Hang Ten? These Big Tech Companies Are Most Likely to Warn

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Editor's Note: This story was first published June 4. Juniper warned on June 8; Intel stuck to its numbers in a June 7 midquarter update; Broadcom warned June 6.

Is the other shoe about to drop on tech stocks?

The last two months have seen computer and telecom shares rally sharply, as the Fed kept cutting interest rates and the economy stabilized. But market observers agree that most companies are still seeing much slower business than they would like. In fact, despite investors' recent enthusiasm, there's no sign that the slowdown will lift anytime soon: Cisco (CSCO Quote), for instance, warned last week in a regulatory filing that it sees no sign of a pickup in telecom spending.

With the second quarter more than two-thirds done and earnings season just a month away, analysts and investors say many of the big names in tech remain at risk. In every tech industry, from PCs to networking to wireless communications, big companies have cut their earnings and revenue expectations -- but perhaps not enough. With this in mind, TheStreet.com presents a sector-by-sector look at some of the big tech companies and their prospects for this quarter.

The Boxxies

PC makers remain at high risk across the board, as nearly every new data point confirms that demand remains extremely weak, and may even be worsening. The price of standard 128-megabit DRAM memory continues to collapse, lately scraping below $3 on the spot market. After a brief uptick in February and March, Taiwan shipments of PC motherboards have softened again. Gateway's (GTW Quote) decision Wednesday to match any competitor on pricing will depress everyone's profit margins -- this in an industry where the only company to make a profit on PCs last quarter was Dell (DELL Quote).

All this could put Compaq's (CPQ Quote) numbers at particular risk. Compaq generally has shown itself more aggressive on pricing than Hewlett-Packard (HWP Quote) and has a PC business second in size only to Dell. More worrisome still are reports of rising retail channel inventories, which have doubled from their level in February, according to market research firm NPD Intellect. That has serious implications for Compaq, which sees the reduction of inventory held by its reseller partners as critical to the company's plan to lower its cost structure enough to compete with Dell.

Although the stock is down 20% from its April high, the probability of another warning may not yet be fully reflected in Compaq's shares, which still trade at nearly 30 times the company's estimated earnings for 2001.

You might not think that Dell would be a strong candidate for warning. After all, it's the strongest of the PC makers, and lowered guidance for its third quarter just two weeks ago. But things have changed since then. Gateway's newly aggressive campaign has forced Dell, which up to this point has mainly been engaged mano a mano with Compaq, into a two-front price war. Dell, of course, has a leaner cost-structure than any of its competitors. Emboldened by its business model, Dell will fight Gateway as aggressively as it's fought Compaq. Chances are good that the company will have trouble making its second-quarter earnings forecast and/or will be forced to lower third-quarter guidance.

In the short term, a warning is probably priced into Dell. It's unlikely that another shortfall will spark a serious selloff among Dell's investors, who will remain dogged in their conviction that the company's leadership position supports its valuation even as profit margins continue to nosedive.

Telecom Gear

As one investor put it: Show me a company that's counting on spending by cash-starved telcos, and I'll show you a company at risk to fall short of earnings estimates.

Juniper (JNPR Quote) is one of the more likely networking preannouncers, analysts say. Juniper repeated to investors two weeks ago what it had outlined during its April earnings call, that there was a 10% risk that the company wouldn't match its first-quarter sales performance.

Warning Signs? Big tech names whose estimates may be at risk
Company	Next Quarter's Estimates		Last Guidance	Recent Price
	EPS (cents)	Revenue ($millions)
Dell (DELL:Nasdaq)	16	$7,700	May 17	$24.36
Compaq (CPQ:NYSE)	5	9,000	April 23	15.99
Juniper (JNPR:Nasdaq)	24	323	April 12	42.53
JDS Uniphase (JDSU:Nasdaq)	5	691	April 24	16.71
Intel (INTC:Nasdaq)	11	6,500	April 17	27.01
Broadcom (BRCM:Nasdaq)	(8)	255	April 18	33.26
DoubleClick (DCLK:Nasdaq)	(7)	105	April 16	13.05
TMP Worldwide (TMPW:Nasdaq)	30	387	May 8	58.27
Motorola (MOT:NYSE)	(12)	8,000	April 11	14.28
Ericsson (ERICY:Nasdaq ADR)	(5)	6,000	April 20	6.20
Figures in parentheses are losses. Source: Yahoo! Finance

Analysts and investors took this to mean that the company was 90% sure it would meet its flat revenue growth forecast this quarter. But the 10% uncertainty has haunted the stock lately, as the share price fell 20% last week.

Should the router challenger, which has consistently swiped business from Cisco, warn that profits will come in below the 24 cents per share Wall Street is expecting, some analysts believe the stock will fall somewhere in the $30 range from the current low $40 range.

And further down the line of network gear suppliers, the formerly highflying optical component maker JDS Uniphase (JDSU Quote) has yet to fully adjust for the network industry's current down phase, say some of Wall Street's number crunchers. JDS is voted the most likely member of its class to warn, though Corning (GLW Quote) and Lucent's component spinoff Agere are under the same pressure.

