No Visibility-- fun read.
STREET WISE -- "Visibility": A Look behind the Buzzword
biz.yahoo.com
STREET WISE
By Amey Stone
The word ``visibility'' -- usually preceded by ``reduced,'' ``lack of,'' or simply, ``no'' -- may be the most overused bit of jargon spouted by technology executives this year. The phrases usually come up whenever analysts and investors ask top management to forecast sales. Their pat answer is badly in need of some dissecting since what tech execs say about visibility in the coming months will help investors determine if tech stocks are really out of the woods yet.
Like most Wall Street wordplay, ``reduced visibility'' sounds pretty benign. Why should tech companies be able to predict what will happen in the future any more than the rest of us can, you might well ask. A lack of visibility could even mean that sales will exceed expectations.
Sorry, it doesn't work that way. The fact is tech companies had visibility when times were good. And the fact they don't have it now is bad. During the tech boom, demand was so strong that many tech companies ran at full capacity, selling software and equipment as fast as they could churn it out. Then projecting sales was as easy as adding up back orders. ``The only uncertainty was whether [companies] could get price increases,'' says Neil Feinberg, president and chief investment officer of Orbitex Funds.
FALSE SECURITY. But when tech spending suddenly dried up in 2000, tech execs lost the ability to forecast sales and earnings. So did execs in every industry affected by the economic slowdown, notes Angela Auchey, co-manager of the Federated Large Cap Growth Fund, who says lack of visibility crops up in retailing and media businesses as well.
But nowhere else has the falloff in demand been as pronounced as in technology, says Chuck Hill, director of research at First Call. Tech earnings have swung dramatically in just two quarters, from up 42% in the third quarter of last year to down 42% in the first quarter this year, says Hill. That precipitous decline is the main reason visibility has become such a buzzword for tech in the past month, when it was never a major concern with analysts before, he says.
Tech execs' false sense of security was buttressed by the belief that in the New Economy, technology could somehow avoid downturns. The illusion of security was furthered by their faith in snazzy new forecasting tools and ``just-in-time'' inventory-management software. But instead of improving visibility, observes Auchey, strict supply-chain management may be limiting it since customers can now wait until the last minute to place orders.
RARE CANDOR. But late-placed and fewer orders aren't the only problems. Now tech companies can't even predict whether deals they've won will actually close. In a trend that shows no immediate sign of abating, companies report that orders are being canceled or postponed at the highest levels at the 11th hour -- after approval from customers' own information technology departments. In Oracle's (NasdaqNM:ORCL - news) Mar. 15 conference call, an exasperated CEO Larry Ellison commented that deals in which the customers were already using the products were falling through.
Now that most of the first-quarter results are in and companies are meeting lowered expectations -- restoring some confidence in the tech sector -- execs still aren't forecasting much beyond the next quarter.
``It is almost embarrassing to watch CNBC and see how many CEOs are saying they have no visibility,'' Advanced Micro Devices (NYSE:AMD - news) CEO Jerry Sanders said with rare candor at a Merrill Lynch technology conference in New York on May 2. ``Well, we have visibility, and it ain't good.'' Practically begged by the audience to elaborate, he went on to say no signs of a recovery in communications chips was apparent, but there were some hints that the PC part of his business would pick up at the end of 2001.
NO CONFIDENCE. At the Merrill conference, every company was asked to comment on visibility. At best, execs said they thought things had gotten about as bad as they could. Most guessed at what would happen the second half of the year, saying they assume that if the economy stays about the same, business will pick up a bit.
Jeffry Allen, the chief financial officer at storage-equipment maker Network Appliance (NasdaqNM:NTAP - news), had a typical answer. ``We're not ready to say we see signs of a recovery,'' he said. ``But it is my personal belief that we've probably seen the worst of the cuts in capital spending, and companies will probably start to make plans to spend.'' Merrill semiconductor-equipment analyst Brett Hodess summed it up best: ``Companies that presented on the first day were generally hopeful that demand would improve in the second half, but not confident of it.''
Many investors believe companies could be more forthcoming in the current economic environment if they wanted to be. Feinberg says part of the problem is that officials are afraid of running afoul of the Security & Exchange Commission's six-month-old Regulation Fair Disclosure, which requires them to make any statements about the company's situation or outlook publicly rather than giving favored analysts or investors the inside scoop. They may just be delaying announcements of bad news in hopes business will perk up. ``They keep saying it is still hard to see,'' says Keith Savitz, CEO of investing-data site B4Utrade.com and formerly at Morgan Stanley. ``They are trying to protect themselves and see how they fare.''
NOT A BOTTOM? But other analysts think companies are being candid. ``I think they are being honest,'' says Hill. ``I think the problem is that they didn't have visibility back in the beginning of the year when they thought they did.'' Auchey agrees. ``I don't think management is misleading us at all,'' she says. Erick Maronak, of investing firm Newbridge Partners, says he's going by what management says. ``It's premature to call a bottom,'' he says.
For investors, the current lack of visibility means that if you buy now, you run the risk that tech spending could slow even more dramatically than it already has. Investors believe tech earnings will fall 51% in the second quarter -- making it the trough and then slip only 38% in the third and 13% in the fourth, according to First Call. That adds up to, at best, a slower rate of deterioration, which theoretically would eventually lead to a rebound in earnings growth.
``If we do get that, there's a good chance that March will have been the bottom,'' says Feinberg. ``That's what the market is predicting, but I don't want to bet on that yet.'' Without better visibility on future tech spending, he sees too much risk that the picture will worsen. If it does, he thinks the Nasdaq would return to its April low of 1620, ``if not go lower,'' he says.
LOOKING FOR A SIGN. First Call's Hill expects third-quarter earnings declines to be greater than they were in the second quarter, and he wouldn't hazard a guess on the fourth quarter. Another ominous sign: The number of companies warning about second-quarter results is accelerating. Maronak says the first positive indication he's looking for is less negative news. He's encouraged that some companies are willing to make ``some preliminary sketches'' of future stability in their businesses. That's encouraging some investors to ``start nibbling'' at companies they like, boosting the Nasdaq. Still, for most investors it's too early to take that chance. A ``lack of visibility'' means tech execs see no signs of an upturn, and it's possible that things may get worse from here. In that light, plunging money back into the Nasdaq may not be a risk you want to run right now. |
