Have we hit bottom?

An increasing number of Internet companies are reporting decent Q1 earnings and delivering mildly optimistic forecasts sparking speculations of an industry rebound.

Investor sentiment about IT services stocks is beginning to turn positive, as an increasing number of companies report decent Q1 earnings and deliver mildly optimistic forecasts for future performance

"People are starting to look beyond the valley to the next six to nine months when IT spending will return," says Christopher Penny, an analyst at Friedman, Billings, Ramsey. "They're looking at what EDS, IBM and other large companies have been able to do," favoring companies with a positive track record servicing established enterprises, Penny says.

Is the IT industry in a rebound? YES

That type of sentiment drove our Partner Index up 6 percent for the week ended April 26. Winners included Proxicom, whose shares doubled amid merger rumors on Wall Street. As we went to press, Compaq Computer confirmed plans to purchase Proxicom for $266 million.

Meanwhile, EDS reported its eighth consecutive quarter of double-digit earnings growth. Q1 revenues rose 17 percent to $5 billion.

"EDS has seen no slowdown in [its] overall market," says Dick Brown, chairman and CEO. "Companies around the world are continuing to invest in the information technology segments we serve to boost their productivity."

Analysts are impressed with EDS's performance. "We are on the cusp of a new outsourcing wave and expect EDS to continue to profitably take share," says Mark Wolfenberger, an analyst at Credit Suisse First Boston.

Tanning Technology and Scient also reported results last week. Tanning met its reduced Q1 expectations, reporting $13 million in revenue and a net loss of 11 cents per share, as did Scient, with $27.1 million in revenue and a $1.31 loss per share.

USInternetworking reported $36.7 million in revenue and a 33-cent-per-share loss, and an nounced that it would lay off 20 percent to 25 percent of its staff and cut other expenses. "We are not immune to the conditions affecting virtually everyone in the technology industry," says CEO Andrew Stern.

Other companies were even less successful. Digitas disappointed Wall Street when it reported revenues of $77.1 million and earnings of 3 cents a share—which failed to meet expectations—and revised downward its future forecast.

ELoyalty didn't wait to disappoint investors. A week before a scheduled earnings call, the company cut its Q1 revenue expectations by 26 percent.

So much for a complete rebound.