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Commentary: Tech Investors: Get Ready for "Armageddon"


Right about now, tech companies are tallying up their revenues for the first quarter. The chore isn't likely to take very long. With domestic sales skidding and the global economy weakening, chief executives of such technology bellwethers as Cisco Systems Inc. (CSCO) and Hewlett-Packard Co. (HWP) are warning investors that sales and profits estimates remain way too high. "The March quarter is going to be an Armageddon like no one's ever seen before," says the CEO of one equipment supplier for computer makers.

That's harsh. But indications from shipping companies, suppliers, retailers, and tech CEOs themselves signal that the quarter will be far worse even than already lowered numbers. Among those who haven't yet dampened expectations, industry sources say, those most likely to disappoint investors include Sun (SUNW), EMC (EMC), and Apple (AAPL). Moreover, the sharp slide is in turn raising questions about the rest of the year--and about whether investors have fully absorbed just how bleak prospects have become.

Increasingly, CEOs say they simply can't tell what's ahead. On Mar. 28, shares in onetime stars Palm Inc. (PALM) and Nortel Networks Corp. (NT) became the latest to tumble after executives conceded uncertainty about how deep a trough they face. Forecasting sales levels or growth rates near term "is a bit like navigating through the fog," HP CEO Carleton S. Fiorina noted in a gloomy speech on Mar. 24.

Just a few weeks ago, many tech companies had begun to think the worst was over. CEOs talked about clearing clogged inventory channels by the end of the first or second quarter of 2001. No more. Of the 191 earnings pre-announcements issued in the tech industry by Mar. 25, 81% warned of lower-than-expected results in the first quarter. Cisco CEO John T. Chambers--previously one of the strongest tech cheerleaders--now predicts the downturn will last at least three quarters. And Dell Computer Corp. (DELL) CEO Michael S. Dell bluntly calls the whole year a wash: "Somebody says things are going to recover in the second half," he says. "Well, why is it going to recover in the second half? Because it's not the first half? That doesn't make sense."

Not when customers all across the tech sector have been pushing back big spending decisions. Internet hosting company Exodus Communications Inc. (EXDS) CEO Ellen M. Hancock, for example, notes that deals that once took 90 days to close now have doubled to six months. And many tech execs still have trouble coming to terms with the downturn. "Talking with management about their outlooks is like talking to parents about their children," says Banc of America Securities analyst Robert B. Austria."It is literally that difficult for management to accept the changing environment."

"BLOODBATH." Nowhere is the pain as evident as in the bellwether PC, semiconductor, and telecom equipment sectors. Analyst Toni Dubois at ARS, a tech research firm, notes that one result of the economic downturn in those areas is a "pricing bloodbath" as companies now try to grab market share.

Dell is one of the main culprits, with a priced-to-move strategy that will slam profits at every competitor. Earnings news from the other sectors is no better. Chipmaker Intel (INTC) issued a third warning on Mar. 9, while shares of telecom equipment suppliers such as Cisco, JDS Uniphase (JDSU), and Lucent (LU) slid in the wake of Nortel's news.

Nor will global growth bail anyone out. Although many companies were counting on Europe and, to a lesser degree, Asia to pick up the slack, those regions are slowing, too.

The curious thing is that many investors also seem to be having trouble fully absorbing the bad fourth-quarter news that CEOs are clearly signaling, and Wall Street expectations for the fourth quarter still look optimistic. According to First Call Corp., analysts still project tech sector earnings to grow 3.6%. "The hype got ahead of the reality for tech, and there's still plenty of room for adjusting that downward," warns Diane Swonk, chief economist at Bank One Corp. Indeed, a lot of CEOs would have to be wrong for that 3.6 number to hold up. By Cliff Edwards with Jim Kerstetter and Peter Burrows.

Edwards covers technology from San Mateo, Calif.


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