Strong Tech Earnings Don’t Halt Markets’ Decline
If investors suddenly have a problem with technology stocks, it can’t be with the earnings growth many companies are reporting for the first quarter.
Sun Microsystems, one of the largest makers of computers that power Internet sites, said late Thursday that its profit in the latest quarter jumped 49% as sales of server computers surged.
Profit from operations rose to $436.2 million, or 26 cents a share, in the quarter ended March 26, from $292 million, or 18 cents, a year earlier.
Analysts had expected earnings of 23 cents a share, the average estimate from First Call/Thomson Financial. So-called whisper numbers published on the Internet were for profit as high as 25 cents--so Sun beat even those.
Sun is one of many tech companies, large and small, whose earnings reports in recent days have topped Wall Street’s expectations, which were already high.
Other firms reporting better-than-expected results this week have included Internet infrastructure firms Juniper Networks and Foundry Networks, chip company Advanced Micro Devices and document management company FileNet.
The results point to continued strong investment by many businesses in technology equipment--exactly the reason why so many investors were enamored of tech stocks in January and February, sending the shares rocketing.
Still, the issue that has loomed over many of the stocks in recent days isn’t their earnings growth per se, but how much of that growth has already been reflected in the stocks’ gains. Despite the declines in many tech stocks, their prices relative to underlying earnings per share remain extraordinarily high.
Sun’s stock, for example, is priced at 85 times the 91 cents a share the company is expected to earn in its fiscal year ending June 30. Foundry Networks’ stock is 190 times its estimated 2000 earnings per share.
By contrast, the average blue-chip stock’s price-to-earnings ratio is about 27.
Nonetheless, the latest earnings reports at least confirm that tech remains a premier growth industry, analysts say. At some point, that should help the stocks to stabilize--though when is anyone’s guess.
Not all of the earnings news has been positive, of course. Indeed, Motorola helped trigger the latest tech rout with its warning this week that second-quarter results will come in slightly below expectations because of stronger competition in the wireless phone market.
But reports from Sun and other firms show still-strong sales and earnings momentum in the tech sector.
Sun’s sales grew 35% to $4 billion in the latest quarter as businesses bought Sun’s powerful servers and software to run Web sites. The company started giving away some software and introduced new services for start-ups as it looked to woo more customers, helping it beat rivals Hewlett-Packard Co. and International Business Machines Corp. for some accounts.
“Everything looked good,” said portfolio manager Scott Vergin of Lutheran Brotherhood, which owns 1.1 million shares of Sun. “Everything was better than expected--revenue growth, earnings, order growth.”
Orders rose 41%, and Sun Chief Financial Officer Michael Lehman said demand has been strong through the first weeks of the current period, the company’s fiscal fourth quarter, which ends in June.
“Q4 [fourth quarter] is shaping up to be very strong,” Lehman said on a call with analysts and investors. He said fiscal 2001 sales and earnings are expected to rise 25% from fiscal 2000.
Sun shares fell $2.25 to $77.75 in regular Nasdaq trading but rose to $79.63 in after-hours activity.
Sun has faced increasing competition from Microsoft Corp.’s Windows 2000, which was introduced in February, as well as the growing popularity of the Linux operating system. To combat those offerings and lure more users, Sun made some of its software source code available to developers and started giving away some of its Solaris software.
Sun added 730 start-up companies as customers and is making inroads in new markets such as health care and entertainment, Lehman said.
On the call, Sun executives sought to allay fears that a new version of the company’s UltraSparc III microprocessor might be delayed. President Ed Zander said the company will start shipping products next quarter and the chips are running as fast as 750 megahertz. A copper version of the chip is in development, which is expected to be even speedier.
“There is no change to our schedule,” Zander said.
At a Glance
Other technology sector earnings, excluding one-time gains or charges unless noted:
* FileNet Corp. late Wednesday said quarterly earnings rose to $6.5 million, or 18 cents a share, from $2 million, or 6 cents a year earlier. Analysts had expected 15 cents. Sales jumped to $92.8 million from $81.4 million.
* Foundry Networks said first-quarter earnings surged to $19.3 million, or 15 cents a share, from $2.1 million, or 2 cents, beating the average estimate of 9 cents. The StreetIQ.com Web site listed the so-called whisper number as 11 cents a share. The maker of computer networking equipment said revenue more than quadrupled to $70 million from $15.4 million.
* Gateway Inc.’s profit jumped 37% to $136 million, or 41 cents a share, in the first quarter on sales from its higher-profit services businesses. The No. 2 direct seller of personal computers said revenue increased 11% to $2.34 billion. Gateway’s PC sales were hurt in the previous quarter as corporations delayed purchases to test for Year 2000 glitches. The earnings were in line with the average estimate of analysts from First Call/Thomson Financial.
* Iomega Corp. said first-quarter profit climbed more than fiftyfold to $31.7 million, or 12 cents a share, from $569,000, or zero cents a share, as cheaper operating costs for its mainstay Zip computer storage drives more than offset a decline in sales. The results blew past estimates of 4 cents. Zip revenue fell 8% to $278.5 million.
* Juniper Networks Inc., which competes with Cisco Systems in high-capacity computer-networking equipment, reported a better-than-expected first-quarter profit, contrasted with a year-earlier loss, as sales rose sixfold. The company also set a 2-for-1 stock split.
Net income was $10.5 million, or 6 cents a share, contrasted with a year-earlier loss of $5.77 million, or 13 cents. Analysts were expecting 3 cents a share, with whisper numbers as high as 6 cents. Revenue surged to $63.9 million from $10 million.
* KLA-Tencor Corp. reported better-than-expected earnings for its fiscal third quarter, but concern over lower orders pulled its shares down. KLA had net income of $73.3 million, or 38 cents a share, for its fiscal third quarter, up from $20.8 million, or a split-adjusted 11 cents, a year ago, as sales rose 96% to $413 million.
Shares in KLA-Tencor, maker of inspection equipment for semiconductor companies, fell $13.25 to close at $64.75 in trading of 12 million shares, after rising as much as 6% to $82.75.
* PMC-Sierra Inc., a designer of chips for networking and fiber-optic equipment, said first-quarter earnings more than doubled to $28.2 million, or 17 cents a share, from $9.42 million, or 6 cents, a year earlier. Revenue climbed to $102.8 million from $50.4 million. The earnings beat the consensus estimate of 16 cents. But whisper estimates were as high as 18 cents. Separately, PMC-Sierra named Chief Executive Bob Bailey as the company’s chairman. James Diller, the previous chairman, will become vice chairman.
* Webvan Group Inc. said its pro forma loss widened to $38.7 million, or 12 cents a share, from $9.8 million, or 4 cents, a year ago, as the Internet grocer increased spending to advertise and expand its business. Analysts were expecting a slightly larger loss of 13 cents. Sales jumped to $16.3 million from $9.07 million.
