Tech earnings diverge as economy weakens

By Jim Finkle - Analysis

BOSTON (Reuters) - IBM (IBM.N: Quote, Profile, Research, Stock Buzz) and other technology companies whose products help big corporations save money or expand data storage capacity are faring better than those relying on consumers as the economy slows.

International Business Machines Corp, the world's biggest technology company, impressed investors by easily beating quarterly profit expectations and raising 2008 forecasts when it reported along with other big tech companies on Thursday.

In contrast, Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) missed estimates amid concern about its online business and the economy, while Google Inc (GOOG.O: Quote, Profile, Research, Stock Buzz) also disappointed. The Web leader told investors it was operating under "uncertain economic conditions" after a weaker-than-expected 35 percent quarterly profit increase.

Darren Bagwell, director of equity research at Thrivent Asset Management, which manages $73 billion, reckons IBM's results point to strong performances for companies like EMC Corp (EMC.N: Quote, Profile, Research, Stock Buzz), the world's biggest maker of corporate storage gear. EMC releases its results on July 23.

"IBM's mainframe business was on fire," he said, pointing to a new line of computers that IBM introduced in February. They sold out at the end of the second quarter after the company's first major upgrade to its mainframes in almost three years. They are used in "green" data centers that help businesses save money on energy and maintenance costs.

In a teleconference with analysts and reporters on Thursday, IBM said demand from companies in developed countries looking to expand data centers contributed to its better-than-expected 22 percent rise in quarterly profit.

Bagwell noted both Microsoft and Google said they plan to invest heavily to develop larger, more sophisticated data centers so they can better compete with each other.

"They are spending a lot of money to build out the infrastructure they need," he said. "Someone is going to get the benefit of that, obviously."

Bagwell expects such infrastructure investment will also bolster profits at VMware Inc (VMW.N: Quote, Profile, Research, Stock Buzz), whose software helps companies save money by allowing them to boost the efficiency of server computers.

SIZE MATTERS

Companies the size of IBM could fare better in a weakening economy than smaller rivals, analysts said, as customers pare back the number of vendors to focus on those deemed most resilient to an economic slowdown.

Demand for hardware appears to be trickling down to smaller manufacturers such as Sun Microsystems Inc (JAVA.O: Quote, Profile, Research, Stock Buzz), whose shares have been battered, losing 48 percent this year.

Sun, a maker of high-end servers, reported on Tuesday preliminary results in line with expectations, but that sparked a rally in its shares by investors who had feared much worse.

Jerry Dodson, a portfolio manager with Parnassus Investments, which manages $1.5 billion, said he fears other software makers may post weak earnings after Microsoft's disappointing results.

"It (the rough economy) seems to be hitting software more than the hardware," Dodson said.  Continued...