THE DAY AHEAD: Hopes for a second-half rebound dwindle

COMMENTARY--Nothing like a profit warning from Nortel and cautious outlooks from tech bellwethers to douse hopes for that economic rebound in the second half of the year.

Nortel (NYSE: NT) dropped a bomb on investors as a host of other tech companies also toned down expectations. The confessional illustrated how limited visibility is for 2001, a point I noted yesterday.

The telecommunications equipment giant said after the bell Thursday that it will report a first-quarter loss of about 4 cents a share on sales of $6.3 billion. According to First Call consensus estimates, Nortel was expected to report a profit of 16 cents a share on sales of $8.1 billion. For 2001, Nortel expects revenue growth to be about 10 percent to 15 percent, roughly half of what analysts were expecting.

The company recently said it would grow at about a 30 percent clip, which was lower than the previous projection of 35 percent.

Nortel officials on a conference call said business in the United States will shrink about 20 percent. Any improvement in the business won't surface until the fourth quarter. Simply put, Nortel's customers slammed on the spending brakes.

Analysts wondered if Nortel was being overly cautious, but officials noted that the company was just being realistic about its outlook.

CEO John Roth said telecommunications customers had approved budgets, but became jittery over funding. Because of cash worries, telecom customers started scrutinizing every dollar spent. "They want to make sure every dollar spent on capital results in a dollar of revenue," said Roth, who admitted he only expected telecom customers to be cautious for only about a month.

Nortel said it sees no signs that customers will suddenly start ramping up capital spending. The company says it has hope that its business abroad will counter a U.S. slowdown, but it may be hard to even bank on that judging from other projections.

Hewlett-Packard (NYSE: HWP), which has a pretty good pulse on the information technology sector, noted on its conference call that the U.S. economic slowdown is spreading.

HP CEO Carly Fiorina said that the U.S. economic woes are already affecting Mexico, Korea, Taiwan and China. These countries export heavily to the United States and they're taking a hit because Uncle Sam just isn't importing as much as he used to. "These are the things that make us cautious," said Fiorina. "This is causing a rapid ripple effect."

HP met lowered estimates with a first-quarter profit of 37 cents a share, but sales of $11.9 billion fell short of projections, with growth of only 2 percent. HP had already issued a profit warning and lowered growth targets.

Dell Computer (Nasdaq: DELL), arguably the best suited to handle a slowdown because it can adjust inventory levels easily, didn't do much better. Dell fell short of estimates with a fourth-quarter profit of 18 cents a share. Analysts aren't going to sweat that miss though, since it was in the range of Dell's recent profit warning.

Dell also toned down its guidance for the first quarter, projecting earnings of 17 cents a share on sales of $8 billion. Analysts polled by First Call were predicting a profit of 19 cents a share on sales of $8.45 billion.

That outlook for the first quarter wasn't great, but that's the best you're going to get. Dell said it wouldn't project earnings beyond the first quarter due to the inability to predict a rebound.

And just in case you still had any hopes for a second-half recovery, Analog Devices (NYSE: ADI) tuned in with a not-so-chipper outlook. Analog Devices, which makes digital signal processing chips, met estimates, but also lowered its projections for the second quarter.

Analog Devices now expects to earn 43 cents to 44 cents per share, on revenue of $710 million to $725 million, for the quarter ending in April. First Call consensus was predicting a second-quarter profit of 49 cents per share. Revenue estimates weren't given. Analog Devices sees a 2001 profit of $1.85 to $1.90 per share. First Call predicted full-year earnings of $2.02 per share.

Now aside from all this gloom and doom, there are a few things to ponder.

• How much more will the Federal Reserve cut interest rates to boost the economy?

• Is the tech sector hit especially hard because of the dot-com implosion?

• And how will investors react to all this bad news?

The Fed probably will move swiftly on rates (again) once it has a little more evidence. The tech sector does seem to be taking its lumps. Notice how those old-economy stocks are doing pretty well. Unsolicited advice: Buy boring stocks. And as far as the Wall Street reaction, there could be a little "it can't get worse" wisdom arriving soon. Applied Materials (Nasdaq: AMAT) did OK after delivering bad news.

HP's Fiorina may have summed things up best. "It's the end of the beginning, not the beginning of the end," she said. Here's to hoping she's right.TDAIN

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