GOOD NEWS BOYS
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Tech Firms Confront Tactical Problems
Dow Jones News Service ~ April 3, 1997 ~ 12:13 am EST
By G. Christian Hill
Staff Reporter of The Wall Street Journal
The stock market continued to bash high-technology companies, and analysts and industry observers are
citing some tangible reasons for the correction that go beyond a shift in market psychology.
A growing number of high-tech companies are struggling with tactical problems and cautious customers
as they deal with a broad wave of transitions to new technologies, analysts say. Still, observers say most
of the problems are short-term ones that could be resolved within a year, and they say long-term
fundamentals in high-tech remain strong.
The extent of damage from the current decline, which began in January, has been masked by market
indexes heavily weighted with the biggest companies, which generally have been hit the least. In a
universe of 600 technology stocks followed by Integral Partners, a Silicon Valley venture-capital firm,
the average software company is off 53% from its 52-week high and the average hardware company is
down 44%.
"This is the definition of what a bear market is like," says Roger McNamee, a principal of Integral
Partners.
Some of the carnage is simply due to an overvaluation of high-tech stocks and indiscriminate dumping of
shares. But the main driver of the long-running global tech boom, the vast personal-computer market,
shows no signs of slowing from its 18% to 20% annual growth rate. Corporations still plan a vast
upgrade to big networks running on the Internet, and a shift to digital telecommunications is in an early
stage.
Even more fundamental trends -- the opening of global markets and the continuing microprocessor
revolution that rapidly reduces the cost of technological goods and services -- have years to run.
But there is something real currently going on in tech markets causing a decline in the performance of
many tech companies: Major technology and market changes are under way in more sectors than usual,
particularly networking, the Internet and databases, leading to strategic mistakes, delayed orders,
disappointment with new products, increased competition and price wars.
A sample of recent ugly surprises: A small chip-design company, Quickturn Design Systems Inc., says
first-quarter orders failed to materialize, and loses half its market value as analysts reduce 1997 earnings
estimates by 80%. A once-hot network-gear company, Fore Systems Inc., announces that big corporate
customers are delaying new orders, sparking another rout in the networking market and its own stock.
The world's second-biggest database software company, Informix Corp., discloses that it will miss
analysts' revenue estimates for the first quarter by a whopping 40%, causing a big loss.
The Informix disaster "was shocking," says Mary Meeker, a top tech analyst for Morgan Stanley.
As investments, many of the high-tech companies are shockers: Fore is down 70% from September;
Informix, down 67% in a little more than three months; Quickturn, 62% since the start of the year. The
list goes on and on: Shiva Corp., another networkgear concern, is down 90% in the past year;
Macromedia Inc., a top producer of animation-design software, is off 84% since the beginning of 1996;
Netcom On-Line Communication Services Inc., which provides Internet access, has swooned 90% in the
past 16 months; Intuit Inc., the biggest provider of personal-finance software, is off 74% in the same
time period and Broderbund Software Inc., a leading producer of "edutainment," has fallen 72% over 18
months.
"Add it all up, and for investors it's as much fun as scuba diving in a septic tank," observes Mr.
McNamee of Integral Partners. One market pundit, Morgan Stanley's Barton Biggs, says a tech bear
market has just begun and will continue for "several years."
(END) DOW JONES NEWS 04-03-97
0 13 AM
Tech Firms -2-: Network-Gear Market Rife With Change
Most tech specialists disagree, because of the strength of fundamental demand. "There are real problems
out there, but the world isn't coming to an end," asserts William Gurley, an Internet analyst for Deutsche
Morgan Grenfell. "To believe in a three-year bear market, you have to show saturation in certain
markets."
Indeed, a close look at some of the troubled high-tech concerns shows that most miscalculated the pace
or complexity of change, rather than the long-term demand in their markets. In the big market for
corporate databases, for example, "there are significant product transitions for everyone," says Mr.
McNamee. Oracle is late shipping a major upgrade, Microsoft is struggling to enhance its SQL database
for big customers, and Informix's obsession with developing a new multimedia database hurt the
marketing of its main product line. To gain market share, Microsoft is expected to slash prices for its
database, casting a pall on the entire sector. Looking at all these factors, companies are wary about
placing big orders.
The network-gear market is rife with change. Corporate customers, Internet-service providers and
telecommunications concerns are trying to decide whether to order big routers from Cisco or new
switching technology from competitors, and how to construct a new breed of very large internal
networks running on the Internet. Investors fear that Cisco, long the market leader, will lose share to a
fast new router from Ascend Communications Inc. or to new switching software from Cascade
Communications Corp., which Ascend recently agreed to acquire. Cisco is late to market with new
routers and switches, and its stock is down more than a third from January's level.
Increasingly, network customers appear to be dragging out the key decisions that will lead to sales. On
Sunday, Cascade announced a slowdown in orders from telephone companies for one kind of fast
switches, leading investors to drive Ascend's stock down 22% when it disclosed at the same time that it
is acquiring Cascade. Fore disclosed a similar slowdown on Tuesday.
"Customers face a series of choices they didn't have before, new technologies that weren't there before,"
Mr. McNamee observes. "It all requires study."
The biggest and trickiest transition of all is to Internet-based markets. Many companies, ranging from
Netcom to search-engine providers such as Lycos Inc. and Excite Inc. to Intuit, haven't been able to
generate enough revenues to create meaningful consumer-sales businesses.
"We're entering almost an inflection period where some companies are negatively impacted by the
Internet, and the benefits aren't yet on the radar screen," says Morgan Stanley's Ms. Meeker.
Most of the bigger high-tech companies will work through the tough transitions, says Mr. McNamee,
probably by the end of the year. Strong PC growth should drive up the earnings of many companies,
corporations will bite the bullet on major investments in new networks, and Internet businesses will
eventually take off.
"The greater issue then becomes what value investors will place on any given level of earnings," he says,
asserting that speculators and so-called momentum investors have been largely driven out of tech stocks,
to be replaced by more hard-headed buyers. "We are undergoing a reappraisal of what a dollar of earnings
is worth."
(END) DOW JONES NEWS 04-03-97
0 19 AM
Tech Firms -3-: Meeker Expects Widespread Recovery
In contrast to the gloomy prediction of her colleague Mr. Biggs, Morgan Stanley's Ms. Meeker also
expects a widespread recovery. "In the core businesses, a lot of companies are doing well," she says,
citing Microsoft, Intel and the PC makers in particular. But she acknowledges that many of the badly
wounded smaller companies, perhaps a majority, won't rebound much in stock price. She notes that such
an abysmal record isn't unusual in high-tech annals, citing a new Morgan Stanley study of 784 high-tech
public offerings since 1980. It shows that 37% of the companies in the end never managed to exceed
their initial share price.
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Don Clark, Quentin Hardy and Evan Ramstad contributed to this article.
(END) DOW JONES NEWS 04-03-97
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