Q2 fears: 'Crisis of expectations?'

Technology investors are said to be motivated by two emotions: greed and fear.

So it should come as no surprise that many of the wheelers and dealers on Wall Street are checking and rechecking their charts as technology firms begin releasing their second-quarter financial results in the next few weeks.

Some of the biggest names in information technology, including Intel Corp., Seagate Technology Inc. and Cabletron Systems Inc., beat the rumor mongers to the punch by firing off press releases announcing that second-quarter earnings and revenues will be lower than expected.

The fallout from these preemptive strikes has generally caused company stock prices to plummet.

Intel, the world's undisputed heavyweight champion of semiconductor manufacturing, took one on the chin as its stock dropped more than $20 a share, or nearly $3 billion of its stock value, as the market lashed out at one of its favorite sons.

But the bigger question, analysts said, is whether these announcements merely indicate softer sales for specific companies or whether they are the harbinger of an industry-wide down cycle.

"It's easy for some people to jump to the conclusion that if these companies are expecting lower earnings in the second quarter, the market as a whole is in trouble," said Don Collier, president of ProLytix Corp., a Santa Barbara, Calif., financial research firm. "But we just don't see that. It's a fast-moving economy that continues to increase its productivity, and I would set that at the doorstep of technology."

Some analysts attribute the sluggish second-quarter results to traditionally poor sales witnessed in the late spring and summer months. The thinking is that consumers are spending their money on vacations and home improvements and will wait until the fall before buying a new computer or upgrading an existing system.

"I think what we are seeing with some companies is just a crisis of expectations," said Jack Geraghty, an analyst at CS First Boston. "Every quarter can't set new and more spectacular numbers than the one before."

Analysts still expect Intel to return a profit of about $1.80 per share in the second quarter, less than originally expected but still considerably higher than the $1.17 per share profit in the same quarter last year. And last year was an all-time record year for Intel.

"What the heck more can you do?" Collier said. "It isn't that bad."

While dozens of companies spanning several segments have prepared their investors for lower earnings, some of the most important bellwether companies haven't made a peep.

IBM, Hewlett-Packard Co., Digital Equipment Corp. and Compaq Computer Corp. aren't racing to their fax machines and are all expected to report solid quarters.

"That's significant," Collier said. "Everyone pays a lot of attention to the companies that make these announcements but tend to forget about all the others that are going strong. Good news doesn't travel very far."

In some segments, intense competition from existing and emerging firms have taken their toll by lowering profit margins and, ultimately, trimming the bottom line.

Networking firms 3Com Corp. and Cisco Systems Inc., long battling among themselves for the lucrative and ever-expanding interconnectivity market, now have to deal with Intel and a slew of other startups looking to carve out a niche for specific products or entire end-to-end systems.

"There's no question that margin squeezing is going on here," said Mary Petrosky, senior analyst at The Burton Group, a San Mateo, Calif., market research firm. "Since Intel has come into the picture, there's more pressure on the 3Coms and Ciscos to perform. That alone will have an impact on their short- and long-term financial results."

Worldwide personal computer sales, which increased 15 percent in the first quarter, will likely taper off in the second quarter, according to market research firm Dataquest Inc., based in San Jose, Calif. Still, analysts expect the market to grow by 20 percent by year's end.

Another factor looming large in investors' psyches is the unprecedented strength of a stock market that threatens to shatter the 8,000 mark on a daily basis and the lowest rate of unemployment in more than 30 years.

Normally those factors alone would scare off the most bullish investor as the threat of inflation may lead to higher interest rates.

But Federal Reserve Chairman Alan Greenspan has so far given no indication that interest rates will be raised anytime soon.

"If this were 10 or 15 years ago, I think he would consider raising interest rates," Collier said. "But this is a different kind of economy that's driven by productivity. And it's technology that's making it all happen."