Google, IBM results raise questions about other tech-sector companies

Both companies missed Wall Street revenue targets

Disappointing results from Google Inc and IBM may unnerve investors shaken by a strong recent selloff in tech stocks, underscoring the challenges the Internet and IT sectors face as corporate report cards come due in coming weeks.

The two companies, both barometers of their respective industries, posted March-quarter results on Wednesday that missed Wall Street's revenue targets, and their shares fell in after hours trade.

IBM blamed weak hardware sales for its lowest quarterly revenue in five years, worsened by an 11% slide in overall sales in emerging markets including China, Brazil, Russia and India.

That spells trouble for other tech companies reliant on enterprise-spending, such as Oracle, Cisco, EMC and Hewlett-Packard, which report results this month or next. Like IBM, they have struggled to grow their businesses, particularly in China, whose economy is down-shifting after years of hyper-growth.

Enterprise spending in general has been on the wane for traditional computing giants as corporations and even governments increasingly turn to software-as-a-service (SaaS) and other cloud offerings instead of maintaining their own in-house technology infrastructure. Many, including IBM and Oracle, have been left behind by smaller, younger rivals as spending goes toward emerging areas like big data, cloud and cyber security.

"We're seeing a lot of traditional technology vendors struggle," said FBR analyst Dan Ives.

"You're seeing spending go away from big-bang projects toward smaller, more modular types of deployments, which speaks to why a lot of SaaS players are doing well. Customers want to buy just the drink rather than the whole bar."

Google's and IBM's poor results on Wednesday may do little to change investors' sentiment following a recent drop in tech stocks. Since early March, the tech-heavy Nasdaq index has fallen over 6%.

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With the latest results factored in, including IBM and Google, tech earnings growth estimates for the quarter have fallen by roughly two-thirds since the start of the year, according to Thomson Reuters data.

On Jan. 1, as the first quarter got under way, analysts on average predicted tech earnings would grow by 7%. But now, as first-quarter reports trickle out, analysts on average expect growth of just 2.4%, according to the data.

That also marks a deceleration in tech profit growth from the fourth quarter, when it totaled 10.3%, but it is an improvement from 2013's first quarter, when tech profits shrank by 1.2%.

In Google's case, investors initially pummeled the stock in after-hours trading after the world's largest Internet company reported its miss, plus a drop in margins as cost-per-click, or the average price of an online ad, slid 9%.

The shares rebounded after CFO Patrick Pichette attributed that profitability decline to a spike in expenses partly because of its $3.2 billion acquisition of home automation pioneer Nest last quarter, which tacked on a raft of payroll and research costs.

More broadly, the three largest Internet corporations - Google, Facebook Inc and Twitter Inc - have each grappled with advertising on mobile devices, where the growth is currently concentrated, and where smartphones with smaller displays typically command lower ad prices than on desktop PCs.

For investors in Google, accustomed to the company enjoying one of the highest ad margins in the business, mobile ads have translated to a steep drop in ad rates. The transition has been less jarring at Facebook, which once relied almost exclusively on low-margin display or banner ads.

Twitter, which had difficulty monetizing its 140-character stream-of-consciousness messaging model, is catching on with TV advertisers because of its growing position as a "second screen" to accompany TV viewing.

"People are trying to adapt to a new delivery system which is mobile," said B. Riley & Co analyst Sameet Sinha. "It is a challenge for most companies, and it's going to be here for the next couple of years."