Updated: 17-Apr-01
General Commentary
That big thud you just heard was the other shoe dropping... Just when it looked like it might be safe to jump back into tech stocks, Cisco (CSCO) issued a stunning earnings warning after yesterday's close... Company sees Q3 (Apr) revenues dropping about 30% sequentially to $4.7 bln, with earnings in the "very low, single digit range." Current consensus estimates were for sales of $5.6 bln and earnings of $0.08... CSCO cited "continued global economic challenges, the slowdown in the global telecom market, and the deceleration in corporate IT spending." CEO Chambers went on to say that "this may be the fastest any industry our size has ever decelerated."
Not encouraging words... In fact, earnings outlook worse than even the most dire of predictions... But as bad as they are, earnings - or lack thereof - not the biggest story... Cisco also announced that they will take a $2.5 bln charge to write down excess inventory (among other sizable charges)... Size of charge is almost as alarming as fact that inventories at the end of the qtr still projected to be $1.6 bln... In other words, if not for the write-down, inventories would have soared to $4.1 bln in Apr from $2.5 bln in Jan and $1.9 bln in Oct... Not surprisingly, company also sees gross margins plunging to the low-mid 50s v. prior expectation of 60%... Clearly, the inventory correction has yet to run its course - at least not for CSCO...And CSCO's excessive inventories remain bad news for suppliers such as PMC-Sierra (PMCS), Applied Micro (AMCC) and Vitesse (VTSS) - all down in after hours trading... Also getting hit were competitors such as Nortel (NT), Juniper (JNPR), ONI Systems (ONIS), Extreme Networks (EXTR) and Ciena (CIEN).
CSCO was the biggest but not the only tech company to guide estimates lower after yesterday's close... After posting as expected Q1 results, Unisys (UIS) warned that it sees Q2 earnings of $0.09 v. estimate of $0.25... On conference call, company noted that it sees weakness in demand for enterprise servers... Also demand for "business integration services" being hurt by the economic slowdown.
Traders likely to assume that if business is so soft at UIS, another big shoe may drop after Wednesday's close when IBM (IBM) delivers its much-anticipated report.
Turning back to yesterday's performance, much was made of the reversal in the chip sector... But Briefing.com was actually encouraged by the group's resilience... Despite fact that Morgan Stanley Dean Witter cut its estimates on Intel (INTC), and lowered its ratings on Xilinx (XLNX 41.14), Lattice (LSCC 21.90) and Broadcom (BRCM 35.38) to OUTPERFORM from STRONG BUY, the SOX index (SOX 576.66) fell by only 21 points, or 3.6%... Most importantly, initial support in the 560-550 area held... In other words, chip stocks held up remarkably well given the negative news and the scope of last week's gains.
If techs can do the same in the wake of CSCO's warning, it would be very constructive indeed... With so many big tech companies due to report results this week (see Earnings and/or Tech Earnings Calendar for complete list), traders simply looking to see how well the Nasdaq holds up under fire... Last week was about big gains... This week is about survival... If the sector can absorb this first wave of earnings reports without giving too much ground, the stage will be set for renewed gains by week's end.
Robert Walberg |
