Investors Brace For Weak Technology Earnings

Intel's headquarters in Santa Clara, California.
Paul Sakuma

Wall Street should brace for a round of profit warnings from U.S. technology companies this results season, as consumers and businesses rein in spending amid a weaker economy and record energy prices.

The world's largest microchip company, Intel Corp , kicks things off for the sector Tuesday, followed by top computer services provider IBM Wednesday and Web search leader Google Inc   Thursday.

Weakness in Intel and rival microprocessor maker Advanced Micro Devices Inc could signal slower computer sales and translate into lowered expectations for PC vendors like Hewlett-Packard Co and Dell Inc , which report quarterly results in May.

"We're hearing from the semis, which are the first thing that goes into a device, that demand is down," said Kim Caughey, senior analyst and portfolio manager at Fort Pitt Capital Group, which oversees $1.2 billion.

"That's always troubling. The year is not looking good," added Caughey, whose fund holds IBM and Dell shares. Intel cut its first-quarter gross margin forecast in early March, citing a huge drop in some memory chips used in consumer electronics -- a trend in place for more than a year now.

Smaller rival AMD reports Thursday, after warning that its quarterly revenue would be less than expected, though its troubles are more company specific as it loses share to Intel. Analysts are warning investors not to expect any pat answers from tech executives on when things will improve.

"There really aren't any expectations because visibility is poor across the board," said Ashok Kumar, an analyst at CRT Capital Group. "Now, whether you look at Oracle or some small widget supplier, everything is under pressure."

Oracle Corp , the number-three software maker, reported disappointing software sales for its fiscal third quarter ended Feb. 29, quashing the idea that software makers would be relatively immune compared with hardware makers.

Oracle is considered a bellwether because of its size and because its quarterly period closes a month ahead of most other software makers, including the two biggest -- Microsoft Corp and International Business Machines Corp.


Jefferies and Co software analyst Katherine Egbert said she expects many quarterly outlooks to be below Wall Street estimates amid signs the U.S. economy is already in recession.

"The June numbers need to come down a bit," she said, citing the weakening economy and record oil prices.

Yet companies may hold off on cutting full-year estimates on hopes the economy will improve, allowing them to make up for sales shortfalls in the second half of the year, she said. The Nasdaq has fallen 16 percent this year, as of Friday's close, while bellwether stocks like Microsoft and Intel have lost more than 20 percent of their value.

"We're going to see a U-shaped recovery, not a V-shaped one," said CRT's Kumar, referring to how the industry's growth rates would look if plotted on a graph over time. "It's likely we'll see one last lowering of numbers and that could be the floor. And at that point the stocks will be discounting most, if not all, of the bad news."

IBM's results may be one of the few bright spots as analysts expect the company to report strong quarterly earnings growth as it benefits from an expansion in emerging markets.

IBM has been expanding in software, its most profitable business, while boosting profitability from technology services, its largest business and a reliable source of recurring revenue, and selling more mainframe computers.

"I'm looking for strength overseas, specifically in Asia," said Fort Pitt Capital's Caughey. "Europe should be healthy, and I'm looking for a softer North America." She said IBM's integrated strategy should be working well, but added, "I'm not looking for them to have a big swing up or a big swing down."

Also reporting next week is Google, the marquee Internet company whose revenue growth has slowed in recent quarters. Wall Street is wondering if its Web search advertising business is maturing and no longer immune to economic weakness.

Among big e-commerce stocks, Inc appears to be taking customers from eBay Inc, which reports on Wednesday. EBaymade controversial pricing changes designed to restore growth in its core U.S., German and UK markets, but near-term results could be hurt.

(Additional reporting by Eric Auchard and Philipp Gollner in San Francisco and Jim Finkle in Boston; Editing by Braden Reddall)