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MARKET REPORT

Flurry of Earnings: Tech Firms Go Gangbusters

During the last quarter of 2006, Cingular Wireless’ profits jumped fourfold and Sun Microsystems registered a profit for the first time in more than a year; however, Seagate Technology’s (NYSE: STX) earnings dropped by about 50 percent.

Nevertheless, as many major tech companies report their earnings this week, the results do not provide much guidance to the health of the overall sector.

Some firms, including Advanced Micro Devices, did not perform well, because of one-off events, such as acquisitions. Others, such as Yahoo, are expected to get out of the red as new investments — such as its new advertising platform — become fully operational. Plus, a few, including Cingular — which was rebranded under the AT&T name last week — are simply going gangbusters.

A Lackluster Sector

Overall, though the tech sector is not expected to post stellar earnings growth for the quarter, Frederic Ruffy, an analyst with the investor education firm Optionetics told the E-Commerce Times.

According to Standard & Poor’s, “analysts currently estimate that the Information Technology components of the S&P 500 Index will report aggregate fourth quarter earnings of US$4.23 a share, which is up from $3.58 in the third quarter, but down from $4.30 in the fourth quarter of 2005,” he said.

The situation is not expected to improve much over the next two quarters, Ruffy added.

“The lack of improvement in earnings from the fourth quarter of 2005 and the expectations for slow earnings growth during the first two quarters of 2007 is one reason why the tech sector has been struggling so far during the earnings reporting season,” he noted.

Ruffy explained that since Intel released results on Jan. 16, the Morgan Stanley High-Technology 35 Index — which tracks the price action of 35 leading tech firms — is down in five of six trading sessions and has fallen from 583 to 557, or 4.5 percent.

Some Exceptions

Cingular is one obvious exception, reporting $782 million in earnings during Q4, compared with $204 million for the same period in 2005. The company pointed to a 2.4 million increase in customers during the quarter as one factor.

Sun Microsystems also reported a profit in its fiscal Q2 of $126 million, compared with a loss of $223 million during the same time period last year.

“Sun has done a great job of turning itself around,” Charles King, principal with Pund-IT Research, told the E-Commerce Times.

He pointed to the $700 million investment that Kohlberg Kravis Roberts & Co. is making in the firm — which Sun Microsystems just announced — as an indication of the market’s belief in the company’s long-term viability.

After the company posted its 4-cent per share profit, Ruffy noted, its stock price rose 45 cents to $6.11. “Analysts were looking for Sun to post profits of a penny a share,” he said.

Check Point Software (Nasdaq: CHKP) also performed better than analyst expectations by a few cents per share, Ruffy added.

In Q4, the company registered total revenues of $160.1 million, an increase of 3 percent, compared with $156.1 million in the fourth quarter of 2005. The company is now trading higher, as well.

“After falling to a low of $22.89 in early trading, [Check Point] is trading up $70 cents to $23.89,” he said.

Other Earnings

The market was also kind to Seagate, now up $2.26 to $28.46 after the company reported quarterly earnings of 39 cents a share — 7 cents better than analyst estimates, Ruffy stated.

However, Seagate reported a 51 percent decline in its fiscal Q2 earnings because of its acquisition of Maxtor, the company reported. It registered $140 million in net income, compared with $287 million during the same time period last year.

Intel archrival AMD also reported a drop in earnings for Q4, which in part was related to the costs of its $5.4 billion acquisition of ATI Technologies. The company reported revenues of $1.77 billion, compared with the $1.84 billion it registered a year ago.

In January, AMD drove down chip stocks after it released its Q4 guidance, according to Ruffy, and was subsequently hit with multiple analyst downgrades.

“Shares tumbled 9.5 percent on the news. Since Jan. 12, the Semiconductor HOLDRS (holding company depositary receipts) are down from $35.09 to $33.13 on Tuesday. The group was also hit with a profit margin warning from Intel on Jan. 16,” he declared.

Yahoo’s net income dropped for the quarter to $269 million from $683 million in the year-ago quarter. The company assured shareholders that as its new ad platform Panama comes online, profits will turn around. Matt Booth, a Kelsey Group senior analyst, agreed.

“In Q4 of this year we will start to see monetization increases from the system,” he told the E-Commerce Times.

More to Come

More results will be reported in the weeks ahead, Ruffy noted.

“January 24th has been the busiest day for tech sector fourth quarter earnings reports so far this year. After the close of trading [Wednesday], eBay, Qualcomm, Rambus and approximately 25 other tech companies will report results,” he commented.

“Now, it will be up to other tech companies to convince investors that they too will be able to deliver strong results; not just for the fourth quarter 2006, but for the first half of 2007. If, instead, companies begin to guide expectations lower — as Intel did with its margin warning last week — it could put further pressure on the sector as the earnings reports roll out over the next few weeks,” Ruffy concluded.

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