Will IT Giants Exceed Wall Street’s Expectations?

Key technology companies will report financial results next week and so far, indications are that several computer hardware firms will meet or possibly exceed Wall Street’s modest expectations.

On Tuesday, Intel will be the first major tech company to report financial results. Intel CEO Craig Barrett was quoted in Friday’s German daily newspaper Sueddeutsche Zeitung saying he believes “that growth rates will perhaps decline a bit.”

But in early trading Friday, tech stocks were higher, in part, because of two favorable analyst reports about Intel and Dell from analyst Eric Gomberg of Thomas Weisel Partners. Gomberg raised his profit and sales estimates for Intel for the rest of this year and 2004. He also raised his rating for Intel to “outperform” from “peer perform.”

Gomberg’s reports said he sees evidence of an IT capital spending rebound. He cited his firm’s survey of 40 companies, which found that 62 percent of the firms surveyed are spending more on IT, which is up from only 29 percent at the end of February.

Three-quarters of those companies surveyed said they have seen, or expect to see, higher spending by the end of September.

Dell also received a positive analyst report on Friday from Steven Fortuna, an analyst with Prudential Equity Group. He said Dell is the “best-positioned” computer-hardware company and expects sales growth of 15 percent for 2003 and 14 percent for 2004. Fortuna started coverage of Dell with a “buy” rating and set $49 as the target stock price over the next 18 months. Dell does not report next week.

IBM will report second quarter results on Wednesday and is expected to deliver solid numbers, thanks in part to a series of major service contracts and the weak dollar in the quarter ending in June. Consensus estimates for IBM, as compiled by Thomson First Call, are for the company to report 98 cents per share on sales of $21.38 billion.

Merrill Lynch’s tech analyst Steve Milunovich said the launch of IBM’s new T-Rex mainframe will add at least $150 million to Big Blue’s sales; he sees the company’s services group raising revenue over last year by 21 percent to $10.57 billion.

While the war in Iraq and the SARS virus have been blamed in part for an economic slowdown, a weakening dollar has been welcome for IT companies with major international operations. But still, after several disappointing quarters and in a conservative accounting environment, tech companies are averse to make over-ambitious sales forecasts.

As a result, meeting or slightly beating existing sales forecasts won’t be too difficult, Milunovich said in a recent research report.

Lehman Brothers’s tech analyst Dan Niles recently wrote that he expects a tech rebound to start kicking in during the second half of 2003. Niles said he believes tech spending will pick up as the risk of terrorist attacks, corporate fraud and bankruptcies and global geopolitical risk subside, which could give corporate IT managers more confidence to boost capital spending.

Goldman Sachs issued an IT technology spending survey this week, which indicated that IT spending would gain momentum in the second half of 2003. The investment bank said it sees IT budgets expanding by 3.5 percent in 2004, the first major pickup in several years.

The Goldman Sachs tech survey results said Dell Computer and IBM stand to gain when spending starts to pick up, especially in the enterprise systems and storage sectors. Goldman also said EMC could be a beneficiary as companies decide to spend more on systems and storage.

The report noted that Hewlett-Packard is losing market share in both storage and enterprise systems, and that Sun Microsoft is “in the most challenging position” in the enterprise market as customers lean towards computer systems based on Intel processors that run with Windows or Linux, rather than Sun’s own operating systems.

In addition, Red Hat , SAP , Microsoft, Check Point , Symantec and Veritas are all gaining market share, while Computer Associates is losing share in enterprise systems, the report said.

However, a recent analyst report from George Elling of Deutsche Bank about the Enterprise Hardware market is less sanguine on IT’s immediate outlook. Elling, quoting a June CIO Magazine Tech Poll, said the enterprise hardware market remains inconclusive on a number of fronts. “Data continues to suggest a likely IT spending recovery in [second-half] of 2003 as 26 percent of those polled expressed optimism on a recovery in that time frame,” he wrote. Nonetheless, he added, the outlook for a pick-up during the second quarter remained anemic at only 4.2 percent.

Chipmaker Advanced Micro Devices reports results on Wednesday, while Microsoft reports on Thursday of the following week. Other major technology companies preparing to report financial results include Motorola , Nokia , EMC , Apple Computer and Fairchild Semiconductor

Information technology companies beat analysts’ estimates in the first quarter, with earnings up 17 percent from early 2002. Second-quarter profits are expected to grow by 20 percent, according to Thomson First Call.

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