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Wall Street Beat: IT vendors feed investor optimism

Investors appear to believe that tech is poised to make gains as the recession eases

Though virtually all IT vendors say they'll face a tough sales environment over the next few quarters, a range of companies including IBM, Intel, CA and even financially beleaguered Nortel offered some hopeful words this week.

At a meeting with analysts Wednesday, IBM officials were positive about prospects for the rest of the year, saying they should be able to meet financial goals and generate earnings per share of US$9.20, a healthy jump from $8.89 last year. IBM also said EPS should be in the $10 to $11 range next year.

Company CEO Sam Palmisano stressed in his presentation that it has been "a good year in a difficult environment."

"The analyst meeting highlights the company's ability to absorb incremental macro weakness and still drive earnings," said Goldman Sachs analyst David Bailey in a research note.

Palmisano ascribed the company's relative good fortune to its product mix, heavily weighted toward software and services. Only 10 percent of IBM's sales comes from hardware, typically the first item cut from tech budgets in tough times.

IDC said in a report Tuesday that inventories of semiconductors are high, since demand for most categories of computers has slowed. Shipments reached around 65 million during the first quarter, a 13 percent year-over-year decline and a 10.9 percent sequential drop from the fourth quarter last year.

Intel, however, offered a ray of light at its own analyst meeting Tuesday. CEO Paul Otellini said orders have been "a little better than expected" this quarter.

Intel could use a boost. After five quarters of falling market share, Advanced Micro Devices gained market share at the expense of Intel in the first quarter, IDC said in its report. AMD's share of global processor shipments reached 22.3 percent, a 4.6 percent jump from the fourth quarter last year.

To make matters worse for Intel, on Wednesday the European Commission announced it had found the chip maker guilty of antitrust violations and fined the company EUR1.06 billion ($1.44 billion). The main issues under review related to payments of rebates to system manufacturers in order to stifle competition from AMD.

Intel investors appeared to take the news in stride. Shares of Intel closed at $15.13 Wednesday, down by $0.08, but bounced back to $15.54 Thursday.

Trading in IT shares was somewhat volatile this week, but on the whole technology companies have made a huge comeback on the markets since March 9, when the tech-heavy Nasdaq hit 1268.64, its lowest close since October 2002, near the trough of the dot-com bust. The Nasdaq was at 1676 in midafternoon trading Friday.

Despite the ongoing recession, which many analysts do not expect to end for several quarters, IT investors appear to believe that the tech sector is poised to make gains as the recession eases and credit markets stabilize. CA CEO John Swainson made precisely this point when the enterprise software company reported earnings Wednesday.

"We can't predict when the recovery will begin, but we strongly believe technology will lead the way," Swainson said in a CA financial statement. "While we are assuming a continuing downturn into at least the early part of fiscal year 2010, we are making significant investments in new and improved products and sales resources and we again are forecasting growth in revenues and earnings on a constant currency basis."

During the quarter, CA's income was flat at $72 million, compared to $71 million a year earlier, while revenue dropped to $1.04 billion from $1.09 billion last year.

On Monday, telecom and networking equipment maker Nortel Networks, which filed for bankruptcy protection from creditors in January, said it is starting to see revenue stability, even though first-quarter revenue was $1.73 billion compared to $2.76 billion a year earlier.

However, while investors may be cheered by hopeful words from some vendors, the sector has a long way to go. All major IT and communications companies play in global markets, and many large international companies are preparing for at least several more quarters of decline.

U.K. carrier BT Thursday said it will cut as many as 15,000 more jobs. The company reported a loss of £977 million ($1.5 billion) for the quarter, compared with profit of £426 million a year earlier, though revenue increased slightly to £5.47 billion from £5.42 billion, helped by the rising dollar.

Consumer electronics giant Sony on Thursday reported its first net loss in 14 years, a $1 billion loss for the fiscal year ended in March. It said losses would deepen this year as sales of digital cameras and other electronics gear slump.