Red flags on Wall Street : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Published Saturday, October 7, 2000, in the San Jose Mercury News


Red flags on Wall Street From the dot-coms to Intel, no part of valley is spared BY CECILIA KANG Mercury News

Like falling dominoes, more than a dozen high-tech companies have warned of gloomy financial results and dragged down the Nasdaq composite index by 12 percent in two weeks.

From hardware giant Intel Corp. to dot-com bellwether Inc., all parts of Silicon Valley have been touched -- including four technology companies that said Friday they won't meet revenue and earnings expectations. It's an unusual turn of events for high-tech firms accustomed to leading the stock market's incredible bull run.

October has traditionally been a month for companies to unveil bad financial news, but the string of negative announcements has many asking: Is the party over?

Economists say the U.S. economy has been cooling for months and that high-tech companies are just the latest to sober up.

Retailers like Gap Inc. and J.C. Penney Co., they note, have struggled with sluggish sales all year.

``Once it became clear the economy was beginning to slow, the premise that technology companies are immune from economic ups and downs was challenged,'' said Tom McManus, a portfolio strategist at Banc of America Securities in San Francisco.

The troubles started with Santa Clara chip maker Intel, which reported Sept. 21 that sales would be weak because of sluggish European demand. Every day since, it seems like another company is delivering the same kind of dismal news. Cupertino-based Apple Computer Inc. issued an earnings warning Sept. 28. Dell Computer Corp. of Round Rock, Texas, warned of weaker results on Wednesday.

On Friday, four others joined the growing list. Software maker Marimba Inc., Internet consulting company Razorfish Inc., disk drive components manufacturer Veeco Instruments Inc. and software maker Hyperion Solutions Inc. warned of weaker results. The companies were punished by antsy investors. Marimba's stock dropped 49 percent to $5.63; Razorfish dropped 43 percent to $5; Veeco slid 34 percent to $67.56 and Hyperion fell 38 percent to $12.

The Nasdaq composite index dropped 111.09 points, or 3.1 percent, Friday to close at 3,361.01. The Dow Jones industrial average fell 128.38 points, or 1.2 percent, and closed at 10,596.54.

Friday's victims and others this week came up with a variety of excuses for their mishaps. Razorfish, like Intel, blamed European demand, and others pointed to economic factors like higher oil prices and high interest rates.

Hardly tough times

But before you throw in the towel, keep in mind that experts say ``slower'' times in Silicon Valley hardly mean tough times. The difference is that sales of some high-tech goods aren't going to be as phenomenal as in previous years. For example, global sales of personal computers are expected to grow 19 percent this year compared to 23 percent growth last year, according to research firm International Data Corp. While the rate of PC sales growth will be down, a 19 percent increase isn't anything to scoff at.

``The economy is cooling, but it isn't going to heck in a handbasket,'' said Larry Wachtel, an analyst at Prudential in New York.

Recent data is mixed on the temperature of the economy. With U.S. unemployment down to 3.9 percent, fewer Americans are jobless than at any time in three decades, according to a Labor Department report Friday.

Still, sales of new single-family homes fell in August and consumer spending in the second quarter grew at its slowest rate in three years.

Friday's warnings were as much about individual companies as about the economy as a whole.

Mountain View-based Marimba said that because it wasn't able to close several important deals, it would have a third-quarter net loss of 13 cents to 17 cents a share, excluding charges. According to a First Call/Thomson Financial survey, analysts had expected the company to earn about four cents a share in the quarter.

And some companies have simply fallen out of favor, said Melissa Eisenstat, an analyst at CIBC World Markets in New York.

Systems management software maker BMC Software Inc. and mainframe computer software maker Computer Associates International Inc. pre-announced lower-than-expected results earlier this week. The two companies also pre-announced poor results last quarter, due to a general slowdown in their industries.

Technology budgets

Companies are spending more of their technology budgets on Internet-based software than on computer systems software, said Eisenstat.

She said the focus is more on software makers that provide Web-based applications that allow companies to sell, communicate and run their operations over the Internet.

Bob Austrian, an analyst at Banc of America Securities noted that applications vendors like Oracle Corp. and Siebel Systems Inc. continue to post healthy results, which indicates the downturn in some businesses hasn't touched all of high tech.

Hardware companies, though, face a slowdown in the growth of personal computer sales. With PCs already in more than half of American homes, computer makers like Dell and Compaq Computer Corp. may find new challenges in selling more computers -- particularly as accessing the Internet becomes cheaper and easier through stripped-down Internet appliances.

``There's not much incentive to do another upgrade cycle,'' said Charles Mosseri-Marlio, an investment adviser at Baldwin Brothers in Marion, Mass.

Observers said the market reaction in recent weeks is healthy.

``Things are becoming more rational,'' Wachtel said. ``People were making too much money too easily and that made the environment more manic. Now, people are much more reasonable.''

-- Martin Thompson (, October 07, 2000


They still do have a tendency to rationalize what's going on, don't they?

-- Uncle Fred (, October 07, 2000.

What will happen when the excuses run out?

-- QMan (, October 07, 2000.

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