Can Hot Techs Keep Growing?

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Many Plan Stock Buybacks

Microsoft also intends to deploy more of its $20.7 billion in cash to buy back stock and generate hoped-for shareholder returns in the wake of its failed takeover attempt of Yahoo! (YHOO) this year. On Sept. 22, Microsoft announced it plans to buy back up to $40 billion in stock, raise its dividend (to 13¢ per share, from 11¢), and sell at least $2 billion in commercial paper. In fiscal 2008, Microsoft spent $12.4 billion on buybacks.

Microsoft isn't the only company using cash to buy back shares. Oracle's board on Oct. 20 authorized repurchase of an additional $8 billion of its stock, raising the amount available for repurchase to $9.3 billion. CEO Larry Ellison told shareholders in September that Oracle would continue to be an opportunistic buyer of software companies; now that the stock market turmoil has taken a bite out of companies' values, Oracle needs to decide whether its $13 billion in cash—some of which is allocated for tax considerations—is best used for acquisitions or buybacks.

And Hewlett-Packard (HPQ), another top performer on the BusinessWeek scoreboard, announced on Sept. 22 an $8 billion stock buyback on top of an $8 billion buyback program its board had already approved last November.

Salesforce.com is emphasizing the pay-as-you-go nature of its customer management software, which sales departments access over the Web and can pay for on a quarterly or annual basis—instead of having to sign multiyear contracts. This is appealing when cash is tight for many companies, and Salesforce is altering its marketing to emphasize the point, says Bruce Francis, vice-president for corporate strategy. "This model is well tuned to the kind of times we're in," he says. "It's very much a back-to-basics pitch for us."

Tech Spending in a Downturn?

IBM, whose return on equity ratio of 40.3% was seventh-best on the list, has used long-term contracts for mainframes, IT services, and software as a cushion against cautious technology spending by customers. About half of overall revenues come from previously signed contracts each quarter, according to Jesse Greene, IBM's vice-president for financial management. And the company has reduced inventory levels and kept a rein on capital spending, he adds. Big Blue reported on Oct. 16 that third-quarter net income rose 20%, to $2.8 billion, on $25.3 billion in sales.

In the PC market, hard-drive maker Western Digital (WDC) finished second on the Hot Growth scoreboard, powered by a 48% rise in sales and a 54% increase in profits over the past year. The company has used acquisitions to bolster its technical capabilities, and has capitalized on expanding markets for laptop-computer hard drives and external drives for PCs, where users' large collections of digital photos, music, and video have fed demand, CEO John F. Coyne said in an e-mail.

A key test for high-tech companies will be whether their longstanding argument that IT can help hard-pressed customers operate more efficiently still holds water. Sequoia Capital, in a presentation to its portfolio companies in October, warned that tech spending tends to go up or down with economic cycles, despite vendors' talk of companies investing in IT to boost efficiency in lean times.

Intel, whose profits have grown 18% over the past year, according to BusinessWeek's analysis, has strongly espoused the theory. The chipmaker heartened investors (BusinessWeek.com, 10/15/08) on Oct. 14, when it issued an upbeat forecast for the remainder of the year after reporting third-quarter earnings. Intel's sales could hold up during the downturn because the company supplies "the tools for productivity"—chips for PCs and servers that can help businesses lower their long-term costs by increasing productivity, says Kevin Sellers, a vice-president for investor relations at Intel. But "that could get dampened a bit if the economy turns ugly, and we're not immune to that," he adds.

Cautious PC Sales Outlook

Intel is counting on sales of its new Atom processor, designed for inexpensive "netbooks," which feature small screens and keyboards and are intended to appeal to budget-conscious buyers who just want to read e-mail and surf the Web. The chips are about 10% less profitable than the Core 2 Duo processors Intel supplies for top-end laptops, but they carry higher margins than the Celeron chips that go into the inexpensive laptops the netbooks could replace. "We have a chance at weathering the storm better than others," says Sellers.

Yet Wall Street remains cautious about Intel's prospects. Goldman Sachs (GS) on Oct. 20 lowered its rating for Intel shares to neutral on concern that its margins could be squeezed. Pacific Crest Securities said in an Oct. 15 report that PC sales growth would slow by half in 2009 and that weak IT spending by companies could hurt top Intel customer Dell in the profitable server market.

Citigroup (C) analyst Glen Yeung forecast in an Oct. 15 report that slower-than-normal PC sales growth and falling prices for computers and their chips could affect Intel's profit margins in the fourth quarter—and cause margins to fall further in the first half of 2009. "With much uncertainty about near-term demand," Intel shares are unlikely to break out of their current range, he said. The next few months could help determine how the debate gets settled.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.