Not All Tech Firms Seeing a Quick Return to Profit

The encouraging signs that the top of the technology pyramid has weathered the worst of the economic slump has obscured a sobering reality: The nuts-and-bolts companies that form the foundation of the industry are still mired in a meltdown.

Firms at the top of the hierarchy such as Microsoft Corp., Yahoo Inc. and Compaq Computer Corp. sparked optimism on Wall Street this week with earnings, though anemic compared with the boom years of the late 1990s, nonetheless signaled that the period of freefall has ended.

Those front-line companies are best positioned to feel the early stirrings of renewed demand from consumers and businesses. But they are merely the first links of a long chain of events that will take at least a year to ripple through the entire supply chain of the high-tech economy.

The bottom is populated by thousands of companies such as Applied Materials Inc., KLA Tencor Corp. and Novellus Systems Inc., which make the equipment needed to produce microchips. Their stocks plummeted this week after chip-making giant Intel Corp. said it would cut its capital spending 25% in 2002 despite fourth-quarter earnings that beat analysts’ expectations.

Shares of Applied Materials are off 11.5% since Intel’s announcement Tuesday. KLA Tencor is down 9.7%, and Novellus Systems has slumped 10.6%.

“The fourth quarter is a mixed bag,” said John Corcoran, an Internet analyst with CIBC World Markets in Boston. “It depends on the sector, it depends on the segment of the sector, and it depends on the particular company. It depends on where they are in the cycle and what they do.”

The gradual rippling process of recovery is being played out in all the major sectors of the high-tech industry: computers, the Internet and telecommunications.

Shares of Yahoo rose nearly 11% on Thursday after the Internet portal reported a narrower quarterly net loss and raised 2002 sales estimates slightly.

But the companies further down the Internet chain are still suffering. Online advertising firm DoubleClick Inc. had a fourth-quarter loss of $64 million, causing its stock to fall slightly.

Even further down the chain are network equipment makers, whose livelihoods depend on demand from healthy Web content and commerce firms. Some of them were once among the highest of the high-fliers when dot-coms were powering the industry.

Juniper Networks Inc. captured one-third of the market for Internet routers with its faster machines, but since then its customers have slashed spending. After reporting a fourth-quarter loss of $5.13 million on Tuesday, its shares fell 5.6% in one day, to $16.96. It has since recovered to $17, but is still just a fraction of its high of $243 in October 2000.

Analysts say it will take at least a year for the recovery that is beginning to lift front-line companies such as PC and software makers to ripple through the economy and lift companies that are several layers removed from end users in homes and businesses.

The process of recovery cannot even begin in earnest until this summer, when corporations--which drive the bulk of tech spending--begin working on their budgets for 2003, said Rob Enderle, a technology analyst with Giga Information Group in Santa Clara, Calif.

Only when their budgets are set can PC makers begin to forecast how many computers and servers they’ll be able to sell. Based on those estimates, they order components such as microprocessors from Intel, Advanced Micro Devices Inc. and other suppliers.

They, in turn, compare those orders to the inventory they have on hand and then decide how much to spend on capital equipment, such as the machines needed to fabricate chips. Only then can the recovery trickle down to companies like Applied Materials, and the sobering reality is that there is little they can do but wait, Enderle said.

“Until then, they can all go to Aruba in sailfishing boats,” he said.