"Technology firms are operating in a difficult environment. January was a weak month, February was barely any better, and March will be pretty tough, since revenue for this month constitutes 50% of the quarterly revenue for most technology companies. I am therefore bracing myself for a raft of profit warnings in the first quarter," says Merrill Lynch telecommunications sector analyst Tal Liani in an interview with "Globes." "January is traditionally considered a weak month in seasonal terms, and revenues were still rising in December, so most companies, with the exception of Cisco, are still in denial and say there's no problem. I beg to differ - there is a problem which is why we can expect a lot of profit warnings by companies which will claim the environment has taken a turn for the worse."
Liani is a senior analyst at Merrill Lynch, and the most senior Israeli analyst working outside of Israel. He maps out two possible scenarios in the upcoming reporting season. "On the one hand, the valuations of many stocks are quite low, with very low earnings multiples. Most companies are also seeing their margins rising to several-year highs. On the face of it, this makes an attractive entry point for investors," he explains. "On the other hand, the valuations relate to future figures that I can't rely on. The first scenario, which I believe will occur, is lowered forecasts. It's a bit too early to buy shares. Another scenario is that I'm wrong, and the first quarter was a good one for the technology companies. But even if this is the case, it would still be better to wait and not buy shares for the time being, since if the first quarter was good while the surrounding environment was atrocious, it will indicate that 2008 will be OK. In any event, it's worth waiting for the first quarter results."
Despite everything, it's not all gloom and doom. "Overall, the recession should not affect the technology companies," says Liani. "The primary driver in technology businesses is larger data traffic volumes, and this is unrelated to the state of the economy. The increase will continue even if the economy does slide into recession," he believes.
The increase in data traffic is being driven by private and business customers alike. "Kids will continue to watch movies on their computers regardless of the economic cycles," says Liani. "The other portion of the traffic is generated by companies. A company that wants to improve efficiency introduces webification, and concentrates all relevant applications at a data enter. An economy in decline creates an incentive to invest is operating cost-cutting technologies, so there is a negative correlation between the economic situation and business traffic."
Globes: Which companies will be affected to a lesser extent by an economic slowdown?
Liani: "We're not seeing any noticeable harm to service providers, and I would even stretch a point by saying there has been no effect on them at all. Landline telecommunications providers sell telephony services, and these are not the kind of contracts that can be amended from one day to the next.
"Amdocs is one of the better companies right now. I have very few "Buy" recommendations at present - Amdocs and Cisco are just about the only ones. Amdocs has long-term outsourcing contracts, while on the other hand it recently reported two major contract wins with AT&T. We estimate one at $500 million over five to six years, and the other is even bigger, $1.5 billion over five years. AT&T employees will be seconded to Amdocs where they will provide the service to AT&T. Amdocs is anti-cyclical - the market falls and Amdocs ramps up its operations."
A few days before the interview with Liani, Israeli advertising media start-up Eyeblaster Inc. made a very bold move by announcing it had filed a preliminary prospectus for an IPO on Nasdaq in which it is seeking to raise up $115 million (including a $15 million allotment to the offering's underwriters. So is the offerings window still open? "There is a window, but the prospects for floating are nil," says Liani. "The market has shut down. For how long? I don't know, but since the beginning of the year, virtually all offerings have been postponed indefinitely. That's how it usually is on a bearish market."
Published by Globes [online], Israel business news - www.globes-online.com - on March 23, 2008
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