The Day Ahead: High-tech's hard landing

The bad news just keeps escalating
Written by Larry Dignan, Contributor

Commentary: High-tech executives almost sound a bit shell-shocked as they realise the economy's soft landing is a bit of a misnomer. Everyone from Fed chief Alan Greenspan to chief executives has apparently overestimated the strength of the information technology industry.

Nothing exists in a vacuum and folks who thought technology companies could somehow escape the Federal Reserve's six interest rate increases were mistaken. Of course, that pesky election issue hangs over the market, but the Nasdaq's woes are also about slowing earnings, weak consumer demand and the economy. It's a big circle of bad news, and tech companies can't escape the big picture.

Gateway dropped a whopper of a profit warning and cited macroeconomics as the primary culprit. The PC maker said it will report fourth quarter sales of about $2.55bn in the quarter, about $500m below projections. The company will post operating earnings of 37 cents a share, well below estimates of 62 cents a share.

Chief executive Jeff Weitzen said the earnings miss was "purely a matter of consumer demand, and not execution." Chief financial officer John Todd cited slowing gross domestic product figures, altered seasonal trends and weak consumer spending for the woes. Gateway lowered its fiscal 2001 earnings estimate to $1.89 a share from the current First Call estimates of $2.28 a share. Don't expect revenue growth either.

Just a few weeks ago, Gateway was comfortable with fourth quarter sales growth in the mid-teens.

You could argue that Gateway's warning has a caveat -- it was based on Thanksgiving weekend. Analysts tried to make the argument that Gateway could rebound, but the company was hell-bent on taking its lumps early in the quarter. Simply put, consumers aren't buying PCs. Thanksgiving sales were down 30 percent compared to a year ago. Given that Gateway's sales typically slip a bit following the big Thanksgiving shopping weekend, you can see where this tale is headed.

Gateway's warning is even more alarming for the PC sector. Gateway arguably has the best business model in the industry with its "beyond the box" approach. If Gateway is getting creamed, what does that mean for the other box makers, Intel and Microsoft?

At least Gateway has some company in the misery department today. Altera, which makes programmable logic devices, got stuck with an inventory glut as DSL customers and contract equipment manufacturers cut back. Blame it all on slowing demand. Altera's customers were anticipating shortages amid strong demand. Now they have excess supply.

Chairman Rodney Smith summed it up well. He apologized for the company's earnings miss. "The zero growth in the quarter indicates how quickly things have turned," he said. Just a month ago, Altera was feeling pretty good about itself.

Looks like Altera's new chief executive John Daane has a lot of work to do -- he starts today.

One Wall Street contingent looking pretty good amid these profit warnings is the analyst crowd.

On Wednesday morning, Merrill Lynch analyst Steven Fortuna sounded the alarm on Gateway. He lowered his revenue and earnings targets, but had no idea what was in store.

"For the all-important kick-off to the retail selling season, we believe that volumes showed significant improvement over pre-holiday weeks but were not quite as strong as originally hoped for," he wrote in a research report.

He wasn't kidding. Sure, you could say Fortuna wasn't exactly a fortune teller, but he was headed in the right direction.

Another analyst looking pretty good is Lehman Brothers' Dan Niles. He flagged Altera a few days ago. Like Fortuna, Niles underestimated the extent of Altera's problems, but you have to give him points for making a call.

One analyst that's not looking so hot is USB Piper Jaffray's Ashok Kumar, who can't keep from ranting about the demise of Brocade. Kumar's tirades, documented over the summer, become more off the mark each quarter.

Brocade reported its fourth quarter earnings and crushed estimates. Investors, however, were waiting for the outlook. Analysts figured Brocade would at least have to raise 2001 sales estimates to $770m. That was a tall order, but Brocade delivered.

The company projected 2001 revenue of $830m, a whopping $130m above most projections. With guidance like that, Kumar may have to grudgingly raise his estimates and say something nice about Brocade.

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