Reading Earnings Tea Leaves

Tech earnings are demonstrating again that the global economy is recovering, and also demonstrating some of the dynamics within the tech market.  Yesterday, IBM, Intel, and Juniper reported, and there’s something to learn from them all.

IBM revenues overall were up 8% and earnings up 10%, and the IT giant raised its forecast for the year.  What was strongest were the platforms (mainframe revenues were up 41%!) and middleware (up 16%).  Services were up only 6%, which was also the software segment’s gain rate.  What’s interesting about this is that it shows a shift of spending away from projects and back to basic budgets.  Project spending periods typically show stronger gains in services and in software, because services are key to sustaining projects and software is typically what makes project business cases.  In short, IBM is showing us a consolidating IT picture.  EMC’s numbers were also up, and in the past stronger storage sales combined with stronger server sales tended to indicate a budget-driven or consolidative environment.  Part of the picture was a banner period for VMware, which beat estimates.  An uptick in virtualization would also suggest a cost-driven IT sector.

Intel’s numbers were truly impressive; revenues up 12% and net income up 3% sequentially.  Intel attributed the gains to a server buildout for “the cloud” but it’s pretty obvious that “online” would be a better characterization, or even “server” by itself.  The point is that Intel is showing that the upspin in server sales is still carrying forward into the supply chain, suggesting that the change has some legs.  That would be good news in the short term; even if we’re seeing a longer-term consolidation it might not impact IT hardware in 2011.

Juniper reported roughly inline numbers, but a weakness in the enterprise side.  Here again we see the handwriting of budget-versus-project on the financial wall, so to speak.  Data center modernization is a project class that has historically straddled that boundary; in some cases the funding for this sort of change is allocated to the network or IT budget and at other times it’s managed as an off-budget project.  I think there’s an indication that the project side of this is what’s weaker.  Networks are also lagging indicators of data center modernization, so this segment might pick up in the second half.

Economically, the news remains positive but the risk factors (North Africa, the EU sovereign debt issues, and US deficit uncertainties and politics) remain.  There seems a new pessimism among some in the US about the future jobs market even though the numbers continue to improve, and this translates into more pressure on the President’s approval rating.  That, of course, means Republicans are in no hurry to make things look better before 2012.  However, there are signs that the Republican balance-the-budget thrust (which they proposed to do with steep social program cuts) has kicked off a tax-the-rich-instead backlash.  The number who favor taxing the rich is double that who favor cutting social spending, according to recent polls.  Tax increases are always problematic, but the foes of the increases may have sanitized the whole notion by offering an even-more-problematic alternative.  We’ll probably not have a resolution to this one any time soon, though.

I’m still cautiously optimistic about the economy, here and globally.  I’m slightly pessimistic about tech spending overall; I think we’re losing touch with the essential truth that enterprise spending depends on projects that enhance productivity in the long run, and that network operator spending depends on profits and not traffic.  AT&T and IBM are signaling us that we need to pay attention to these two dynamics, and right away.


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