Intel, IBM: Tech Resilience on Display

The duo's strong third-quarter results indicate the sector hasn't been hurt by housing's troubles or the credit crunch. But can it last?

by Arik Hesseldahl

Tech bellwethers Intel and IBM offered fresh evidence that the housing slump and financial malaise are separating the economy's haves from its have-nots. Both companies—the haves, in this case—reported third-quarter gains Oct. 16 that exceeded analysts' expectations in key ways. For Intel (INTC), the world's largest maker of computer chips, profit and sales outstripped analysts' expectations on robust demand for personal computers and the semiconductors that make them run.

At IBM (IBM), sales of computer services rose at the fastest pace in four years. It was enough to exceed the forecasts of some analysts, and more important, offset a drop in demand from some of the most notable have-nots: financial-services firms. IBM Chief Financial Officer Mark Loughridge told analysts on a conference call that U.S. banks and brokerages scaled back spending. That affected U.S. results especially in the area of mainframes, the hulking machines that help companies tackle mammoth data-processing tasks. "Given that the financial-services sector was uncharacteristically the poorest performing segment…and that they are big consumers of both mainframes and related software, there is at least a hint that the credit crunch may have affected the demand in the third quarter," notes Bob Djurdjevic of Annex Research.

Sales Strong

Taken together, the results underscored why the often-volatile technology industry has been a relative oasis of calm amid recent turbulence in financial services and other areas of the economy affected by the subprime mortgage meltdown and pullback in credit. But the third-quarter performance also served as a reminder of ways the contagion could spread (BusinessWeek.com, 10/15/07).

IBM said sales rose 7%, to $24.1 billion, helping lift profits 16%, to $1.68 a share. The company chalked up that performance to a 14% increase in global-services revenue, which made up for slowing growth in software and a 10% decline in hardware, led by a 31% drop in mainframe revenue. IBM Chief Executive Officer Sam Palmisano called the services performance "outstanding." Analysts now will be on the lookout for signs that cutbacks in financial services will continue to drag otherwise positive results heading into the end of the year. The stock slipped 1.2%, to $118.19, in extended trading.

For its part, Intel reported a profit of $1.9 billion on sales of $10.1 billion, outdistancing forecasts that had averaged $9.62 billion. Per-share profit was 31¢, versus an average estimate of 30¢, an improvement of 40% over a year earlier. Gross margin, a key indicator of the company's health, widened more than five percentage points, to 52.4%, from the prior quarter. Shares of Intel jumped 5.1%, to $25.48, in extended trading.

Holiday Season

What's unclear is whether consumers will show up in sufficiently high numbers in the all-important fourth quarter to keep the Intel locomotive on track. Concerns about a buildup of inventory have led some analysts to lower ratings on Intel in recent days. Robert Burleson of Thinkequity Partners wrote in an Oct. 11 note that Intel's exposure to the PC market could become a liability in the first quarter of 2008 when sales are generally weaker than at other times of the year.

Another downgrade came from Merrill Lynch's (MER) Srini Pajjuri, who argued that Intel had reached the "high end of its valuation range."