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IBM miss could spell trouble in tech-land

IBM's surprise earnings miss this week sent technology shares sliding Friday and could suggest a weaker year than expected for the broader industry.
/ Source: The Associated Press

This year may not be as rich as technology companies and investors had hoped.

Shares in technology stocks and the tech-heavy Nasdaq stock market fell Friday after International Business Machines and Sun Microsystems missed analysts’ quarterly earnings expectations.

Goldman Sachs analyst Laura Conigliaro wrote about IBM’s surprise earnings miss: “Implications for most other companies within tech are an obvious negative.”

IBM had been expected to report earnings Monday. Instead, it reported late Thursday that  earnings were 5 cents per share lower than analysts predicted.

IBM shares fell sharply Friday to their lowest level in more than two years. Sun shares also fell Friday after a less-than-stellar earnings report.

The bad news in technology has a variety of causes, according to analysts, ranging from rising energy costs, weakness in the European economy and low prices from Dell.

Dell price cuts in Europe helped take away sales from IBM, Conigliaro wrote. But Dell itself is not immune to the sector’s troubles. Company executives told analysts at a recent meeting that large business customers are delaying purchases, she wrote. Dell is trading near a 52-week low.

Price cuts are a rule in the computer industry, but recent declines have been dramatic.

Prices on servers declined 6 percent over the past 12 months, wrote Richard Gardner, an analyst at Citigroup’s Smith Barney unit, who blamed “relentless deflation in the server industry,” for Sun’s earnings miss.

The weak dollar may be making things worse.

IBM and other technology companies have benefited from the weak dollar, which makes their goods cheaper and more attractive to European customers. At the same time, every euro it brings home translates into a wealth of dollars. IBM’s revenues were up 3.3 percent in the first quarter, but without the benefits of currency translation, revenue would have been up only 1 percent.

But what’s good for U.S. companies hurts European companies: Their U.S. sales look puny when translated into euros.

As a result, the days of euro-fueled earnings may be waning. European companies dependent on sales in the United States and hurt by the weak dollar have slowed their technology spending, wrote Tom Berquist, an analyst at Smith Barney.

On a call with analysts Thursday night, Mark Loughridge, the company’s chief financial officer, said IBM might undertake a “sizable restructuring.”

News of the planned restructuring is already out in Europe, analyst Gardner wrote, and that knowledge hurt morale and contributed to lower sales in March. For instance, the company confirmed in March that it would lay off 500 workers in Sweden, almost 9 percent of its work force there, and close most of its operations in five cities.