Week in review: In the money?

A deluge of earnings reports from tech companies big and small offers no definitive answers on where the industry is headed for the second half of the year.

Steven Musil
Steven Musil Night Editor / News
Steven Musil is the night news editor at CNET News. He's been hooked on tech since learning BASIC in the late '70s. When not cleaning up after his daughter and son, Steven can be found pedaling around the San Francisco Bay Area. Before joining CNET in 2000, Steven spent 10 years at various Bay Area newspapers.
Expertise I have more than 30 years' experience in journalism in the heart of the Silicon Valley.
6 min read
With many tech stocks climbing substantially in the second quarter, investors were anxiously awaiting earnings reports that would justify further gains or turn out the lights on Wall Street's brief party.

For the most part, the answers were not definitive as technology companies reported earnings that represented a mixed bag and offered no consensus on where the industry is headed for the second half of the year. Microsoft, for example, said sales exceeded its targets, but earnings were hit by a legal settlement with AOL Time Warner.

The software giant, which now sits on a nearly $50 billion pile of cash, also raised its revenue outlook for the 2004 fiscal year to a range of $34.2 billion to $34.9 billion, up from an earlier forecast of between $33.1 billion and $33.8 billion.

In other earnings news:

• Software maker PeopleSoft reported improved second-quarter results and raised its outlook for the third quarter, a good sign for a company that is fending off a hostile takeover attempt by rival Oracle that many feared would drive customers away.

• SAP, Europe's biggest software maker, posted earnings above forecast and raised its profit margin target.

• Leading cell phone maker Nokia reported weaker second-quarter earnings and warned that a soft dollar could hurt sales and profits at its main handset unit.

•  IBM posted a larger second-quarter profit than a year ago, meeting Wall Street targets, but said it's too early to predict an upturn in the tech market.

•  Apple Computer said third-quarter results exceeded expectations, although profit was down from a year ago.

• Data storage giant EMC turned in a stronger-than-expected second quarter, driven by growth across all major segments of its business.

Yahoo's bid to own search
Yahoo plans to buy search company Overture Services in a $1.63 billion deal, bolstering its position against rivals Google and Microsoft in the booming market for Web search advertising. Yahoo said the deal will allow it to expand its pay-for-performance search business and to expand contextual advertising throughout its network.

Overture specializes in selling advertising links that accompany search results on sites such as Yahoo and MSN. It's a market into which search rival Google has been making inroads. Yahoo Chief Executive Officer Terry Semel said that the combined companies represent the largest player in the Internet advertising sector and that the deal gives Yahoo a greater ability to market itself to small and medium-size advertisers.

The deal is biggest endorsement yet of the paid search model as not only a viable, but a desirable, method of spinning hits into cash on the Web. The company, which pioneered the paid search model, was widely panned when it launched, especially by purists who worried that the paid search model would tarnish the freewheeling information hub of the Web.

Critics, including consumer advocate Ralph Nader, have accused paid search companies of misleading Web surfers with distorted results.

Yahoo for now will face off most directly with Google, but analysts said the wild card will likely be Microsoft. MSN is Overture's biggest partner, delivering as much as one-third of Overture's revenue this year, or an estimated $350 million. As a result, many industry watchers say that it is only a matter of time before MSN takes stock of its alternatives, including replacing Overture with Google on its Web sites and hastening efforts to build its own Web search technology.

Three's a crowd?
PeopleSoft ran into a speed bump en route to its intended merger. On Friday it announced that investors have tendered 88 percent of J.D. Edwards shares, delaying the closure of the $1.8 billion merger as J.D. Edwards shareholders must now vote on the deal. PeopleSoft now expects to close the deal in August, rather than next week.

Federal regulators said the pending merger is not anticompetitive, clearing the way for the friendly $1.7 billion deal and frustrating Oracle's desire to acquire PeopleSoft in a separate, hostile takeover bid. Oracle, in response to the U.S. Department of Justice decision, announced that it will still proceed with its hostile bid for PeopleSoft and will extend its deadline for PeopleSoft investors to tender their shares. PeopleSoft shareholders will now have until Aug. 15 to tender their shares.

