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Tech Titans' Earnings Keep Investors Upbeat

April 20, 2001|JOSEPH MENN and CHARLES PILLER | TIMES STAFF WRITERS

The good news is you've already heard the bad news.

Several technology titans, ranging from software giant Microsoft Corp. to profitable Internet rarity EBay Inc., reported quarterly earnings Thursday that in many cases beat grim expectations, cheering investors who have been searching for the market's bottom.

"It's a sign that things aren't as bad as people had feared. It's a bullish signal," said analyst Christopher Galvin of J.P. Morgan, noting that Microsoft sales rose a better-than-expected 14% and that the company kept in place growth projections for the full year.

It was a second day of relatively upbeat earnings news from technology mainstays, following hopeful comments from IBM Corp. and AOL Time Warner Wednesday.

And in a sign of how low the standards for good news have fallen, shares of many of the companies rose simply because they did not forecast tougher roads ahead. For example, Microsoft's earnings edged up 2.8% from a year earlier, while profit at high-end computer maker Sun Microsystems Inc. plunged 73%.

"It's going to be another strong day for the Nasdaq [Friday]--three in a row," Galvin said.

Not all the bad news has subsided. Several other tech giants, including personal computer maker Gateway Inc. and telecommunications equipment maker Nortel Networks Corp., disclosed more pain from the slowdown in technology spending.

Fred Hickey, editor of the High-Tech Strategist newsletter, cautioned that apparent modest improvements in the prospects of a number of still highly valued tech firms could be a trap for investors.

EBay, for example, still trades at more than 100 times its trailing 12-month earnings, implying that investors are banking on phenomenal growth. "If you don't understand it's a bubble, buy the stocks again and get slaughtered again," Hickey said.

Having endured a week of earnings, "I would say it's a mixed bag," said Melissa Eisenstat of CIBC World Markets. "We're not out of the woods yet, but the psychology seems to have changed."

On Thursday, investors focused on the good, or at least the less bad.

Microsoft said its third-quarter profit rose to $2.45 billion, or 44 cents a share, from $2.39 billion, or 43 cents, last year. Analysts had expected 42 cents. Sales of the Windows operating system and other programs reached $6.46 billion, aided by purchases by corporate customers.

Microsoft said it expects to earn $1.90 to $1.94 a share in the year ending June 2002. The stock, which gained $2.61 to $68.04 in regular trading, rose as high as $72.25 in after-hours trading on the report.

"We're finally starting to see [Microsoft] accelerate with their product cycle," said Edward Dowd of Microsoft shareholder Independence Investment Associates.

Sun Microsystems, whose fortunes have fallen along with those of the dot-com companies that were some of its most loyal customers, said quarterly profit fell to $136 million, or 4 cents a share, as sales gained 2%, to $4.1 billion. Profit before adjustments for acquisitions and investments slightly beat Wall Street expectations, while sales missed the target.

"Revenues were a little light, but its hardly a shocker," said J.P. Morgan analyst Daniel Kunstler. Analysts said Sun faces another two quarters of possible sales declines.

"People are trying to figure out how long it will take for them to fix it," said Salomon Smith Barney analyst John Jones. "You can see that IBM is healthy and should continue to take market share. It's unclear whether or not Sun and HP [Hewlett-Packard] are ready yet."

Online auction leader EBay easily beat Wall Street expectations, earning $30.6 million, or 11 cents a share, excluding one-time expenses and other costs. Analysts polled by First Call/Thomson Financial predicted an average of 8 cents. In the year-earlier period EBay earned $4.4 million, or 2 cents a share.

Revenue soared 79% to $154 million. EBay also predicted revenue in the next two quarters "could be as much as $10 million to $15 million higher than previously anticipated."

Shares of EBay jumped $4.24, more than 9%, to $49.99 in regular Nasdaq trading. In after-hours trading following the earnings report they reached $52.07.

"EBay's performance in the quarter was outstanding and should merit significant investor attention," said Derek Brown, analyst with WR Hambrecht & Co. "There's a very real possibility that EBay becomes more valuable in a slower economy. Buyers become more interested in value and sellers become more interested in cash flow, in turning inventory into cash."

Unlike other pure-play Internet leaders such as Yahoo Inc. and Amazon.com, "EBay has almost nothing to do with the online advertising market, no sales force, no inventory, no warehouses and no distribution concerns," Brown said.

Deeply troubled Xerox Corp. also won over investors Thursday. The photocopier leader had a smaller-than-forecast first-quarter loss as it cut expenses and raised cash by selling assets. The stock soared $2.50, or nearly 40%, to close at $8.90 in NYSE trading after the report.

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