Quashing fears that the nation's high-tech boom might be running out of steam, Microsoft and other leading computer firms announced strong earnings results Tuesday, driving a powerful rebound in technology stocks.
Even companies such as IBM and Compaq, which announced results below analysts' expectations, saw their stocks surge as the market focused on hopes of strong Christmas sales of personal computers--and a continuation of heavy corporate investments in information technology.
"You're going to see a banner fourth quarter for technology companies," said Bill Bluestein, analyst at Cambridge-based Forrester Research. "We're still in the early stages of the opening of a brand-new consumer market for technology. We're in front of a big wave of people buying their first PCs."
Software leader Microsoft led the parade, trumpeting earnings of $499 million, or 78 cents a share, an impressive 58% higher than the $316 million, or 51 cents a share, in the comparable period a year ago. The profit was about 10% higher than analysts' average projections. Sales jumped 62%, to $2.02 billion from $1.25 billion a year ago.
The company said it sold 7 million copies of the new Windows 95 software it began shipping in August, beating most analysts' estimates.
The Microsoft announcement came after the stock market closed, but its shares rose $4.375 to $91.125 on the Nasdaq market as investors anticipated the good news. Analysts said the results could drive a sustained rally in tech stock prices, calming the fears of money managers who had grown jittery over the stratospheric heights to which tech stocks have climbed over the past year.
"This is positive not just for Microsoft but for the whole tech sector," said Rick Sherlund, an analyst at Goldman Sachs. The success of Windows 95 will not only drive sales of a whole new generation of personal computer products, but also improve investor sentiment, he said.
"This could be a catalyst for improving investor psychology that has been damaged over recent weeks," Sherlund added.
Microsoft said survey results show that 90% of its Windows 95 customers are happy with their purchase and that no major bugs were found in the product.
"The verdict is in and the quality is good. You should have confidence moving to Windows 95," said Brad Silverberg. "We have a lot of reason to be optimistic and hopeful going into the holidays."
Intel launched the tech stock rebound Monday when it reported a 41.3% gain in third-quarter earnings. Sun Microsystems also pitched in with a whopping 120% increase in earnings, far exceeding analyst projections, and its share price soared $9.25 to $67.875. Sun is benefiting from a strong trend among companies moving applications from large mainframes to smaller, networked computers.
But the same trend that is helping Sun and Microsoft is hurting IBM. The computer giant's sales of hardware fell to $7.74 billion from $7.75 billion in the year-ago period, a number that IBM Chairman Louis V. Gerstner Jr. called disappointing.
Net income, excluding a one-time charge for the purchase of software maker Lotus, climbed to $1.3 billion, up from $710 million last year. That was on the low end of analyst estimates. Including the $1.8-billion Lotus charge, IBM posted a $538-million loss for the quarter, the first loss since 1993. Profit margins were also lower.
The decline in hardware sales and profit margins was tied to falling prices for large, profitable mainframe computers. Analysts said there is little in IBM's numbers to suggest it has been successful in making the transition to new sources of revenue growth.
"Gerstner still has his work cut out for him," said Scott McGready, analyst at Framingham, Mass., market researcher IDC. "Wall Street will judge him on how he grows his software, services and networking businesses."
"There is a lack of strategic direction," said Lynn Berg, an analyst at Stamford, Conn.-based Gartner Group. Berg pointed to IBM's continued weakness in the personal computer sector.
Still, IBM's overall 9% increase in sales to $16.8 billion in the third quarter from the year before reflects continued strong industry demand for computer products. IBM's share price initially dropped on news of its earnings, but it ended higher on the strength of the broad-based tech rally, closing up $2.875 to $96.875.
What bad news that did emerge from this week's string of earnings results could even be counted as good news for the tech sector as a whole. IBM and Compaq both complained that sales were pinched by shortages for key components, a sign of continued strong demand.
IBM said it lost sales of as much as 50,000 personal computers because of a shortage of monitors, while Compaq executives told analysts that a components shortage for its LTE 5000 high-end laptop computer held sales to 20% of what the company had expected for the quarter.
Such shortages suggest continued strong demand for semiconductor manufacturers and other suppliers of high-tech products. Chip maker Cypress Semiconductor on Tuesday said profit had more than doubled on robust demand.
But analysts caution that much of the strength in summer sales is based on the assumption that Christmas sales of personal computers will be strong.
For now the outlook seems good.
Windows 95 "is an extreme hit and will continue to create traffic in the consumer channel," Daryl White, Compaq's chief financial officer, said Tuesday after announcing that the company's earnings rose a lower-than-expected but still-respectable 22% last quarter.
"We expect a very strong consumer season and one we may have a hard time meeting demand on."
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The Hambrecht & Quist technology stock index has been on a wild ride since peaking at 773.01 on Sept. 11. Closes every other day since its peak.
Source: Hambrecht & Quist