Companies finally appear to be muscling up their spending on the most expensive kinds of computers after slashing budgets during the recession, but fears of more economic uncertainty are proving tough for the technology industry to shake.
Intel Corp., which makes the brains for 80 percent of the world's personal computers, turned in blowout quarterly financial numbers on Tuesday, a sign to the rest of the industry that better times are on the way.
But analysts caution that Americans are still expected to be cautious with their spending for the rest of the year. So companies may just be upgrading their technology to boost productivity, not necessarily expecting a sudden, huge increase in demand. Economic shakiness in Europe could hurt demand, too.
Intel's results were the best in its 42-year history, including its highest revenue and profit margins ever, at a time that is historically the low point of the year for technology spending, coming ahead of the back-to-school and holiday shopping.
"I think people are going to be surprised that the technology spending budgets are robust and stable and growing," said Doug Freedman, an analyst for Gleacher & Co.
Two other companies already say they are benefiting. Applied Materials Inc. said it expects to bring in more money from semiconductor equipment, and ASML Holding NV, a Dutch company that also makes chip equipment, said it expected record revenue this year.
Intel rival Advanced Micro Devices Inc., which reports earnings Thursday, and Nvidia Corp., which makes graphics chips and competes with both AMD and Intel, should be encouraging as well, said Craig Berger, an analyst with FBR Capital Markets.
"Intel's results are clearly much better than feared, and indeed are much better than most investors dreamed possible," Berger wrote in a note to clients. "We think this shows global PC demand is fairly resilient even in the face of macro-driven pressures."
The reverberations aren't limited to chip companies. There are positive signs for heavyweights like Apple Inc., Cisco Systems Inc., Hewlett-Packard Co. and Research in Motion Ltd., which makes the BlackBerry.
Business spending on equipment and software is an important force helping to keep the economic recovery alive.
Companies increased spending in those areas at a blistering 11.4 percent pace in the first three months of this year, the most recent period available, and 19 percent in the final quarter of last year. Consumer spending in both of those quarters was tepid.
Most signs are now pointing to slower economic growth in the second half of this year, mostly because Americans are expected to stay skittish with their wallets. But analysts think businesses spending on equipment and software will hold up fairly well.
That's because companies, while keeping their work forces lean — are taking advantage of improvements in technology to increase productivity.
Worldwide information technology spending is expected to grow 3.9 percent to $3.35 trillion in 2010, according to market research firm Gartner Inc.
There are some companies trying to tamp down expectations of a quick recovery.
In Microsoft Corp.'s latest quarter, rising PC sales helped push net income up 35 percent, but investors were disappointed that business spending didn't provide a bigger boost to the bottom line.
At that time, Microsoft CFO Peter Klein worked to rein in expectations for the pace of a recovery for software companies.
"If you think about what's happened over the last year, the first thing that got hit and decreased earliest and fastest was hardware, and that's what's coming back first," Klein said.
One Intel customer illustrating the technology-buying trend is Zach Nelson, CEO of NetSuite Inc., which sells "cloud computing" business software that's delivered over the Internet.
NetSuite decided earlier this year to build a new data center in Boston with a couple hundred servers to accommodate its growing number of customers. It had postponed the decision a year waiting for the economy to improve, and was made this year with the reevaluation of the company's technology budget, Nelson said.
Demand for such software is helping drive technology spending, in large part because companies such as NetSuite bear the cost of buying lots of servers to process data so their customers don't have to.
"What you're seeing in the Intel numbers in one way is the delayed impact of the recession causing this move by customers to the cloud," Nelson said.
Despite Intel's strong quarter, there's still considerable worry that economic shakiness and austerity measures in Europe and fears about slowing demand in China will crimp growth.
Intel's stock rose just 1.4 percent, or 30 cents, to $21.31 on Wednesday, and the Philadelphia Semiconductor Sector index, which comprises chip companies as well as manufacturers of chip-making equipment, fell 0.5 percent. Technology stocks overall were up, with the tech-heavy Nasdaq composite index rising 0.4 percent.
Chris Caso, a semiconductor analyst with Susquehanna Financial Group, said investors are having a "muted" reaction to Intel's news because of uncertainty about the economy in the second half of the year and fears that Intel's forecast may be too aggressive.
"What troubles people a little bit, and I'll speak for our own research, generally people have picked up a more cautious approach from the PC supply chain in the past 2 months or so, and that didn't seem to be reflected in Intel's guidance," Caso said. "That's left investors a little uneasy."
Intel says it is confident in its forecast. Intel CEO Paul Otellini acknowledged on a call with analysts that Intel's business in China and Europe was slow to start the second quarter, but "settled down" by the end of the quarter and were "nicely up" in both regions.