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Wall Street Beat: Tech companies stir market turbulence

Wall Street Beat: Tech companies stir market turbulence

Mixed news from the IT sector including earnings from Cisco Systems, worries about the telecom sector and a cloudy forecast for chips is being blamed for causing markets to take what most industry watchers are hoping is just a temporary dip.

The US Labour Department released some positive data on the macro economy on Thursday, saying initial jobless claims are slowing, declining 38,000 to 550,000 in the week ended August 1, from 588,000 the week before. Normally that would spark elation among investors, but continuing concerns about the tech sector seemed to have blunted excitement about the employment situation and broadly depressed markets Thursday.

Cisco reported late Wednesday that for the quarter ending July 25, revenue fell 18 percent to US$8.5 billion, while its net income dropped by 46 percent to $1.1 billion. In a statement issued with the earnings release, Cisco CEO John Chambers pointed to some good news, however.

"We saw a number of positive signs this quarter in the economy and in our business, especially comparing our sequential quarter-over-quarter order trends," said Cisco CEO John Chambers in the statement. "If we continue to see these positive order trends for the next one to two quarters, we believe there is a good chance we will look back and see that the tipping point occurred in our business in Q4," he said.

But on a conference call later, Chambers was more measured: "While this is an important trend, I would like to see this trend continue for several more quarters."

Cisco needs to expand its lines of business to be able to deliver the double-digit growth it has promised, and a new management approach to deal with change has some observers worried. Chambers said Cisco is moving from a "top-down" management model to one where multiple committees manage various lines of business. Cisco will increase the number of senior managers involved in committees from 750 to 3,000 -- a number that some observers say is much too unwieldy.

Meanwhile, there has been mixed news from telecom companies -- all potential customers for Cisco. On Thursday Comcast, the largest U.S. cable operator, announced quarterly earnings of $967 million up from $632 million, a year earlier. Even though overall profit looked good, slowing subscriber growth remains a concern. For example, Comcast added about 250,000 subscribers for digital cable TV, below 320,000 a year earlier.

Also on Thursday, T-Mobile USA reported a drop in net income. Slowing customer growth was a factor in the slump. For the latest quarter, the company's net income declined to $425 million from $452 million in the year-ago quarter.

IDC Thursday had an upbeat report about second quarter sales of microprocessors -- one of the sectors that has caused the most concern in tech this year -- but the market survey was colored by some words of warning

IDC said that although sales of microprocessors declined 15.3 percent compared to the same quarter in 2008, it increased sequentially by 7.9 percent from the first quarter. This is a nice sequential turnaround, since microprocessor sales decline 11 percent sequentially from the fourth quarter last year to the first quarter this year.

However, IDC said the processor sector is not robust yet. Much of the sequential uptick in sales was due to netbook makers replenishing stock of microprocessors after depleting inventory, and they are now back up to the level they need for the moment.

"We can't rely on inventory replenishment to drive market improvements," said Shane Rau, director of Semiconductors: Personal Computing research at IDC, in the IDC report. "Instead, we can only rely on what actual end demand really is, and that means we have to be cautious not to be over-exuberant that, say, the traditional back-to-school PC buying season will materialize into a bullish second half. It won't."

US exchanges including the Dow Jones Composite Index and the tech-oriented Nasdaq on Tuesday reached their highest points since last year, buoyed over the last few months in part by growing confidence in IT vendors.

But concerns raised by the tech sector were widely blamed for the market decline later in the week. What's interesting is that some of the companies that were blamed for the stumble did well Thursday. Cisco was trading at $22.34 late in the day, up by $0.18. Comcast was up by $0,05, at $15.11.

It seems that investors are keeping the faith with at least some tech bellwethers even when the concerns they raise cast a pall on other areas of the economy.


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