Expectations are running high as some of tech's biggest players, from Apple to Yahoo, get ready to report third-quarter results. Signs of bullishness abounded in the days leading up to tech reporting season, which kicks off the week of Oct. 16.
Consider shares of cell-phone maker Motorola (MOT), which reports on Oct. 17. The stock reached a 52-week high on Oct. 13 amid hopes for solid results. IBM (IBM), due to release results the same day, also came within spitting distance of the same milestone.
Analysts at Standard & Poor's Equity Research Services, which, like BusinessWeek.com, is owned by the McGraw-Hill Cos., hiked their rating on information technology stocks to "marketweight" from "underweight," citing an improved outlook for the economy. "We believe IT is poised for better performance in light of improved economic visibility, which should help reduce investor risk aversion," S&P said.
DEVIL IN THE DETAILS. Indeed, oil prices are down from lofty heights, and interest rates have reached a plateau. Advertisers continue to shift spending toward the Internet, benefiting companies like Google (GOOG). And demand for PCs has exceeded some analysts' dour expectations, a boon for the likes of Apple (AAPL) and Intel (INTC).
But, as ever, the devil is in the details, especially when it comes to an unpredictable tech sector. The more bullish the Street's outlook is heading into earnings season, the greater the dismay when companies fall short of expectations. Shareholders eager for a glimpse of the industry's health in the three months through September will get an eyeful starting Oct. 17.
Herewith, a preview:
INTEL. Analyst Doug Freedman with American Technology Research in San Francisco expects Intel, which reports on Oct. 17, to say it whittled away at a stockpile of unsold chips amid greater-than-expected demand for PCs. "I think that people could be very surprised at the overall demand for PCs," he says. "On the cost-savings front, I'm hoping to hear that those things are moving along nicely as well." Chris Danely of JPMorgan (JPM) expects gross margins to hold steady at 48%.
Still, analysts expect a 14% drop in sales and to see per-share profit slumping to 18 cents from 32 cents a year earlier. And while analysts cite the introduction of high-powered chips as reason to be upbeat about Intel's prospects in coming quarters, the company was forced to cut prices amid rivalry with Advanced Micro Devices (AMD) in the third quarter.
Looking ahead to the current quarter, already under way, Intel may be doing a better job coping with rivalry. Fourth-quarter sales will be higher than previously expected as the company gained share from AMD, John Antone, Intel's general manager for Asia-Pacific, said at an Oct. 16 press briefing in Taipei, according to Bloomberg News.
MOTOROLA. The biggest U.S. mobile-phone maker also releases earnings on Oct. 17. Analysts estimate that the company will say sales rose 17%, to $11.1 billion, as consumers flocked to Motorola's lineup of phones, including the ultra-thin RAZR. American Technology Research analyst Albert Lin says the company will likely report sales of at least 56 million mobile phones and better operating margins.
Just how long Motorola can keep the music playing is in question, though. "Expectations are probably too high," Lin says. "It is going to be a challenge for them to continue to improve their operating margins."
YAHOO! Analysts have already been cautioned to scale back forecasts for Yahoo, which also reports on Oct. 17. Yahoo (YHOO) said on Sept. 19 that sales would come in at the low end of its reported range of $1.12 billion to $1.23 billion (see BusinessWeek.com, 9/21/06, "Yahoo's Ad Slump,"). The average analyst estimate for the quarter is revenues of $1.15 billion, with sales growth of 23% year over year.
Competition from relatively new players in online advertising such as News Corp.'s (NWS) MySpace, and YouTube, which Google just acquired, is taking a toll on sites like Yahoo. JPMorgan's Imran Khan says the new sites charge less for ads than the large platforms such as Yahoo, making them more attractive for advertisers looking to target the social networking demographic. Also holding Yahoo back is the delay of its improved advertising technology, nicknamed "Project Panama." Finally, Yahoo suffered from a decline in advertising from the auto and finance industries.
IBM. A fourth tech titan reporting on Oct. 17 is IBM (IBM). The results are likely to keep intact the rally that's lifted IBM shares to $86.08 from a recent low of $73.50 on July 14. Analysts expect signs of improved profitability and better services bookings and predict that IBM will say per-share earnings rose 7%, to $1.35, as revenue inched ahead 2%, to $22.1 billion.
There's a lot of positive thinking about IBM on Wall Street right now. There are 13 buy recommendations, seven holds, and two sells. Citigroup (C) analyst Richard Gardner, for instance, points out that in spite of the rise in the stock price it remains near 10-year lows, at 13.5 times fiscal year per-share earnings. He expects that service bookings will exceed the $10 billion to $11 billion consensus and last year's $11 billion. A report from Thomas Weisel concurs. IBM's services business, which represents 50% of sales, is bottoming and its growth should accelerate over the next 12 months, the company says.
APPLE. Move over iPod. Apple Computer's September results, due Oct. 18, will be as much about the Mac as they are about the popular digital music player. Merrill Lynch (MER) analyst Richard Farmer, in a research note published Oct. 13, says he expects iPod sales to be lower than previously expected, and recently lowered his iPod forecast, while boosting estimates for Mac sales. Farmer reckons that Apple will sell 7.7 million iPods in the quarter, vs. his previous estimate of 8.3 million. The lower guess still represents growth of 20%.
Meanwhile, Farmer expects Apple to sell more than 1.5 million Macs vs. a previous estimate of 1.44 million. At that level, Mac sales would account for more than $2 billion, or 43%, of his estimate for Apple's revenue in the quarter.
But what next? Analyst Shaw Wu at American Technology Research expects Apple to give a conservative forecast for the current period. "We think the September quarter will be good, and that's not a big surprise," Wu says. "But we think the guidance of the December quarter will be a little more conservative than what the Street is expecting." Wu says he has lowered his revenue forecast for the December quarter to $6 billion, which is about $500 million short of consensus estimates. "We think Apple will give a range of $5.7 billion to $6.1 billion, which would be sales growth in the range of 25% to 30%, but the Street has it much higher. I think that's a little too optimistic."
GOOGLE. The Web search colossus will round out the week with an earnings report due on Oct. 19. Analysts expect Google to say revenue surged 73%, to $1.81 billion. JPMorgan's Khan says that Google is not affected by the new competition from social networking sites because it already offers highly targeted advertising with high sales-conversion rates compared with sites such as Yahoo. "In the past, you saw the ad dollar shift from the broadcast networks to the cable networks and, with the Internet, I think we are seeing the same thing, where ad dollars are shifting to more targeted and more conversion-driven models like Google," says Khan.
In an Oct. 10 note to investors, Khan also wrote that Microsoft's (MSFT) MSN and Yahoo posed little threat to Google in search. More troubling would be if Google fails to build out its international advertising base, Khan wrote in his note. Also, government regulations in countries such as China could stifle Google's ability to increase advertising revenue as it also spends money to develop the site.
Holahan and Hesseldahl are writers for BusinessWeek.com in New York.
With Steve Hamm in New York
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