Wall Street Beat: Market Rally, Tablet Excitement Lifts IT

Tech stocks rose along with major indexes this week as central banks came up with a plan to ease market fears about European sovereign debt, and as key IT players including Microsoft, Intel, and Cisco held conferences for developers, users and analysts.

Tech stocks have been depressed through most of the third quarter, weighed down by fear that a sputtering recovery would short-circuit IT spending. The possibility that one or more countries in Europe would default on debt obligations, disrupting the financial sector throughout the world, compounded those concerns.

"The odds of a double-dip U.S. recession continue to rise and are raising fear that sales prospects will deteriorate further," said Bryan Lewis, research vice president at Gartner in a report on the semiconductor market this week. "Gartner is closely monitoring IT and consumer sales trends for any significant signs of weakness."

In a separate report, IDC noted that PC sales have been tepid. PC sales rose just 2.7 percent in the second quarter of 2011 from the year-earlier period, compared to a forecast of 2.9 percent growth. For the full year, IDC expects worldwide PC shipments to increase by just 2.8 percent, a downward revision from the previous forecast of 4.2 percent.

"In these tight economic times, and with new and competing products for consumers and businesses to spend money on, PC growth will remain slow in the next couple quarter," said Loren Loverde, vice president of IDC's Worldwide Consumer Trackers.

This week, however, a consensus among central banks on how to deal with the sovereign debt crisis emerged, calming fears of market watchers. On Thursday the U.S. Federal Reserve along with the European Central Bank and three other central banks agreed to supply loans to financial institutions with exposure to Greek debt.

The news sparked a market rally, lifting shares of IT companies. Computer companies on the Nasdaq closed Thursday flat for the year. Just Wednesday, Nasdaq computer stocks were down 1.67 percent for the year, and earlier in the quarter they had been down about 5 percent for the year.

The rally continued Friday morning, with Nasdaq computer stocks up 9.24 percent for the day by midday.

Conferences held this week by major IT vendors also played a part in boosting confidence.

For example, Cisco on Tuesday presented a plan to focus on core businesses and streamline management, about a month after reporting that profit dropped by a third, year over year, in its latest fiscal quarter. CEO John Chambers also put to rest rumors that he would be stepping down.

The company has cut its long-held view that it could generate 12 percent to 17 percent annual sales increases, adjusting expectations to 7 percent to 8 percent. Nevertheless, the management shakeup and new focus appears to have assuaged investors.

Elsewhere this week, vendors jumped on the tablet bandwagon. Even as growth in the PC market slows, tablets are taking off. Gartner said this week that global semiconductor sales have slowed, with the market due to decline slightly from last year.

"Three key factors are shaping the short-term outlook: excess inventory, manufacturing overcapacity and slowing demand due to economic weakness," said Gartner's Lewis.

However, increasing user takeup of smartphones and tablets are making NAND flash memory and data processing ASICs the fastest-growing areas for components in 2011, with about a 20 percent increase in sales, Gartner said.

At its BUILD conference for developers, Microsoft pitched Windows 8, making a big play for the tablet market with the upcoming OS' ability to run on ARM processors. ARM processors dominate the tablet market.

Intel, at its Intel Developers Forum, also made a push for the tablet market, showing off devices running on its Atom chip.

Tech investors took heart, boosting vendor share prices. Microsoft shares, closing at US$25.74 last Friday, rose throughout the week, jumping again Friday morning by $0.14 to $27.13. Cisco shares rose from $15.82 at the end of last week to $16.62 Friday morning, while Intel shares increased from $19.70 to $21.84 over the same period.

The rising tide has not lifted all boats, however, as Research in Motion shares plunged Friday, dropping $5.52 to $24.32 in late morning trading. RIM, reporting earnings Thursday, said shipments of its PlayBook tablet declined by half during its second quarter, as overall revenue dropped. Revenue was $4.2 billion, down 10 percent year-over-year, it reported.

RIM was blasted at the launch of the PlayBook for coming out with a first version that did not have crucial features such as enterprise email built in to the device itself. Though the tablet market is providing a respite from bad news in the hardware market, current market conditions, in which IT buyers are cautious, apparently do not leave much room for vendor error.

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IBM Shines in Strong Q2 Server Market

IBM's worldwide server revenue jumped a healthy 24.5 percent in the second quarter, putting it neck and neck with Hewlett-Packard for the top spot, IDC reported Tuesday.

Helped by a surge in mainframe sales, IBM's revenue climbed to just over US$4 billion in the quarter, giving it 30.5 percent of the overall market. HP's sales climbed a more modest 9.3 percent, to $3.9 billion, for 29.8 percent of the market. IBM crowed that it had recaptured the server crown, but IDC declared it "a statistical tie."

Server sales were strong overall, with worldwide revenue climbing 18 percent from a year earlier to $13.2 billion, IDC said. Unit shipments were 2.1 million, the second-highest total ever reported for a June quarter. The highest was in 2008, just before the economy went south.

"These numbers were actually slightly better than we were expecting," said IDC analyst Jed Scaramella.

Recent Unix upgrades from HP, IBM and Oracle helped lift the results, as did new mainframes from IBM. In addition, companies that put off buying new gear during the recession finally had to make purchases, IDC said.

The second half of the year won't be so rosy, however. The refresh cycles are starting to dry up and "weakening macroeconomic concerns around the world will serve to moderate demand for servers later this year," IDC said in a statement.

The research firm predicts "a soft landing" for the server market in the second half, Scaramella said.

Still, for now business was brisk in all segments. Sales of volume systems, which by IDC's definition cost less than $25,000, were up 17 percent from a year earlier, while sales of midrange systems, priced from $25,000 to $250,000, were up by the same amount. Sales of high-end systems -- those priced above $250,000 -- climbed 23 percent, IDC said.

The high-end sales undoubtedly were helped by IBM's System z mainframe sales, which were up 61 percent from a year earlier, to $1.2 billion. Blades also performed well, with revenue up 27 percent year over year, IDC said.

All vendors saw their server revenue increase from a year earlier. Fujitsu, the smallest of the top five vendors, saw its revenue more than double, largely thanks to the K-computer high-performance computing system in Japan. It finished the quarter with 6.5 percent market share, in a statistical tie with Oracle, whose sales increased just 4.2 percent.

Dell's server sales increased by 5.1 percent, IDC said, putting it in the middle of the pack with revenue of $1.8 billion.

"This was the fifth consecutive quarter with double-digit year-over-year revenue growth, as the market recovery continued to extend from x86 servers to midrange Unix to high-end mainframe class systems," IDC analyst Matt Eastwood said in a statement.

James Niccolai covers data centers and general technology news for IDG News Service. Follow James on Twitter at @jniccolai. James's e-mail address is james_niccolai@idg.com

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