Oracle CEO Larry Ellison predicted that PeopleSoft would post lackluster financial results during the next several quarters, a weakness that could sway support for Oracle's hostile takeover. Ellison refuted the idea that delays caused by an extended antitrust review and continued resistance from PeopleSoft management would hurt Oracle's buyout plan. "It's not clear to me that time is on PeopleSoft's side," Ellison said.

Oracle attempted to sweeten the offer by pledging support for business software made by J.D. Edwards. Oracle has promised to maintain PeopleSoft technology for at least 10 years and not force thousands of customers to use Oracle's competing products. Oracle extended that promise to nearly 6,700 J.D. Edwards customers.

Twin flaws' double threat
Security experts warned that a flaw in Microsoft Windows and another in Cisco System's ubiquitous network routers could lead to serious Internet attacks. The two flaws affect a large number of computers and devices connected to the Internet, and that could make the two weaknesses prime targets for attack.

Experts worry that the combination could lead to something like the Code Red worm and the SQL Slammer worm, which disrupted corporate networks by infecting servers and inundating parts of the Internet with data. The software giant issued a patch to plug a critical security hole that could allow an attacker to take control of computers running any version of Windows except for Windows ME.

The flaw is in a component of the operating system that allows other computers to request the Windows system perform an action or service. The component, known as the remote procedure call (RPC) process, facilitates such activities such as sharing files and allowing others to use the computer's printer. By sending too much data to the RPC process, an attacker can cause the system to grant full access to the system.

In addition, Cisco warned that a flaw in its router software could allow attackers to freeze Cisco routers and stop the flow of network data through the devices. Cisco said that it was working on a fix and that the company wasn't aware of any online vandals taking advantage of the issue.

The vulnerability is caused by a flaw in the way a Cisco router handles certain Internet data. An attacker could use a special sequence of packets and cause the router to believe its input queue--storage for incoming data--was full, according to the Cisco advisory. The attack would crash the router and the device would have to be rebooted to clear the queues.

Swappers beware
Peer-to-peer users who swap copyrighted files could be in danger of becoming federal felons, under a new proposal backed by Democrats in the U.S. House of Representatives. Their legislation would punish an Internet user who shares even a single file without permission from a copyright holder with prison terms of up to five years and fines of up to $250,000.

And if that isn't enough, the record industry's plan to sue individuals who trade songs online has caused a precipitous drop in the use of file-swapping applications, according to one Internet ratings service. The use of top file-trading applications such as Kazaa and Morpheus has fallen by about 15 percent since the end of June.

Although the numbers are provisional, and falling Net traffic in the summer can be explained in part by vacationers going offline, the statistic is bound to be closely watched by those with a stake in the copyright debate.

However, the Recording Industry Association of America's (RIAA) may run into trouble with hot spots. Wireless Net access through free, open or publicly available hot spots is proving to be a last bastion of privacy on an Internet where the veil of anonymity can now easily be pierced. Wi-Fi access points give anyone who possesses the appropriate computer equipment within a radius of about 300 feet the ability to reach the Internet.

Consequently, hot spots represent a slowly widening hole in the RIAA's recently announced drive to identify and ultimately sue what could be thousands of file swappers online. Traditional ISPs give each subscriber a unique, if temporary, identification number while they're online. Wi-Fi access points don't, and that makes it difficult for the RIAA or anyone else to pinpoint exactly who is doing what using these nodes on the Net.

Also of note
Dell Computer has identified a software glitch inside its Axim handheld and will not ship new units until it corrects the problem...Microsoft is getting this unexpectedly good feedback from other software companies as it readies the next version of its Office desktop application package...Orbitz was hit by a site outage that made the popular travel site unavailable to visitors at the height of the busy summer travel season...America Online laid off 50 employees involved in Web browser development at its Netscape Communications subsidiary amid a reorganization of its Mozilla open-source browser team.