Reason for Optimism: Tech Earnings Keep Beating Expectations


After Adobe (NAS: ADBE) and Oracle (NAS: ORCL) both posted earnings last night that pointed toward an improving IT spending environment, investors bid up shares of tech companies in early trading. However, a late-day downgrade of several large banks and an unusual plan by the Federal Reserve to buy mortgage-backed securities sent investors running for cover. The Nasdaq ended the day down a hair over 2%. However, even with the steep decline there's plenty of room for optimism. Today we're checking in on the top stories developing across the technology sector over the past 24 hours.

Tech News No. 1: Red Hat follows up on Adobe and Oracle's success
Investors weren't pleased with Adobe's and Oracle's earnings last night because neither company walloped estimates. Oracle's sales guidance looked light, and while Adobe surpassed expectations, sales are set to be only a few percent above watered-down expectations.

Instead, the rise in both stocks was more a sigh of relief. Economic uncertainty at the tail end of July led almost every tech company reporting earnings last month to warn of a slowing spending environment ahead. The repeated warnings furthered the tech sell-off. Investors don't like uncertainty and came to expect the worst. What Adobe and Oracle showed last night is that IT spending looks to have stabilized throughout August.

After the bell today, Red Hat (NYS: RHT) delivered earnings that should feed more than cautious optimism; the company's earnings were stellar for any economic environment. Sales were up 28% year over year, and Red Hat proceeded to raise full-year guidance, a move that shows a high level of confidence and that stands in stark contrast to tech companies last month that complained of "poor visibility." Best of all, Red Hat's a company that signs long-term contracts, resulting in a high level of deferred revenue recognized in later periods. As a result, cash flow often exceeds reported profits. So it's a pretty bullish sign that the company is also raising its operating cash flow target for the year.

There are still plenty of tech earnings on the horizon, but tech bellwethers reporting August results are certainly pointing toward a rebound off the dreary days of late July.

Tech News No. 2: Is Microsoft the Rodney Dangerfield of tech?
Last night, Microsoft (NAS: MSFT) raised its dividend 25% to $0.20 per quarter, ahead of broad expectations of a $0.19 increase. That leaves the company's yield near 3%. Investors have been clamoring for the company to raise its yield, so surely Microsoft's shares would respond by trading up today, right?

Wrong. Microsoft traded below the Nasdaq all day, closing down 3.67%. What gives? It appears investors got a bit greedy in their expectations. Microsoft generated $2.69 in diluted earnings per share in the past year, so even $0.20 per quarter isn't a huge yield. Investors might have hoped for something like a $0.25-per-quarter dividend, which would still leave Microsoft below a 40% payout ratio but turn it into a high-yielding dividend monster.

However, Microsoft still has plenty of cash held overseas -- and it's set for taxation if brought stateside for dividends -- and it might be eyeing more acquisitions that could require some dry powder. While investors might increasingly want Microsoft to embrace the role of a middle-aged dividend dynamo, that change will continue acting like a slow evolution.

Tech News No. 3: Are you ready for the iPhone 5?
All Things Digital is reporting that Apple (NAS: AAPL) is planning an Oct. 4 media event. The obvious implication? The iPhone 5 is right around the corner.

Apple has a pretty set way of handling major product launches. The company holds an event that drums up plenty of media attention and showcases all of the product's new capabilities and then announces that it'll be available in a short timeframe.

While speculation is rampant just what the iPhone 5 will improve upon, the important point is that Apple's moving ahead with a new phone before the holiday season. Earlier reports had pegged the iPhone launch as maybe being delayed all the way until January. The iPhone 4 continues to be a hot seller despite being on the market for over a year, but even with its continuing success, you don't want to be leaving out hardware for too long in a rapidly evolving mobile market.

Tech News No. 4: Bon Voyage, Leo?
After less than a year on the job, Bloomberg is reporting that Hewlett-Packard's (NYS: HPQ) board is weighing whether it should replace CEO Leo Apotheker. I'm no fan of HP's recent Autonomy acquisition, but I also think ousting a CEO who came to the company with a software background after he's had so little time to transform the company isn't a wise decision. Simply put, if they don't like the direction, why'd they hire him in the first place? I guess HP's learning that trying to become the next IBM is tougher than it looks.

  • Read more about Apotheker and his potential to get the boot.

That's it for today's tech recap. To stay apprised, add any of the major companies mentioned here to our free My Watchlist service today:

At the time thisarticle was published Eric Bleeker owns shares of no companies listed above. You can follow Eric on Twitter to see all of his technology and market commentary.The Motley Fool owns shares of Apple, Microsoft, and Oracle.Motley Fool newsletter serviceshave recommended buying shares of Apple, Adobe Systems, and Microsoft, creating bull call spread positions in Apple and Microsoft, and creating a diagonal call position in Adobe Systems. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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