IBM service contracts boost profit
IBM, which had strong second-quarter earnings, is known as an indicator for the health of tech stocks. Then why did other tech giants fall flat? Janet Babin has the story.
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TEXT OF STORY
There has been all manner of curious thinking in the markets, this week. Stocks have moving on expectations about expectations. Disappointments have been recast as triumphs. Just today, Citigroup announced a loss of $2.5 million. Yet, somehow, that's a good thing. Today, Google and Microsoft gave investors something else to rethink: turns out, even trusted technology stocks aren't immune to an economic downturn. Shares in both of those companies got hit by lackluster earnings. But tech is a big sector and not all of it's in trouble. From the Marketplace Innovations Desk at North Carolina Public Radio, Janet Babin reports.
Janet Babin: Google took it's biggest one-day hit ever today -- down almost 10 percent. Now, it's at the bargain price of $481 dollars a share. The Internet search creator fell from grace after its CEO admitted the obvious: Eric Schmidt said on a conference call, "This is a challenging economic environment to do business in." Piper Jaffray Analyst Gene Munster says, if Google's feeling the pressure, everybody is. That includes Microsoft which also took a hit today.
Gene Munster Yes, if Google says something and it is negative, it's gonna give some cover for other companies to make similar comments. And so, there's just a general belief that as earnings get ramped up next week that we're going to hear more comments like that.
The company that's now a verb has one of the most talented tech staffs around. But analyst Martin Pyykkonen with Global Crown Capital says Google's not in the tech business.
Martin Pyykkonen: At the end of the day, in terms of running the business and how they get paid, it is through advertising.
And we all know what happens to ad budgets in a weak economy -- they get cut. Firms with more of a hardware focus, like Intel and IBM, don't have that problem. Big Blue's profits were up more than 20 percent. MIT professor Michael Cusumano says more than half of IBM's business now comes from long-term service contracts:
Michael Cusamano: When IBM comes in and takes over the information technology operations of a big company, they become entrenched in that company, and those kinds of revenues are very sticky.
A global focus also helps. Long term though, a broad economic slowdown sticks to most every business.
I'm Janet Babin for Marketplace.
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