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Thursday, 5 October, 2000, 17:15 GMT 18:15 UK
The Millennium bug bites back
Chart showing Nasdaq's fall from 1 September
by BBC News Online's Mike Verdin

So the Millennium Bug may be getting the last laugh after all.

Ten months after it failed, as doomsters had predicted, to cause global mayhem, it is being implicated in a profits slump among US technology firms.

The Nasdaq index of technology stocks has tumbled 20% in a little over a month. The evening ring of Wall Street's stock exchange bell has come to signal not only the close of trade, but open season on profits warnings.

On 21 September Intel, the world's largest chipmaker, announced significantly lower revenues for the third quarter. A week later, computer giant Apple said income would fall "substantially below expectations".

On Tuesday it was the turn of software company Computer Associates to warn investors.

And on Wednesday SciQuest, BMC Software and most significantly Dell, the world's number two manufacturer of personal computers, followed suit.

Bug bites back

The reason? A fall in information technology spending by big corporate customers. They are cutting back after spending fortunes countering the Millennium Bug, which threatened to confuse as computers as they switched dates from the year of 1999 to 2000.

Spurt of alerts
Sept 21: Intel warns of weak EU demand
Sept 28: Apple says sales of 'Cube' weak
Oct 3: Computer Associates foresees revenue down 10%
Oct 4: BMC Software foresees 50% earnings slump
Oct 4: Dell predicts weak sales
Oct 4: SciQuest warns of third quarter loss

"Corporate spending on computer systems was strong in 1998 and 1999, in the run up to the millennium change," a senior analyst with investment bank Beeson Gregory told BBC News Online.

"What seems to be happening now is that spending is falling off, perhaps more seriously than had been thought."

A spate of UK software systems consultants announced early this year that takings were lower than expected.

"If companies implementing the systems were warning of a slow down then, it is not surprising that systems providers are saying the same now," the analyst said.

Currency effects

The weak euro is also being fingered as a culprit, for rendering US products expensive in the eurozone.

Steve Jobs, chief executive of Apple
Apple's Steve Jobs: fighting poor sales

Intel, Apple and Dell all reported weak European sales.

"There has been some macro-psychology play at work with the weak euro," Dell's chairman and chief executive Michael Dell told analysts on Wednesday.

"People [in Europe] have been significantly less inclined to make expenditures in terms of technology."

Self interest

Indeed, analysts see more than a little self-interest being served by the co-operation of the US Federal Reserve in central bank intervention to boost the euro.

"The intervention is very directly connected to issues like Dell," said Paul Horne, economist at Schroder Salomon Smith Barney in London.

"The profits warnings of major tech companies have contributed to serious concerns about the rapidity of softening of the US economy."

Deutsche Bank senior currency strategist Paul Meggyessi said: "One could argue that a strong dollar has become too much of a good thing.

"The benefits in terms of low inflation are increasingly being outweighed by the negative aspects in terms of US ability to compete in overseas markets."

Old new, and new new

So is the party over for technology firms in the US, and indeed worldwide?

It is important to differentiate your old new economy firms from new new economy firms

Beeson Gregory, investment bank

"It is important to differentiate your old new economy firms from new new economy firms," the Beeson Gregory analyst said.

The technology sector can be divided between the classic technology firms, serving markets which have largely matured, and the companies serving the new internet gateways, which have yet to reach anything like their potential.

"However many million PCs there will be in the world in three years time, there will be five times as many mobile phones, personal organisers and other new devices for accessing the internet," the analyst told BBC News Online.

"The PC market is not where the action is. Dell and Apple are both computer makers. Intel may be a huge maker, but its market share is far greater in PCs than elsewhere."

Investment slump

Why, then, are the likes of BMC, SciQuest and Computer Associates floundering, as providers of corporate software applications rather than hardware products?

Nasdaq trader
Nasdaq traders have watched the index dive

"They are all in roughly the same market, in that they are involved in investment in computer systems by companies, which are not prepared this year to spend as much as the previous two years."

Beeson Gregory's advice is to monitor promising new new economy stocks, such as Ariba, a specialist in internet business-to-business marketplaces, or multimedia specialist Geo Interactive.

"If revenues for Geo Interactive next month are not what was expected, well that is not what this area is about. We are talking about potential.

"A lot of these companies have yet to make a profit. You can't have disappointing revenues if you have no revenues with which to disappoint."

Limited effect

Not that this truism is shielding them from at least some of the effects of profits warnings among US old new economy firms.

Nor is it likely to protect shares of cutting edge UK firms, especially as profits warnings have been so far confined to US companies only because of accounting anomalies, not business fundamentals.

"US firms report quarterly, and UK firms only every half year. So if there were UK firms in similar predicament, you would not expect them to report them until nearer the time their figures were out, later in the year."

Maybe even around late December/ early January time.

Millennium Bug, welcome back.

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See also:

04 Oct 00 | Business
Dell warns on sales
29 Sep 00 | Business
Apple slump rattles tech sector
02 Oct 00 | Business
Apple, rates send markets lower
22 Sep 00 | Business
Intel shocks high-tech industry
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