The June-quarter earnings landscape for OEMs isn't a pretty sight, especially in the networking equipment sector. Sharply lower sales, high operating costs, bad loans, and reorganization charges have savaged these companies' revenue and crimped profits.
For many of the leading networking equipment suppliers, including Lucent Technologies, Nortel Networks, and Cisco Systems, the second quarter is a write-off. On June 15, Nortel set the stage for what's expected to be a series of woeful results by announcing that its second-quarter loss would be approximately $19.2 billion on revenue of $4.5 billion, down from revenue of $5.8 billion in the first quarter and $7.8 billion in the second quarter of 2000.
Nortel and its peers in the networking equipment market, along with many other electronics OEMs, have shifted investors' attention to the second half of the year, hoping they can salvage respectable returns by the fourth quarter, according to analysts.
The latest estimate for the PC sector shows Dell Computer Corp. posting flat year-over-year revenue for the second quarter, with the rest dropping after expected sales failed to materialize.
For instance, Compaq Computer Corp., which fell to second place behind Dell as the world's leading PC supplier, is expected to report revenue of $8.3 billion in the second quarter, down 18% year-over-year, according to Steve Fortuna, an analyst at Merrill Lynch & Co. Inc., New York. In response, Compaq last week announced that it will phase out its Alpha 64-bit microprocessor line in favor of Intel Corp.'s Itanium processors.
"Resources that would have otherwise gone to development of Compaq's core Alpha infrastructure now can be freed up to focus on software and systems engineering that should serve to focus on Compaq's shift from hardware vendor to solutions provider," said Eric Rothdeutsch, an analyst at Robertson Stephens Inc., San Francisco.
More tough choices await the industry. When OEMs begin reporting their results next week, starting with Motorola on July 11, analysts will be focusing on a variety of issues, including available cash, inventory, receivables, one-time charges, write-offs, and any other items that could provide a better idea of the companies' viability.
While many OEMs will continue to pass muster, analysts are increasingly questioning the strategies a handful have deployed, especially Lucent, which recently turned down a merger offer from Alcatel. The Murray Hill, N.J., networking equipment provider will likely face questions about its ability to complete the promised spinoff of Agere Systems to shareholders.
"Lucent will be challenged to achieve significant profitable growth given their operating condition and the prevailing downturn in the economy," said Paul Johnson of Robertson Stephens.