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THE DAY AHEAD: Just wondering ...

COMMENTARY -- As we start the new week, there are leftover items from last week worth flagging. We were just wondering ...

About Microsoft's explanation of its hack attacks ...

Microsoft (Nasdaq: MSFT) has spent a lot of time and effort to keep its employees happy. It recently moved up the dates on its option grants. It has also lowered strike prices to keep employees in the golden handcuffs.

Obviously, Microsoft recognizes its people are the most important asset. So what does it do? Blame them for its site outages last week.

As you are probably well aware, Microsoft sites were rattled for much of last week over denial-of-service attacks -- a technique where hackers overwhelm a site so the real users can't get through. The first two days of Microsoft's site outages were pinned on its techies. In other words, a Microsoft employee goofed.

On day three of Microsoft's problems, the company said its outage was due to a hack attack. The company stuck to its "technical error" excuse for the first two days.

I don't buy the blame-it-on-our-techies routine.

Think about it. Microsoft is making a big push into enterprise software. But it doesn't look so hot when your industrial-strength software is vulnerable to a hack attack. That's why Microsoft's initial strategy was to blame its site outages on an internal error. After three days, however, that story got old. Now Microsoft has this hybrid story going.

Makes you wonder, doesn't it?

About the analysts' after-the-fact PMC-Sierra worries ...

PMC-Sierra's (Nasdaq: PMCS) outlook for the first quarter and 2001 was "catastrophic" as analysts strained to find adjectives to describe the communications chipmaker's woes. But it would have been nice if more analysts could have provided a little bit of a heads up before the earnings release.

SG Cowen analyst Rick Billy cut PMC-Sierra's rating and said the outlook was a "stunning reversal of fortune" as the company experienced a "catastrophic decline" in bookings. Billy said PMC-Sierra is a fine company, but it's being hit by an inventory/macroeconomic slowdown.

One question: Where was Mr. Billy a few months ago? The inventory worries were hardly new. Everyone knew the economy was slowing.

Billy wasn't alone. The PMC-Sierra fallout shocked other analysts. One analyst was so stunned that he downgraded Broadcom (Nasdaq: BRCM) even though its business is only roughly comparable to PMC-Sierra's. Salomon Smith Barney analyst Clark Westmont said Broadcom is in a "fairly different" market, but will still get whacked on communications demand and inventory worries.

There were a few analysts who were ahead of the curve. "We anticipated an inventory correction when we downgraded the communications-IC sector in November. However, we were surprised at the magnitude and severity with which it hit PMCS," said Merrill Lynch analyst Joe Osha in a report.

"We believe that we have yet to see the brunt of the inventory correction and expect it to last for two quarters," he added.

Lehman Brothers Arnab Chanda said his firm expected the inventory correction in October. A little gloating is fine -- as long as you're ahead.

About AOL Time Warner's growth rates ...

AOL Time Warner (NYSE: AOL) released its pro forma financials for the past nine months. These pro forma results make it look like the two companies have been merged since Jan. 1.

The pro forma figures aren't that shocking, but they do indicate how Time Warner's media properties can be a drag on growth rates. Combined, the companies grew sales 15 percent in the first and second quarters of 2000. In the third quarter, sales grew 9 percent from a year ago. AOL's sales grew at least 33 percent for the first nine months of 2000.

For the third quarter ending Sept. 30, AOL Time Warner's growth was hurt by the filmed entertainment division, which saw its sales fall 9 percent. Sales in the music and publishing divisions were also down in the quarter. Keep an eye on those Time Warner media properties when assessing the company's target projections.TDAIN
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