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10/31/2003
03:20 PM
William Schaff
William Schaff
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Taking Stock: Tech Sector Shows Mixed Signs Of Uptick

'It is too early to say that a rebound is at hand,' Palmisano says.

My life is getting back to normal as the number of earnings announcements slows to a trickle. There are some signs that IT spending is returning to this side of the river Styx. But not all areas are on the upswing, so let's take a peek at the trends in technology.

The PC market continues to be a mixed bag. Intel's numbers show that demand in the Asia-Pacific region, from small to midsize companies and government, is strong. Large companies, though, still aren't increasing spending on PCs and servers dramatically.

IBM confirmed that demand from large businesses remains anemic. Revenue was up only 4% in constant currency from a year ago, and earnings per share increased just 3% year over year. Few of IBM's segments displayed significant growth in constant currency. Its consulting division saw revenue decrease when the effects of currency and the PricewaterhouseCoopers Consulting acquisition are excluded. CEO Sam Palmisano cautioned that "it is too early to say that a rebound is at hand." That's not too optimistic, and IBM should have a pretty good view of what's ahead.

Sun Microsystems posted dismal results. Revenue declined 15% from the previous quarter, and the company reported a loss. This decline probably indicates the unique problems Sun faces as Linux and lower-priced Intel-based servers pummel it.

Though a full-fledged recovery may not be at hand, business IT spending seems to be stabilizing. On the software side, Siebel Systems' numbers showed little improvement in terms of revenue growth, and license revenue was flat compared with the previous quarter. Furthermore, the outlook was muted, with just a bit of a pickup in license revenue expected for the fourth quarter. Restructuring efforts are still a part of the Siebel story as the company attempts to lower its break-even point and increase profitability.

Semiconductor manufacturer Texas Instruments had a nice surprise in store for investors when it reported third-quarter results. Revenue was up 8% from the previous quarter and 13% from a year ago. Much of the increase was driven by sales of chips for wireless and consumer-electronics products. The company also increased its outlook for the next quarter, expecting revenue to grow 3% to 12% from the third quarter.

The growth in demand for chips is slowly translating into demand for semiconductor capital equipment. While fabrication-equipment maker Lam Research didn't show revenue growth this quarter, bookings, an indicator of future revenue, were strong. Several other companies in this sector are experiencing similar trends. One caveat: We're still waiting for industry bellwether Applied Materials to release its quarterly results.

Overall, the recovery appears tepid, particularly in terms of business IT spending. Most tech stocks seem to me to price in a much stronger recovery than what we're experiencing. Unless the recovery truly gets under way, I doubt tech stocks can stay at today's levels.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

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