IBM (IBM) And Google (GOOG): The Corporate Recovery Has Not Arrived

IBM (NYSE:IBM) and Google (NASDAQ:GOOG) each reported better-than-expected earnings. Wall St.’s reaction to the Google numbers was muted and its stock moved up 3% to $547. IBM raised its guidance for the year, but the market was disappointed and pushed the computer giant’s shares down by 3% to $123. Google and IBM both trade near their 52-week highs, so the slight price movements are hardly a sign of any real disappointment or jubilation

The large computer company and large search firm are among the pantheon of American tech stocks which also includes Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), Intel (NASDAQ:INTC), and Hewlett-Packard (NYSE:HPQ). All of the companies have market capitalizations over $100 billion. All have cash balances in the tens of billions of dollars. Each has such a large part of its market that it has no real, direct challengers, except perhaps the other companies on Olympus.

Unfortunately, none of these companies is growing very fast if they are growing at all. Google’s revenue moved up 7% in the third quarter to $5.94 billion. That number should seem impressive, but it isn’t. One of the greatest tech companies in history, now barely a decade old, should be able to grow faster than the economy. Google’s reputation is based on its sales expansion. Seven percent is not good enough. Google’s operating profit improvement was a result of cost controls and not an impressive improvement in revenue. Operating income at the search company was $2.1 billion up from $.1.65 billion in the same quarter a year ago. But, Google, which has been known for hiring thousands of people a year and making investments of tens of millions of dollars in experimental technology, actually cut its expenses very slightly compared to last year’s third quarter. That is not like Google at all.  Google now has to manage costs along with innovation. That was never true before.

IBM is nearly a century old, not eleven years old, like Google . The computer and IT services company has gone through a reinvention in the last five years. Hardware sales are now a modest part of revenue and not the core of IBM’s operations. IBM’s technology service and software operations dominate its business. The diversification has not kept the recession from its door. IBM’s revenue dropped 7% last quarter to $23.6 billion. Global business sales dropped over 11% to $4.3 billion. The firm’s legacy hardware sales operation also lost over 11% of its revenue, dropping to $3.9 billion. IBM is not in trouble, but it is not in robust health either.

IBM’s ability to do well with its bottom line was due to its cut in R&D expenses by over 8% to $1.44 billion and its decrease in administrative and sales costs by 11% to $5 billion. IBM is a nearly perfect example of a management team’s ability to make judicious cuts, but there is a point at which R&D has a value that reaches so far beyond the current quarter that reducing its cost almost certainly will have future consequences.

The one thing that economists and securities analysts said they wanted to see in third quarter results was revenue growth. Companies can keep improving profits, at least short-term, by cutting costs and firing people. Costs that can be cut begin to give way to cutting costs which are essential to the ability for competition in the future. Executives rarely know exactly where that line is until after the fact.  That is, until it is too late.

This earnings season, which is still in its early stages, is starting to tell a story. Business and consumer spending has not recovered. The greatest growth company in the world only improved its sales by 7%. These are trends which mean that job growth is not going to occur soon. When rich companies are not adding people, or are actively cutting them, the balance of the business world is almost certainly in no position to expand.

IBM and Google did fine, but not well enough to offer any encouragement on the state of the economy.

Douglas A. McIntyre