Tech: Down, but definitely not out

Sales and profits were largely dim amid the recession. Some firms managed to impress, while others offered hope of a better times to come.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Big tech firms from IBM to Microsoft reported less-than-stellar financial results this week -- but there were pockets of optimism and most companies expect the end of 2009 to look much brighter.

The quarterly numbers were expected to be rotten, especially coming in the midst of a deep recession, and they were. Microsoft's sales fell for the first time in the company's history as a public company, Apple's Mac sales fell for the first time in five years, and Yahoo announced it would cut 5% of its workforce. IBM (IBM, Fortune 500) reported a decline in its quarterly revenue and profit on the same day that rival Oracle scooped up once-coveted Sun Microsystems for $7.4 billion.

The economy factor: Most big tech companies have gotten slammed by a shift in consumer spending during the economic downturn. A marked shift toward cheaper, scaled-down computers called "netbooks," hurt companies such as Microsoft, which offers a much less expensive version of its Windows operating system on those computers. Chipmaker Intel has also been hurt by about a 7% drop in PC sales.

Similarly, IBM's revenue was dragged down by business' shift away from purchasing new server units, as a growing number of clients opt for off-site "cloud" computing solutions. Sales in IBM's server division slumped 23% in the last quarter.

"For a number of big tech companies, if the overall economy is not doing well, they're not going to do well either," said Carl Howe, tech analyst with Yankee Group. "Some are in a number of different businesses and track like index funds. Others are going to track PC sales and some are media companies in an industry that's under pressure."

Shining stars: It wasn't all bad. Some companies managed to surprise analysts and investors with better-than-expected sales.

Amazon (AMZN, Fortune 500) impressed with its earnings and revenue, driven by more customers opting for online deals and its Kindle ebook product. Apple's iPhone sales more than doubled from last year, beating everyone's expectations. And last week, Google reported that profit was up, roundly beating Wall Street's expectations.

What made Apple (AAPL, Fortune 500) and Amazon's financial reports so impressive is how the companies were each able to successfully sell expensive products in the current consumer climate. IPhones and Kindles don't come cheap, and people have been shying away from discretionary purchases lately.

Google's ability to squeeze out higher profit was also exceptional, because its advertising sales were down a bit more than expected. Competitors such as Yahoo and Microsoft couldn't manage that -- Microsoft even suffered a loss in its ad sales division.

"Google and Apple are well established brands that are monetizing nicely," said Howe. "It's a great business model to find a defensible niche and stay there, and these companies are standouts in a premium part of the market."

A turnaround is coming: Many of the tech companies that have been hurt worst by the recession said they believe the turning point is near, but cautioned it will be gradual.

Last week, Intel (INTC, Fortune 500) and mobile phone company Nokia (NOK) reported steep declines in their earnings from a year ago. But both the companies' CEOs said they believed computer and mobile device sales had reached a bottom and that the consumer environment is beginning to improve.

Yahoo (YHOO, Fortune 500) is banking on cost-cutting to boost its bottom line. The company has pledged to eliminate some of its less successful products, a move it hopes will translate into earnings this quarter that will roundly trump analysts' forecasts.

Ebay, whose earnings and sales fell last quarter, also hopes trimming down and cutting non-core assets like Skype will revive its revenue and profit.

Meanwhile, Microsoft (MSFT, Fortune 500) said the release of its Windows 7 operating system in early 2010 (analysts believe it will be released much sooner), as well as a number of other new products coming to market later this year will help fuel sales even if the consumer environment remains stagnated.

Analysts said predictions are nice, but in this environment, investors want results.

"If any of these companies could accurately forecast events, they wouldn't have to sell products to make money," Howe said. "They all have to plan for ways to make their companies better during the recession, but the truth is that no one can predict the future accurately."

Words of caution: Chris Liddell, Microsoft's chief financial officer, said Thursday that he expects a slow, gradual change, and made clear that he thought conditions would continue to get worse before they got better.

"I didn't see any improvement at the end of the quarter that gives me encouragement that we're at the bottom and coming out of it," Liddell said. "I'd like to, but I don't."

Google also said the economic downturn has taken a toll on its core business, and it expects ad sales will worsen in the next six months as the recession wears on. To top of page

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