2HRS2GO: Techs still need sign of better things to come

4 min read

COMMENTARY--Is that it? Can I poke my head above the rubble now? Has the last bomb fallen?

When the technology industry started sounding its air raid sirens last year, three enterprise hardware giants stood above the fray for awhile: Sun Microsystems (Nasdaq: SUNW), Cisco Systems (Nasdaq: CSCO) and EMC (NYSE: EMC). Throughout the fall and early winter, they refrained from warnings. Business was fine. Nothing to see there. Move along.

Turns out something was going on, after all. With EMC's pseudo-warning today, we now know that everyone has been hit.

Cisco was the first one to blink. Executives for the network equipment maker in January told analysts to lower their expectations, a glum forecast borne out by the company's second-quarter report.

Sun became the next depressing titan. Although the Unix server vendor met estimates in its latest quarterly report, analysts trembled after the company cut revenue targets for the year.

We'll learn more about Sun this afternoon, when the company provides a mid-quarter update. No one expects anything but more gloom and doom because CEO Scott McNealy, in an unusual move, plans to be on the call.

The final leg of the corporate hardware triangle collapsed this morning. EMC is the world's largest seller of network systems used to store massive amounts of corporate data, and until this week, it was seen as immune to the shrunken technology budgets. The company stuck to its original revenue target of $12 billion for the year. As one analyst pointed out to me last night, even in an economic slowdown, work goes on and large companies still produce electronic content that needs to sit someplace.

Or so the theory goes. Somehow, that argument didn't quite apply to the customers of Emulex (Nasdaq: EMLX) and Brocade Communications Systems (Nasdaq: BRCD), whose products are used in various parts of a storage network. Both companies have reduced their near-term sales projections, with Brocade's warning coming yesterday.

EMC couldn't withstand the industry trend. Although the company will not back down from that $12 billion sales forecast, EMC today left room for a slower increase in sales. The company this morning said annual growth could be as low as 25 percent, which would be quite a letdown from its original goal of percentage growth in the mid-30s.

Wall Street reacted as you would expect. EMC shares, already poised to fall with the rest of the storage-networking industry following Brocade's report, plunged more than 20 percent at one point this morning.

Yet the stock had regained most of that loss by the afternoon. As of 1:20 p.m. ET, EMC shares were down about 7 percent.

You get the feeling that Wall Street believes that this is it. EMC was the last notable plane in the formation--at least on the hardware side, where everything starts--and now that the company has dropped its payload, people are breathing again. Any other corporate warnings in the next few weeks will be nothing more than the occasional fighter on a strafing run.

At least that's the idea, and there's some merit to it. After all, the only major tech report left for this earnings season is Oracle (Nasdaq: ORCL), which will likely do alright, if recent earnings reports from other enterprise software companies are any indication. The bad news is all out, and EMC's catharsis has purged us, judging by the recovery of the Nasdaq Composite Index, which was hardly down at all by mid-afternoon after a larger drop in the morning.

That doesn't mean things are going to get any better anytime soon for the tech industry.

A closer look at EMC's caution reveals no real change in the company's outlook. Had Brocade not injected its caution yesterday, EMC likely would have said nothing, but when the storage kingdom rumbles, the king must show empathy. He must feel his subjects' pain.

Had EMC not warned this morning, the stock would have been killed anyway on rumors and innuendo. EMC launched a pre-emptive strike.

From a tactical perspective, it's a commendable move. But it doesn't really help, as far as providing a clearer picture of when the tech industry will recover.

What will Sun--the second largest seller of network storage, by the way--say this afternoon? When will telecom companies start buying equipment again? What kind of reception will all those supposedly wonderful wireless devices get when they're introduced later this year?

EMC can't tell us that. No one can, really, except maybe Alan Greenspan.

We still don't really know when that rebound is going to happen. Until then, it's tough to feel good about techs. Don't demolish the bomb shelters yet. 22GO>