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Rob Preston
Rob Preston
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5 Big Takeaways From Tech Earnings Season

Most of the bellwether vendors reported solid revenue and profit growth in their latest quarters, suggesting that the tech economy is back on track.

It's tech earnings season, and for the most part it's the season to be jolly, as the evidence suggests the tech economy is back on track. Across the board, the financial results of some of the industry's bellwether vendors--Apple, Google, IBM, Microsoft, VMware, and parent EMC--were strong. Apple's results, in particular, were stellar. Cisco, which isn't due to report its fourth-quarter results until Aug. 10, is an exception among the bellwethers--it's in cost-cutting mode amid pricing and profit margin pressures.

What follows are five takeaways.

1. Apple bigger, more profitable than Big Blue (and everyone else). Apple's third-quarter revenue of $28.57 billion, up 82% from the year-earlier quarter, surpassed IBM's quarterly revenue ($26.7 billion) for the first time in its history. $100 billion in annual revenue is now well within Apple's sights.

Apple's already a lot more profitable than IBM, posting 125% higher net income of $7.31 billion in the third quarter, compared with the $3.8 billion net income IBM just posted. Apple’s operating profit margin of 32.8% isn’t huge by software company standards (for instance, Microsoft’s operating margin this quarter was 35.5%), but for a hardware/systems company, it's outstanding. Apple's market cap of around $360 billion, meanwhile, blows away every other tech company's valuation. Closest are Microsoft and IBM, valued in the $220 billion to $230 billion range.

Apple is firing on all cylinders. Mac unit sales were up 14% in its third quarter, to 3.95 million, even before Apple's release this week of Mac OS X Lion, the eighth major version of its personal computer operating system. iPhone unit sales soared 142% in the quarter, to 20.34 million. Apple's introduction of the iPad 2 in the quarter jacked its tablet sales up 183%, to 9.25 million units. All those numbers far surpassed analysts' forecasts. (iPod sales declined 20% from the year-ago quarter, to 7.54 million units--poor Apple.)

2. Big Iron, Big Data rule at IBM. In contrast to the small devices and lightweight apps that are driving Apple to unprecedented heights, Big Blue's biggest increase last quarter came from Big Iron. IBM's second-quarter sales of servers, mainframes, and other hardware systems climbed 12% from the year-earlier quarter, to $4.7 billion, as CEO Sam Palmisano cited cloud computing among the company's high-growth areas. Revenue from mainframes alone leapt 61% year-over-year, and midrange server sales were also strong, as IBM noted that customers are reducing data center costs by consolidating virtual machines onto large hardware systems.

IBM's software revenue rose 10% in the quarter to $6.2 billion, fueled by sales of information management systems--including the Netezza Big Data warehousing software IBM acquired for $1.8 billion last year--which increased 18% in the quarter. Services, long at the center of IBM's growth, rose only 2% in the quarter, to $15.1 billion.

Overall, IBM's second-quarter net income increased 11% from the year-earlier quarter, to $3.8 billion, on 5% higher revenue of $26.7 billion. (All percentage sales increases reported here exclude currency gains.)

3. Google under spotlight or klieg lights? In reporting strong financial results on July 14, Google emphasized the growing popularity of Android (135 million Android devices have been activated to date, up from 100 million just two months ago; users have downloaded more than 6 billion apps from the Android Market) and its new social network, Google+ (it surpassed 10 million users in two weeks). But Google didn't provide an update on its thin client Chromebooks, on sale for about a month.

All in all, Google reported that its second-quarter net income rose 34% compared with the year-earlier quarter, to $2.51 billion, on 32% higher revenue of $9.03 billion--a new quarterly revenue record. But with such success comes mounting responsibility and scrutiny. CEO Larry Page spent a part of the earnings call addressing investor concerns about Google's growing headcount, up to 28,768 full-time employees as of June 30, from 26,316 on March 31. Meantime, there's the backdrop of U.S. and EU antitrust reviews of Google's search business; patent infringement claims from the likes of Apple, Microsoft, and Oracle; and the specter of Google won't be able to monetize all of its online traffic. Welcome to the big leagues.

4. Can Cisco cut it? Cisco, one of the most valuable companies in the world during its high-flying dot-com days, has fallen on pedestrian times. Its profit margins under pressure and its market cap down to around $87 billion, Cisco plans to cut its workforce by 6,500 employees in early August--4,400 through layoffs and 2,100 through early retirement--as part of an effort to reduce annual operating expenses by $1 billion.

Cisco also is selling its set-top box manufacturing plant in Juarez, Mexico, to Foxconn Technology Group, moving another 5,000 employees off its rolls. Cisco said the sale is consistent with its intention to simplify its operations; the company shut down another of its consumer businesses, its Flip video camera unit, in April, two years after paying $590 million for that business.

As my colleague Art Wittmann and I have argued in previous columns, Cisco's challenges aren't just operational. It faces ever-more sophisticated competitors, especially in the data center, where the likes of Hewlett-Packard, Brocade, and Dell are also looking to unite networking, servers, and storage into a single architecture. The fat profit margins of Cisco's core router and switch businesses can't survive that competition, and the company can't cut its way back to prominence.

5. Microsoft The Mature. Microsoft's challenge isn't its profit margins; it's sustaining its historical growth rates as its core product lines mature. In the company's fourth quarter, for instance, sales in its Windows division fell 1% compared with the year-earlier quarter, to $4.74 billion, as the rise of tablets cut into PC sales. For the full fiscal year, Windows division sales were down 2%, to $19.02 billion. Sales at Microsoft's two other grown-up divisions--Server & Tools (which includes SQL Server and dev tools) and Business (which includes Office and other enterprise apps)--were up modestly: 12% and 7%, respectively.

But don't prep Microsoft for assisted living just yet. In posting 30% higher net income of $5.87 billion in the quarter, on 8% higher revenue of $17.37 billion, Microsoft said its Entertainment & Devices division continued to charge ahead, with sales up 30% thanks to the ongoing success of the Xbox console and Kinect motion-sensing device. Microsoft's Online Service division, which includes the Bing search engine, grew 17% in the quarter.

Rob Preston,
VP and Editor in Chief, InformationWeek
[email protected]

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