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Cost cuts help tech giants ride out weak economy

SAN FRANCISCO (Reuters) - A solid crop of earnings reports from the leading lights of technology suggests the sector is proving adept at cost cuts and more resilient to the economic meltdown than previously thought.

While executives from Apple Inc, Google Inc, IBM and Intel Corp were almost uniformly cautious in talking about the rest of the year, they all reported quarterly profits that beat Wall Street expectations.

Microsoft Corp’s earnings on Thursday were in line with forecasts, but investors sent its shares higher in part because of cost cuts that the world’s largest software maker is undertaking to protect its bottom line.

With corporate and consumer spending under pressure, analysts say many tech companies moved swiftly to slash jobs and output -- positioning themselves for growth when a bottom is reached, which some say may have happened already.

“It does look like tech might very well lead us out of the recessionary market,” said Enderle Group analyst Rob Enderle. “They are structured to respond more quickly and they’ve demonstrated they can.”

Although the results were not necessarily strong on a historical basis and the outlook for the economy remains extremely uncertain, analysts see positive signs for the sector.

Technology shares have been surging, with the Morgan Stanley Hi-Tech index of major tech stocks up more than 30 percent since early March.

While a rally may prove difficult to sustain, analysts say the prospects are better for an IT recovery because tech products and services are integral to the day-to-day functioning of the global economy and people’s lives.

“Everybody’s taking big cuts in their budgets, but a lot of tech spend is not so variable,” said M. Eric Johnson, director of the Center for Digital Strategies at the Tuck School of Business at Dartmouth. “A lot of their spending needs to and has to occur even in a downturn.”

He said the recession in some ways has benefited information technology service providers like IBM, as corporations have moved to outsourcing.

IBM reported an 11 percent drop in revenue, which was weaker than expected, but higher margins helped its profit beat analysts’ forecasts.

There were other encouraging signals in major tech earnings reports. Apple’s earnings topped Wall Street forecasts as consumers showed they were still willing to spend on premium devices such as iPhones and iPods even in a tough economy.

Google’s and Intel’s results also beat expectations, thanks to cost discipline. Intel Chief Executive Paul Otellini declared the worst is over for the PC market, a message echoed by disk drive maker Seagate Technology, but Microsoft Chief Financial Officer Chris Liddell said he saw no sign the bottom had been reached.

Positive signs also emerged from earnings reports from chipmaker Texas Instruments and flash memory maker SanDisk.

“Things at least seem to have stopped falling,” said Barry Jaruzelski, a partner at consulting firm Booz & Co. He said the key is in how enterprise IT spending plays out.

“It looks like we’ve found the reset level...The thing IT has going for it is it’s often an enabler for cost reductions.”

Reporting by Gabriel Madway, editing by Tiffany Wu, Leslie Gevirtz

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