Tech Sector on Edge for Flood of Warnings Next Week

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Friday March 30 8:06 PM ET Tech Sector on Edge for More Warnings

By Peter Henderson

SAN FRANCISCO (Reuters) - A stream of warnings from the technology sector is set to turn into a flood next week as companies admit that hopes for an end-of-quarter rally in sales were dashed, firms and analysts said on Friday.

Many technology companies typically book a large chunk of sales at the end of the quarter and the stakes are higher this quarter because of the slowing economy.

As a result, analysts are braced for earnings warnings from a wide range of sectors in the coming weeks, including some from companies that have already warned once during the course of the rocky first-quarter.

Already there are signs of new trouble for suppliers to the network storage sector, once considered largely immune to the broader slowdown in corporate spending.

``Clearly there was some additional demand that we thought would materialize near the end, and held off making this announcement until we confirmed they weren't going to,'' Clark Foy, vice president of marketing at Gadzoox Networks Inc.(Nasdaq:ZOOX - news), said in an interview after his company announced on Thursday that quarterly revenue would fall $2.5-$3.0 million short of its initial forecast.

Foy said the economy alone was to blame and Gadzoox would not be the last to warn in the previously go-go sector. ``I fully expect that this is hitting anybody who is in storage. Anybody.''

JNI Corp.(Nasdaq:JNIC - news), which makes parts for storage networks, also warned this week, saying sales of Sun Microsystems Inc.(Nasdaq:SUNW - news) servers with which its own products are often bundled were not going well.

Bear Stearns took the opportunity to cut its outlook to a 3-percent rise in Sun's revenue. That compares with the 10-13 percent increase in revenue that the company had forecast in mid-February amid an earlier warning.

``There is a possibility that Sun will guide down expectations,'' analyst Andy Neff said in a recent note.

Sun warned in late February that a slowdown in capital spending had hit U.S. demand and the company lowered its revenue and profit targets for its third-fiscal quarter, ending Friday.

Sun typically books as much as 50 percent of quarterly sales in the crucial final month, officials have said. Third-quarter results are due to be released April 19. A company spokesman could not be immediately reached Friday.

Dominoes To Fall

Debra McNeill, a portfolio manager at Fremont Investment Advisors, said she was suspicious of any company, like Dell Computer Corp. (Nasdaq:DELL - news), that said business was on track while peers -- like Compaq Computer Corp (NYSE:CPQ - news) and Gateway Inc.(NYSE:GTW - news) -- warned.

``I'm skeptical, but I would love to be proven wrong,'' she said.

Companies that have already warned are not necessarily immune, as communications giant Nortel Networks Corp. (NYSE:NT - news) showed, warning this week for a second time.

``The slowdown has not found the bottom yet, so most companies that warned once in January or February and their business is continuing to deteriorate, they will be back for more warnings,'' said Jaye Morency, portfolio manager with Boston-area investment advisor David L. Babson & Co.

Hard-hit telecoms service providers are watching spending carefully, which could lead to new downward revisions from bellwethers Cisco Systems Inc. (Nasdaq:CSCO - news) and JDS Uniphase Corp. (Toronto:JDU.TO - news), both of which already have either warned of the slowdown's impact or cut estimates, analysts said.

The technology sectors most likely to deliver bad news next week are those that rely most heavily on last-minute sales, such as software companies, and parts suppliers who are farthest from the final buyer and so most likely to be caught with inventory, said one portfolio manager who asked not to be named.

``Next week is going to look like this. You are going to have a lot of software companies that are going to have to say 'I missed.' You are going to see a lot of these guys with component (inventory) issues who said I thought I would be down 10 percent and I'm down 25 percent,'' he said.

That could include chip makers, although many have preannounced this month, he said.

Software companies which depend on a small number of big deals that might or might not come through, could be especially pressured as customers delay buying until the next quarter, Merrill Lynch analyst Chris Shilakes said in a recent note, citing Ariba Inc. (Nasdaq:ARBA - news) and Commerce One (Nasdaq:CMRC - news) and i2 Technologies Inc.(Nasdaq:ITWO - news).

``The likelihood of an earnings disappointment remains high for these companies in the near term,'' he wrote.

E-commerce pioneer Amazon.com Inc. (Nasdaq:AMZN - news), has upheld its guidance despite analyst concerns over how the online retailer plans to achieve profitability. Software developer Microsoft Corp. (Nasdaq:MSFT - news) has also stuck to its forecasts, but Rick Sherlund of Goldman Sachs, considered Wall Street's top Microsoft analyst, last week trimmed his estimates for the company, saying that he expects it to post profits of 41 cents a share in the quarter, a penny below the consensus. http://dailynews.yahoo.com/h/nm/20010330/tc/warnings_dc_1.html

-- Carl Jenkins (somewherepress@aol.com), March 31, 2001


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