Industrywide capital spending -- the money phone and Internet companies shell out for new switches, routers and optical parts for network construction -- is likely to fall 10% this year. That means there will be roughly $7 billion less flowing down from the big spenders to the gearmakers. Add to that a vicious price war fueled by surplus supply, and you have a double whammy on outfits like JDS.

You had operating leverage on the upside in terms of production capacity, which in this downside has turned into a burden of high fixed costs, says a Boston-based buy-side analyst. "This is more than just an economic cycle issue, it's an industry investment cycle problem for the telecom equipment providers," says the analyst, who has no positions in Juniper or JDS.

In the event JDS does warn that it won't hit its 5-cent EPS target for the quarter, JDS shares would likely fall to the $12 range from the current $17, says a sell-side analyst who asked not to be named. "A warning would be a catalyst to take the stock lower," says the analyst. "The group trades at about four or five times 2002 projected sales. If you apply that to JDSU, you end up with a $12 stock."

Chipmakers

Analysts are expecting bad news from Intel (INTC Quote) Thursday, when it is scheduled to provide a midquarter financial update to investors. Intel has cut revenue guidance at midquarter in each of the last three quarters. Based on Intel's guidance, analysts expect $6.5 billion in revenue, according to Thomson Financial/First Call. Analysts also see 11 cents in earnings per share for the second quarter and 55 cents for the year. Intel typically doesn't offer earnings guidance, however.

Lehman Brothers' Dan Niles said on Wednesday during the Silicon Valley-based Churchill Club's annual semiconductor forecast that there's no reason to buy Intel stock, because a warning is coming. "I believe Intel will lower its guidance again," Niles said. Earlier that day, Morgan Stanley Dean Witter analyst Mark Edelstone also said in a research note he expected Intel to cut guidance. Intel said on April 17 when it announced first-quarter earnings that it expected revenue of $6.2 billion to $6.8 billion. (Neither bank has done underwriting for Intel.)

Another semiconductor company that Edelstone says could come up short in the second quarter is communications chip maker Broadcom (BRCM Quote). Broadcom has no midquarter update scheduled, but the company has been known to issue warnings. For instance, Broadcom came out during the first week of the last month of the first quarter to guide estimates lower as telecommunications spending slowed and inventories built. Currently, analysts expect Broadcom to lose 8 cents a share in the second quarter and lose 2 cents a share for the year. Broadcom said in April when it reported first-quarter earnings that it expects a loss of 7 to 9 cents a share for the second quarter. Morgan has done underwriting for Broadcom.

Advertising

There's not a lot of good news circulating in the online advertising business. With ad rates dropping, pricing pressure is coming to bear on DoubleClick's (DCLK Quote) ad-serving product, says one analyst. The larger economic slowdown pressures both its data business and online media sales. But the company has already brought down the bar somewhat, lowering its second-quarter revenue estimate to a range of $100 million to $105 million (Thomson Financial/First Call puts the consensus at $105 million), following first-quarter actual revenue of $114.9 million. "They might miss earnings by 5%," says an analyst who requested anonymity. "It's not going to be 30%"

On the other hand, TMP Worldwide's (TMPW Quote) Internet recruiting business, anchored by its Monster.com service, bucked the trend by showing strong year-over-year growth, with Internet commissions and fees more than doubling to $156.6 million in the first quarter. But, said Chief Operating Officer Jim Treacy in the first-quarter earnings release, "We are feeling the impact of an economic slowdown in the U.S." The slowdown has already hit traditional lines of business such as advertising/communications and executive search, though to a degree much outweighed by the positives on the Internet side. The questions are now whether the weakening job market will hit the Internet business, too, or significantly worsen the non-Internet businesses. The company, which has no shortage of enthusiastic fans, has seen its stock nearly double since early April.

Wireless

Motorola (MOT Quote) and Ericsson (ERICY Quote) have brought the bar down about as far as it will go. Motorola forecast that its second quarter would show a wider loss than its historic money-losing first quarter. For its part, Ericsson predicted weaker equipment sales growth and flagging wireless handset sales against a year ago.

That said, both wireless communications giants are faced with a continuing handset-sales slowdown that could leave their numbers well short of analysts' expectations. Analysts expect a 12-cent loss for Motorola, narrowly eclipsing the first quarter's 90-cent loss, on $8 billion in revenue, according to Multex.com. Ericsson is expected to turn in a 5-cent-a-share loss on revenue of $6 billion, vs. the first quarter's 3-cent loss and $5.4 billion in revenue.

After a bleak first quarter, the second quarter hasn't gotten much better. In the past two weeks, several analysts have reduced their expectations for 2001 handset sales, to 450 million from the 650 million predicted months ago. Additionally, Ericsson fell this week after the Gartner Group predicted Ericsson would tumble from the ranks of the top three handset makers. "It's like if a guy lost 10 pounds," says Morningstar analyst Todd Bernier. "If he weighs 480 pounds, that's not a big dent. But if he weighs 90 pounds, it's not good.

"Ericsson is registering no EKG in terms of handsets," Bernier says.