| SAN FRANCISCO, April 16
SAN FRANCISCO, April 16 Disappointing results
from Google Inc and IBM may unnerve
investors shaken by a strong recent selloff in tech stocks,
underscoring the challenges the Internet and IT sectors face as
corporate report cards come due in coming weeks.
The two companies, both barometers of their respective
industries, posted March-quarter results on Wednesday that
missed Wall Street's revenue targets, and their shares fell in
after hours trade.
IBM blamed weak hardware sales for its lowest quarterly
revenue in five years, worsened by an 11 percent slide in
overall sales in emerging markets including China, Brazil,
Russia and India.
That spells trouble for other tech companies reliant on
enterprise-spending, such as Oracle, Cisco,
EMC and Hewlett-Packard, which report results
this month or next. Like IBM, they have struggled to grow their
businesses, particularly in China, whose economy is
down-shifting after years of hyper-growth.
Enterprise spending in general has been on the wane for
traditional computing giants as corporations and even
governments increasingly turn to software-as-a-service (SaaS)
and other cloud offerings instead of maintaining their own
in-house technology infrastructure. Many, including IBM and
Oracle, have been left behind by smaller, younger rivals as
spending goes toward emerging areas like big data, cloud and
"We're seeing a lot of traditional technology vendors
struggle," said FBR analyst Dan Ives.
"You're seeing spending go away from big-bang projects
toward smaller, more modular types of deployments, which speaks
to why a lot of SaaS players are doing well. Customers want to
buy just the drink rather than the whole bar."
Google's and IBM's poor results on Wednesday may do little
to change investors' sentiment following a recent drop in tech
stocks. Since early March, the tech-heavy Nasdaq index has
fallen over 6 percent.
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With the latest results factored in, including IBM and
Google, tech earnings growth estimates for the quarter have
fallen by roughly two-thirds since the start of the year,
according to Thomson Reuters data.
On Jan. 1, as the first quarter got under way, analysts on
average predicted tech earnings would grow by 7 percent. But
now, as first-quarter reports trickle out, analysts on average
expect growth of just 2.4 percent, according to the data.
That also marks a deceleration in tech profit growth from
the fourth quarter, when it totaled 10.3 percent, but it is an
improvement from 2013's first quarter, when tech profits shrank
by 1.2 percent.
In Google's case, investors initially pummeled the stock in
after-hours trading after the world's largest Internet company
reported its miss, plus a drop in margins as cost-per-click, or
the average price of an online ad, slid 9 percent.
The shares rebounded after CFO Patrick Pichette attributed
that profitability decline to a spike in expenses partly because
of its $3.2 billion acquisition of home automation pioneer Nest
last quarter, which tacked on a raft of payroll and research
More broadly, the three largest Internet corporations -
Google, Facebook Inc and Twitter Inc - have
each grappled with advertising on mobile devices, where the
growth is currently concentrated, and where smartphones with
smaller displays typically command lower ad prices than on
For investors in Google, accustomed to the company enjoying
one of the highest ad margins in the business, mobile ads have
translated to a steep drop in ad rates. The transition has been
less jarring at Facebook, which once relied almost exclusively
on low-margin display or banner ads.
Twitter, which had difficulty monetizing its 140-character
stream-of-consciousness messaging model, is catching on with TV
advertisers because of its growing position as a "second screen"
to accompany TV viewing.
"People are trying to adapt to a new delivery system which
is mobile," said B. Riley & Co analyst Sameet Sinha. "It is a
challenge for most companies, and it's going to be here for the
next couple of years."
(Writing by Edwin Chan; Editing by Ken Wills)