Capital Markets

More Companies Revising Downward

Last week, companies that issued negative outlooks outnumbered those that upgraded their earnings forecasts by two to one.
Stephen TaubJuly 7, 2004

Is the economic recovery already starting to peter out, or has Wall Street been too giddy of late?

Last week, as the June quarter came to a close and businesses geared up to report their three-month results, companies that issued negative outlooks outnumbered those that upgraded their earnings forecasts by two to one, according to Reuters.

Cyclical consumer-goods businesses and technology companies delivered 42 percent of the downgrades, according to the report. Their most common reasons for lowering expectations were inventory build-up, pricing pressure, and weak sales.

Yesterday, for example, Veritas Software Corp. warned that second-quarter earnings and revenues would come in lower than it previously anticipated. “At the end of the June quarter, our anticipated order flow weakened, contributing to lower-than-expected license revenues,” said Gary Bloom, the company’s chairman, president, and chief executive, in a statement. “Our services business remained strong, driven primarily by healthy maintenance renewals throughout the quarter, and the demand for our products and services in most of Europe and Asia Pacific met our expectations.”

The company announced that second-quarter earnings would probably come in between 17 cents and 19 cents per share on revenue of $475 million to $485 million (between 18 cents and 20 cents per share excluding amortization of intangibles and stock-based compensation).

Veritas had been expecting second-quarter earnings closer to a range of 21 cents to 23 cents per share on revenue of $490 million to $505 million. What’s more, analysts were projecting earnings of 24 cents per share on revenues of about $501 million, according to Thomson First Call.

Also yesterday, semiconductor maker Conexant Systems Inc. warned that it expects revenues for its third fiscal quarter, which ended July 2, will be about $40 million lower than anticipated, according to TheStreet.com. The Website also noted that Conexant’s earnings forecast of 2 cents per share was about half the consensus estimate.

“In the third fiscal quarter, a shortfall in demand in our wireless LAN business led to overall company performance that was less than we expected at the beginning of the quarter,” said Armando Geday, chief executive officer, in a statement. “Our other businesses, which include solutions for dial-up and digital subscriber line connectivity as well as digital set-top box and PC video applications, were essentially flat, and we are absolutely confident in the long-term prospects for the combined company.”

Amid this continuation of earnings warnings, it’s little surprise that the Nasdaq lost 43.23 points, or 2.15 percent, to 1963.43 — its largest loss since early March, reported TheStreet.com. The Website added that the Dow fell 63.49 points, or 0.62 percent, to 10,219.34; and the S&P 500 closed down 9.19 points, or 0.82 percent, to 1116.19.

One encouraging sign: Of the 31 S&P 500 companies that had reported second-quarter results by the end of last week, 3 missed their estimates, but 26 exceeded expectations, and by an average margin of 7.6 percent, according to Reuters.

Keep in mind that Wall Street analysts have been projecting second-quarter earnings growth of 25 percent for the Standard & Poor’s 500 Index. This could change if more companies miss their targets.

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