Interesting piece here concerning how tech companies dwindling investment profits in other companies could adversely affect 2nd qtr results.
Friday April 14, 7:27 pm Eastern Time
U.S. technology firms get double blow from selloff
By Nicole Volpe
NEW YORK, April 14 (Reuters) - Leading U.S. technology firms took a double-whammy
on Friday. Not only were their market values slashed by the crushing sell-off on Wall Street,
but their return on investments in other listed companies, were also put in jeopardy.
Intel Corp. (NasdaqNM:INTC - news), Microsoft Corp. (NasdaqNM:MSFT - news) and
Compaq Computer Corp. (NYSE:CPQ - news), among other big names, have made large gains on their investments in cutting
edge technology companies because of the surge in technology stock prices in recent years. As some of these investments are
sold, the gains have contributed to earnings.
But in the current bear market in technology stocks that extra kick to profits from a company's investment income is under
threat, leading to the possibility of earnings disappointments as companies lose the flexibility to massage their accounts.
``When you start counting on market gains, especially outlandish market gains, you wind up in trouble whether you are an
individual investor, or Intel,' said SG Cowen analyst Drew Peck. ``You are adding a great deal of volatility when you do that.'
Intel, at last report, had more than $8 billion in holdings of securities in both privately held and publicly traded firms.
The microchip giant reported $327 million in investment income in its results for the fourth quarter of last year. Intel said in
January it expects to report some $500 million in interest and other income, largely from returns on investments, when it reports
its first quarter results, which are due out next Tuesday.
The current market shakeout would not affect those first quarter prospects, but could have an impact on the sale of shares in
the second quarter, and -- if the downdraft is sustained -- for the rest of the year.
``I'm sure Intel is watching very closely and crossing their fingers and hoping this correction doesn't interfere with their ability to
sell shares in the second quarter,' said Peck.
Microsoft in January noted in its fiscal second quarter report a gain on investments of $773 million, off a total portfolio of nearly
$20 billion.
Compaq held $8.3 billion in investments in publicly traded stocks alone in January, according to industry estimates. The
computer maker recorded a $50 million net gain on its investments as part of its bottom line earnings report for the fourth
quarter of 1999.
The reaction to Intel's earnings in January, which exceeded Wall Street expectations on the strength of the gain on investments,
suggested some investors may treat gains on investments as though they were a reflection of the company's ongoing operations.
The stock jumped more than 10 percent after the earnings report.
To be sure, analysts pointed out that many savvy investors ignore the cash gains.
``You can think about it almost like foreign exchange effect,' said Chase Hambrecht & Quist analyst Walter Winnitzki, in
reference to losses and gains on the translation of revenue and profits from one currency to another. ``It could jump from pluses
to minuses real fast.'
And companies with such large portfolios have an enormous amount in unrealized gains, making them somewhat protected from
market corrections.
``If you look at Intel, it's one of the largest venture capital firms out there,' said CS First Boston analyst Charlie Glavin. He said
that Intel's Chief Financial Officer Andy Bryant ``is looking at how much could he roll out over the next two or three years, not
over the next two or three quarters.'
But any gain taken in the second quarter, if the bear market continues, would have to be made at depressed rates, meaning
Intel and other tech companies would need to sell more shares to boost their profits.
Because of the current market slide, companies with investments may need to lower the value of their assets on their balance
sheet to reflect any lower market value of their investments.
``It could be that companies like Intel in their first quarter conference calls are going to caution that the second quarter's
numbers may have a noncash impact in the current market environment,' said James Meyer, analyst with Janney Montgomery
Scott Inc. |
