its PCs, and whether it's benefiting from the Boot Camp software that lets customers run Microsoft's (MSFT) Windows operating system on Apple computers. The 10% run-up in Apple shares the day Boot Camp was unveiled may have been overdone, says Merrill Lynch's Richard Farmer. "Consumers that signal superficial interest may bail at the cash register when it's time to pay a premium," Farmer wrote on Apr. 13.


  For some, prices are under pressure. Nokia is expected to report revenue growth that outstrips profits, thanks to pressure on handset prices for the broader market, which makes up some 64% of Nokia's sales. Analysts expect revenue to be up 21% to $10.9 billion over last year's first quarter. Profits should increase just 13% to $1.2 billion. Like Motorola, some of the pressure is coming as Nokia seeks a bigger foothold in the developing world.

Some companies are doing a better job withstanding the pressure. Cingular, the largest U.S. provider of wireless services, is expected to report sales increased to $9.1 billion from $8.2 billion a year earlier. Sales per user -- a closely watched figure for wireless carriers -- may have increased slightly from the fourth quarter, contributing to wider profit margins, says Chris King of Stifel Nicolaus & Co.

Texas Instruments, the world's No. 1 maker of cell-phone chips, benefited from rising demand for both higher-priced handsets and low-end devices aimed at less-developed markets. Its gross margins fattened to 50.1%, from 46%. "This is a good start to the year," Texas Instruments Chief Executive Rich Templeton said in a statement. "Demand was strong and we expect it to continue." Likewise, for IBM earnings growth was strong. Big Blue delivered on its promise of double-digit earnings gains, while revenue was flat at $20.7 billion.


  The first quarter does not the year make. For many technology companies, the first quarter is usually slower than others. In some cases, challenges will continue. Motorola may see a slowdown in sales of its popular, ultrathin Razr, analysts say. The company could also suffer from a delay in the introduction of its long awaited Q, a handset with e-mail capabilities that is expected to rival Research In Motion's (RIM) BlackBerry.

On the other hand, the outlook may brighten for Intel. It's expected to unveil a new chip architecture that could top AMD's Opteron and Athlon chips in performance and battery life savings. That's already started to weigh on the smaller chipmaker's stock.

The seasonal and sluggish software sector, too, should get a boost in the second half, as it does every year. Credit Suisse First Boston has called the year its most bullish for software since 2000. Calls to customers find many willing to spend as much as 30% of their budgets on software in 2006, CSFB says. That's one trend companies and shareholders hope will take hold across the industry.

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