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The Starting Line: Tech profit warnings to cite terrorism

Many technology companies are expected to issue profit warnings citing the Sept. 11 terrorist attacks for their earnings misses, but analysts doubt terrorism is solely to blame.

With the third quarter coming to a close, many technology companies are expected to issue profit warnings citing the Sept. 11 terrorist attacks for their earnings misses. But analysts doubt terrorism is solely to blame.

The Sept. 11 attacks halted business and probably pushed the U.S. economy into a recession, and tech companies that rely on end-of-quarter, or back-loaded, sales will suffer.

But many tech companies--especially the ones warning about profits so soon after the terrorist attacks--may be using the tragedy to cushion the blow of bad news that would have been announced anyway, analysts said.

No one is suggesting companies will outright lie, but industry watchers were quick to note that the World Trade Center attacks provide an opportunity for companies to "manage earnings" by lowering expectations, masking internal problems and ultimately showing better growth figures for 2002.

And there's precedent to support the theory that most profit warnings will at least mention the Sept. 11 attacks. When the Asian economy melted down in 1998, "Asian contagion" was a press release favorite for technology companies. Then came the Year 2000 bug, which was later followed by references to Europe's weak economy.

"You're going to see a lot of companies cutting their outlooks and attributing it all to the World Trade Center attacks," said Bill Schaff, fund manager for the Berger Information Technology Fund. "In some cases it'll be warranted, but I have no doubt that it's going to be abused."

If Schaff is right, a lot of technology companies are going to sound a lot alike. Although First Call, which tracks earnings results and estimates, says third-quarter profit warnings are lower than those in the second quarter, it notes the pace could pick up. In the next two weeks, analysts are expecting more profit warnings.

Indeed, the terrorism references have already started. For example:

• Online advertising company DoubleClick said Sept. 20 that its revenue would be in the $87 million to $90 million range, down from $96 million to $102 million. "The tragic events of September 11 have led to softness in both online advertising and software sales," DoubleClick CFO Bruce Dalziel said.

• Software giant Oracle said its software sales would be down in the current second quarter by as much as 15 percent because of the terrorist attacks.

• AOL Time Warner on Monday said its revenue and cash flow targets would fall short, largely because of an advertising slowdown related to the terrorist attacks.

• On Tuesday, broadband equipment maker Redback Networks said its September-quarter revenue would be $35 million to $40 million because of "uncertainty surrounding the events of September 11." Redback said it would miss its First Call revenue targets by at least $12 million because of terrorism.

Although each case is different--and to some extent valid--analysts said the aforementioned companies have deeper issues than the abrupt slowdown triggered by the terrorist attacks. The tech sector was already struggling before the attacks.

"While (Redback) blamed overall economic uncertainty exacerbated by the recent terrorist attacks, we also suspect this was a prime opportunity for new CEO Kevin DeNuccio (named CEO Aug. 29) to clean house and lower the bar, as it were," said Tim Savageaux, an analyst at WR Hambrecht. "We believe this quarter's results will likely represent the low watermark for Redback."

Savageaux wasn't the only analyst reading between the lines.

Wall Street had been predicting AOL Time Warner would cut its targets amid slow advertising sales well before the World Trade Center attacks, and some analysts have said executives were looking for the right time to warn. DoubleClick knew the magnitude of its earnings miss just days after the attacks occurred, indicating it may have already been struggling to make the quarter, analysts said.

Many analysts flagged DoubleClick's profit warning.

"The company blamed the fall-off partly on last week's terror activities, but we believe that sector fundamentals have more to do with the deteriorating conditions at DoubleClick," said Michael Legg, an analyst at Jefferies, who noted that DoubleClick's business was struggling before Sept. 11.

Legg also noted that DoubleClick has missed five consecutive quarters and isn't profitable. Although the terror attacks exacerbated an online advertising downturn, Legg said he would have remained "extremely wary of any forward-looking guidance we may receive."

Simply put, industry watchers need to watch the "shades of gray" when it comes to the true impact of the terrorist attacks on a company's business, said Schaff, who is expecting tech companies to not only cut estimates, but also announce big write-offs.

"Anything bad even remotely related to the terrorist attack will be thrown in," Schaff said. "Some will do so in a reasonable context, and some will abuse it. It's definitely something to be wary of."