As the Industry Shows Weakness, Google Romps and Apple Shines

WHAT A MISH-MASH! WHILE A MAJOR­ ity of tech companies hit their numbers last week, not all of then did (Hello,Moto!). In fact, a multitude of reports seemed to have come loaded with bag­ gage. Caveats were flying, outlooks were softened, and margins were get­ ting squeezed.

Enterprise-software giant SAP met its third-quarter earnings targets last Thmsday, suggesting that a weak second quarter had been just a blip (See Emopean Trader, page M6). But Chief Executive Henning Kagger­ mann warned that growth of the company's software-li­ cense revenue for this year might fall in the lower part of a range suggested earlier, which was 15% to 17%.

In a phone interview, Kagermann took umbrage with my suggestion that SAP was "toning" down expectations for the rest of the year. "I don't think that we have really toned it down. We have confirmed om guidance," Kagermann said. "It is just less likely that we will achieve the upper end of the range."

OK, but I still took it as slightly dampened expecta­ tions. So did the market: SAP's American depositary receipts (ticker: SAP) fell 1.7% on Thmsday's news to 50, even though the company's earnings of $486 million beat analysts' estimates by 1.8%.

Any way you ,slice it, this kind of news ain't good.
The tech market has been grinding out decent growth against a backdrop of lackluster corporate spending on gear and software. And then, only the strongest leaders in given product segments were finding success. But now there are signs that the economy is truly softening.

Detroit and Silicon Valley are laying off people in droves. Intel (INTC) is in the middle of mass layoffs, and even turnaround success Hewlett-Packard (HPQ) is still trimming thousands of employees. Yahoo!" miss-it projected fourth quarter revenue well below analysts expectation of $1.3 billion-could now be viewed as a referendum on the economiy and advertising spending. Of cource, Yahoo! (YHOO) is more vulnerable to large national advertisers than rival Google especially in the hard-hit auto and financial sectors. But Yahoo!'s revenue woes might mean the economy is under pressure.

It is the rare tech company that can manage to defy economic trends. For now, that list is short. Google and Apple Computer, and perhaps a few others. Google (GOOG) on Thursday reported quarterly profits that nearly doubled from a year ago, sending its shares up 7.4% in after-hours trading to $457.65.

How much longer can Google pull this off? When Google ultimately misses its numbers, the overvalued tech tape could finally meet its match.

Broad consumer resilience certainly seems absent when Motorola (MOT) misses its third-quarter revenue estimate-about $11 billion-by a full $1 billion, as it did last week. In previous quarters, Motorola has succeeded where others failed, largely on the strength of the RAZR sales, which are no longer growing at an exponential rate. But Motorola has been a consumer darling compared with its enterprise-tech brethren. The company has intro­ duced new models, such as the media-rich KRZR, to take the RAZR's place, but the jmy is out. Meanwhile, profit margins for both Nokia and Motorola will remain under heavy pressme as the two fight for global mm'ket share. (See Tech Trader; page 33.)

Then there is Apple. It continues to amaze and defy. The staying power of iPod sales growth is smprisingly impres­ sive, especially against criticisms that the latest upgrades to the iPod line may not have been dramatic enough to maintain consumer enthusiasm. Plus, there was the launch of Mi­ crosoft's Zune MP3 player, which is not a positive develop­ ment for Apple. Ipod sales of 8.7 million units sm'passed lofty expectations by about 100,000 devices.

On top of that, new Intel-powered Macintosh sales set records by shipping 1.6 million units during the quarter, up 30% from a year earlier and about fom' times the personal­ computer market's growth rate, notes Needham & Co. hard­ ware analyst Charles Wolf. Wolf has predicted that Macin­ tosh sales could fuel future growth of Apple based on high expectations for Windows users to switch to Macs using Apple's soon-to-be-released Boot Camp operating-system software. Customers seem to be snapping up the Intel­ Macs as a result of aggressive pricing and anticipation of the new software, Wolf muses.

Apple's shares (AAPL) shot up nearly 6% the day after the earnings report, to 78.99. That's up 56% from when Bar­ ron's ran an upbeat cover story on the company just a few months ago ("Mac Attack," July 17, 2006). Wolf sees the shares going to about 90.

Apple did say last week that it might have to eventually re­ statl~ the quarterly results owing to an investigation into stock­ option hack-dating, but the market barely flinched. I'm sure ~AP'H Kagermann wonders why his company's shares didn't benefit 1'1'0111 Hllch investor benevolence.

By Mark Veverka