In Tech World, Recovery Always Seems 6 Months Away
By Nicole Volpe
Fri Sep 20, 4:20 PM ET
NEW YORK (Reuters) - For more than two years now the big question in every corner of tech world has been: "Where's that recovery?"
And like an old, scratched-up vinyl record, the answer repeated ad infinitum has been: "Six months from now."
Maybe it's lingering optimism, a longing for the old days, when technology companies believed the growth would go on forever. Or perhaps there is a disconnect between what technology buyers say they expect to spend and then what they eventually do buy.
Whatever the reason -- the long dream recovery is perpetually two quarters away.
"The reality is that many of these companies were born and raised in a time of unbelievable growth, it's probably a different skill set to manage during a period when things are maturing before your eyes," said Marty Shagrin, research analyst at Victory Capital Management, which has about $75 billion in assets under management.
In the late 1990s, technology companies saw an unprecedented boom driven by the wide use of the Internet and an economy that supported massive sales growth of computer systems.
While companies have had to face slower spending, some investors say that executives may be worse than inept -- they pumped up their companies' outlooks in order to fatten their own wallets.
"They can tell a bullish story while they sell the stock," said Christopher Bonavico at Transamerica Investment Management, which has $12 billion in assets under management. "They have an inherent bias to get their share price up."
That contention has been made against executives at AOL Time Warner , WorldCom Inc. , and Global Crossing Ltd. who have all come under fire for selling shares while painting a happy picture for the public.
AOL Time Warner's top executives, including Chairman Steve Case, have been particularly criticized for selling shares since the merger was completed in January 2001.
The company maintained its aggressive financial targets for much of last year before finally abandoning them last fall -- and the stock has dropped 70 percent since the $106.2 billion deal was completed.
"Steve Case was promising advertising is fine and he was selling stock in the meantime," Bonavico said.
AOL declined to comment. WorldCom and Global Crossing are under investigation for similar stock sales.
Whatever the case, many companies have stretched investor tolerance to the snapping point, sending their stock prices to the rock bottom, because they've been unable or unwilling to forecast the bad news ahead.
BAD NEWS KEEPS ON COMING
Sanmina-SCI Corp. has been something of a bellwether for the contract manufacturing industry's persistent optimism that a recovery is only quarters away.
Early last September Sanmina Corp., which had not yet closed its SCI Systems merger, guided lower for the September quarter, then the next month gave guidance for the December quarter below Wall Street estimates.
In December, after the merger closed, the company gave forecasts for fiscal 2002, ending in September, assuming 80 percent of its profits would be in the second half of the year. In January, the company reeled that in, blaming poor forecasting.
In April, the company warned of a revenue shortfall in its fiscal third and fourth quarters, met Wall Street estimates in June, and then said it saw some recovery in the second half of calendar 2002. That remains to be seen, with a profit warning from rival Celestica Inc. earlier this week.
"They and others got caught up in this business of being somewhat impervious, and that's baloney," said Chuck Hill director of research at Thomson First Call. "We refer to them as one of the canary group because they serve such a diversified group of customers and markets."
Sanmina-SCI's shares have fallen more than 81 percent this year. The company was not immediately available for comment.
LONG TIME GONE
Some say that companies -- and technology companies especially -- feel comfortable with a six-month horizon.
"Any company, when they have a problem, they say 'it'll take six months to fix -- three months to get a handle on it and another three to turn it around.' But things take longer to correct than you think," said Ken Smith, a fund manager at Munder Capital, which has about $30 billion in assets under management.
"For a lot of technology companies, that may be more true," he said. "The product cycles are shorter and the business moves faster."
Most companies are at a loss as their future financial performance depends on a broader economic rebound, and many have stopped making official forecasts altogether .
Interpublic Group of Cos. Inc. and Omnicom Group Inc. have been forced to lower expectations when a recovery in the advertising market never materialized.
In the computer industry, companies such as Hewlett-Packard Co. and International Business Machines Corp. have been forced to push back their hopes for a rebound when corporate technology spending has stayed weak.
SAP AG , Oracle Corp. , and a host of other software companies have been forced to reduce expectations, many more than once.
Despite moves by companies to be more conservative, technology expectations have consistently been puffed up and then reeled in. The tech sector has had the biggest downward revisions in analysts' estimates of 11 industries tracked by Thomson First Call.
On July 1, analysts had expected 81 percent earnings growth overall for technology as a sector for the third quarter, according to Thomson First Call. That expectation was ratcheted down to about 38 percent today.
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