Earnings Warnings Dim Hopes for a Turnaround
The wait for a turnaround in the technology industry was supposed to get shorter this fall. But those expectations have been dashed by a flurry of downbeat reports in recent weeks.
As Silicon Valley returns to work this week, analysts are bracing for a fresh wave of warnings about third-quarter earnings from key tech firms.
Last week, Tokyo-based Toshiba Corp., the world’s second-largest semiconductor maker, said it would report a nearly $1-billion loss this year, instead of an expected handsome profit. The company said it would cut 10% of its staff.
Another report showed that global shipments of mobile phones, previously considered a relatively safe bet for continued growth, dropped 7% from the first quarter to the second.
Also last week, high-end computer maker Sun Microsystems Inc. said it might lose money this quarter. And Gateway Inc., the nation’s fourth-largest PC maker, said it would lay off as much as 25% of its employees.
The dismal reports have reinforced the sense that the tech sector still hasn’t reconfigured itself for what many analysts expect will be an era of weaker demand for tech equipment.
The reason you’re seeing the restructurings and layoffs [continue] is that they had built infrastructure within their own companies as if 20% growth [in tech spending] was perpetual,” said Kay Doremus, a senior sector analyst at Banc of America Capital Management in St. Louis. “That’s why you’re seeing so many of these companies struggle as demand has fallen off.”
In fact, 20% or better growth in technology investment was a fluke, driven in part by the race by companies to establish a Web presence in the late 1990s, analysts say.
Overall tech spending will fall this year for the first time in at least a quarter of a century, Doremus estimated. When growth resumes it will be at a more normal rate of about 12% a year, she said.
The question, of course, is when that turnaround will begin.
The dwindling number of top executives and analysts who feel like hazarding a guess are betting on later rather than sooner--well into next year, in fact.
‘Doom and Gloom’ in Projections
One leading indicator is the number of companies warning of weaker-than-expected earnings in the near term.
At this point in the first quarter (i.e., with four weeks to go before the quarter ended) a then-record 370 companies, including 137 tech firms, had issued negative “preannouncements” about earnings for that quarter, according to Chuck Hill, research director at earnings-tracker Thomson Financial/First Call in Boston.
The number of warnings for the current quarter already has passed the old mark, with 377 firms issuing negative preannouncements, including 124 tech firms.
The height of earnings warnings often occurs two to three weeks before a quarter ends.
“Talk about doom and gloom,” Hill said.
Analysts’ estimates of tech company earnings for the fourth quarter and for 2002 are tumbling in tandem with the third-quarter warnings.
Two months ago analysts on average expected blue-chip tech firms to post a 24% decline in fourth-quarter earnings from a year earlier, Hill said. Now the average forecast is for a 42% earnings decline, he said.
And the projections for a return to growth in the first quarter of 2002 are getting more and more modest.
The new wave of pessimism is remarkable because it follows what already have been four or more quarters of sequentially flat or declining profit--even as loosely defined as that term is by tech firms--at such blue chips as Cisco Systems Inc., Dell Computer Corp. and Intel Corp.
Still, some tech CEOs have hinted that the worst soon will be over. Cisco Chief Executive John Chambers said on Aug. 23 that the company was “beginning to see signs that our business is stabilizing.” And Texas Instruments, the top supplier of chips for mobile phones, last week said orders were starting to pick up.
Tech Rebound Might Be Slow
But even the end of steadily worsening news doesn’t mean tech company fortunes soon will swing positive.
“It may be true that orders might not get much worse,” Hill said. “But who knows how long we can bounce along the bottom?”
Because technology has become a larger percentage of the economy as a whole, it is more dependent on the overall global outlook. And for a number of reasons, a resurgence of demand for goods and services worldwide may well be slower than it has been in the past, some economists warn.
Within technology, the quickest pickup might come in relatively unfamiliar places, said portfolio manager Mark Herskovitz of the Dreyfus Premier Technology Growth Fund, ranked by mutual fund tracker Morningstar Inc. in June as having one of the best three-year records among tech funds.
“The quicker any technology sector becomes successful, the more quickly it becomes a commodity,” Herskovitz said. True now of personal computers and networking gear, that trend dates back to railroads and electricity, he said.
So Herskovitz is exploring companies that assume their customers already have networked computers and are providing another edge--for example, software that manages contracts or manufacturing.
Like many analysts, he warns against getting too pessimistic about tech spending in the long run. In tough times, “how are corporations going to try to grow revenue without spending on technology?” he said.
“As long as the fundamental value proposition of technology remains intact--that companies need it to stay competitive--over the long term, technology will continue to grow faster than the rest of the economy.”
