Tony,
Following was from yesterday, before the CPQ report. Talks about PC demand, and that MSFT may have an agenda in it's forecast for a soft corporate market. I found it interesting.
TheStreet.com - View from TSC
PC Analysts Ignoring Microsoft's Warning Cries
By Thomas Lepri
Staff Reporter
Microsoft's (Nasdaq: MSFT - news) dour forecast is proving to be a rather hard sell among PC industry observers.
That might seem odd, given the massive fallout Monday from the company's warning that sluggish sales of personal computers to corporations could weigh on its next two quarters. Largely because of that dire prognosis, Softee lost 16% of its value Monday. The broader tech market followed, the Nasdaq Composite Index suffering its 10th-worst point loss in history.
No companies are tied more closely to PC sales than the boxmakers themselves. But PC analysts simply don't believe what they're hearing from the Redmond brass.
Many Agendas
"The issue isn't what Microsoft forecast," says Kurtis King, analyst at Banc of America Securities , which has no underwriting relationship with the company. "It's how much credibility we should give that forecast. Microsoft has a lot of agendas in addition to accurately forecasting the future of hardware sales."
Microsoft's agendas could include managing analysts' expectations, or attempting to depress its stock price to enable future buybacks. There's even speculation that the government's antitrust suit has made the software giant eager to promote the notion that it's no longer the invincible market force it has been in the past.
A sell-side analyst like King isn't about to make that last claim. But he stresses that demand looks good in the short term, no matter what Microsoft says: "Just about every data point you can find, aside from Microsoft, says that the current demand environment is healthy, despite the worst we saw in the first two months of the year. All the major component suppliers, and the PC manufacturers themselves -- nobody is out there complaining about demand right now."
All That Jazz
Semiconductor-maker Intel (Nasdaq: INTC - news) cited stronger-than-expected demand when its first-quarter earnings surpassed expectations last Tuesday. Meanwhile, the stellar reports turned in last week by Apple (Nasdaq: AAPL - news) and Sun Microsystems (Nasdaq: SUNW - news) indicated no demand problems on their end.
In general, industry analysts aren't preparing for any imminent disruption in the normal cycle of PC demand, which usually drops off in the first quarter, bottoms in the second quarter and picks up strongly in the second half of the year. To them, whatever weakness in corporate PC demand that showed up in Gateway's (NYSE: GTW - news) first quarter, and which threatens to nip Compaq's (NYSE: CPQ - news) results when it reports this afternoon, has easy explanations: seasonality, Y2K hangovers and a slow adoption of Windows 2000 by businesses.
Those factors are expected to right themselves as the year progresses. And while some concede that difficult year-over-year comparisons could pressure unit-shipment growth figures in the third and fourth quarters, few expect things to be nearly as bad as Microsoft is making out.
Same Old Same Old
"Have we changed our outlook for the PC market?" asks U.S. Bancorp Piper Jaffray analyst Ashok Kumar. "No. We're still looking for a high-teen growth rate."
Judging by the performance of the PC-maker stocks themselves, investors share the analysts' generally positive short-term outlook. Despite the 14.4% year-to-date plunge in the Nasdaq Composite Index, the Philadelphia Stock Exchange Computer Boxmaker Index , or BMX, is still up 8% on the year. The fallout from Microsoft's warning took the BMX down a relatively modest 1.7% Monday.
"PC demand is fine," says one money manager who requested anonymity. "That's indicated by Intel being up 40% this year, Tech Data's (Nasdaq: TECD - news) stock doubling in the last month, and CDW Computer Center (Nasdaq: CDWC - news) reporting blowout numbers yesterday -- all in the face of Microsoft's forecast.
"Either those three companies are lying, or Microsoft is lying," the manager continues. "I'm prepared to believe that Microsoft is being slightly self-serving. If they weren't lying I'd be stunned."
The Secular Trend
Compaq's first-quarter earnings release, due out at 3:30 p.m. EDT, will give the market its latest lagging indicator of demand. Recent figures from Dataquest show overall unit shipments at the company rising 19.6% from last year, with most of that jump likely due to consumer sales.
There's broad agreement that desktop PC sales are slowing over the long term. But with the immediate weakness in corporate PC demand currently seen as a general and ephemeral trend, analysts will likely be more concerned with how Compaq moves toward profitability in its commercial PC business than with assessing strict counts of unit shipments. And the enterprise segment of its operations -- which includes sale of servers and storage systems -- will be key.
"I'm optimistic," says King, who rates Compaq a strong buy and whose firm hasn't done any underwriting for the company. "Investor expectations are low. Compaq is continuing to make progress on its various execution issues. Server demand is strong, and Compaq's enterprise business represents more than half of revenues and pretty much all of its earnings."
As Sun Microsystems' blowout quarter showed, personal computers are only one way to capitalize on the ongoing information-technology buildout among corporations.
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