What a great week for tech stocks.
, a standout in the depressed chip sector, posted upside surprises, while the
and Goldman Sachs software index moved within shouting distance of their 52-week highs. And, oh yes, the
Those heavyweights had plenty of company.
As of Thursday evening, 151 of the
companies had reported quarterly earnings: 74% outdid expectations, 16% matched and just 10% flopped, according to Thomson First Call.
John Butters, a First Call analyst, says the typical split is roughly 60%-20%-20%. "This is a very strong quarter -- so far," he said.
And the sector doing the best, he adds, is tech. On average, the 25 tech companies that have reported so far have beaten earnings expectations by 10%, compared with a 5% upside for the nontech stocks in the S&P.
Freed from its money-losing PC business, IBM continued to gain strength and exemplified the return of the big-cap tech stock. Once derided as "dead money," Big Blue,
and most notably,
, have regained investor interest.
Indeed, Oracle, capitalizing on the apparent success of its $20 billion acquisition spree, has appreciated by a 55% this year.
Although IBM's run-up has been a much-less spectacular 9%, the company's third-quarter report was a home run that pushed shares to a 52-week high. Not surprisingly, software was again the star, with sales totaling $4.4 billion, rising 9% over the same quarter last year.
The 9% figure is significant, because it comes in at the high end of targets set by Senior Vice President Steve Mills, who heads the company's software operation. Last year, the group grew revenue by 4%.
in an interview with
, Mills said he expects his team to grow revenue by 6% to 9%.
Moreover, software continues to be a driver of profit. In 2005, for example, the software group posted sales of $15.8 billion, or about 16% of the company's total revenue, but 37% of its profit.
And in the just-reported quarter, software contributed 19.5% of revenue but approximately 40% of the company's pretax net income. Gross profit margin for software was 85.3%, while pretax operating margin increased by a point to 26%.
Interestingly, software based on service oriented architecture (SOA), derided by some pundits (you know who you are, John Dvorak) as "just a buzzword," has become a significant revenue-driver for IBM, says Kristof Kloeckner, vice president for strategy and technology for the software group.
Roughly one-third of sales for the group's Tivoli and WebSphere brands were related to SOA. "It's fair to say that SOA has reached a tipping point," Kloeckner said in an interview.
SOA allows software applications to act as services that can be mixed and matched to meet the needs of diverse business processes. It's become a major front in the battle between IBM and other infrastructure providers, notably
Even hardware companies like storage giant EMC are beginning to focus on SOA. Of course, EMC isn't exactly a pure-play hardware company anymore.
In the second quarter, nonbundled software revenue accounted for $1.08 billion of EMC's $2.8 billion quarterly revenue, or just under 40%.
EMC doesn't break out profit figures, but because typical software gross margins are about 85%, and EMC's total gross margin was 52.7%, it's likely that software now contributes more than half of the company's profit.
The blue-ribbon quarter for Big Blue software does well for the rest of the sector. "The Q3 report showed that demand in key segments continues to be healthy, and barring any major market share gains, we believe independent vendors should be able to generate similar growth results," Credit Suisse analyst Jason Maynard wrote in a note to clients this week.
Next week promises to be very interesting as well, with Microsoft reporting first-quarter earnings after the closing bell Thursday, and Oracle hosting some 60,000 people for OpenWorld, at San Francisco's Moscone Center.
CEO Larry Ellison will give a keynote address Wednesday afternoon, and the big question is: Will Oracle offer its own version of Linux? If it does (but right now the betting is running against), life gets a lot more complicated for