Rate Cut Heals Some Wounds

By eweek  |  Posted 2001-04-23

A surprise interest rate cut by the Federal Reserve coupled with strong earnings reports from several technology firms, including IBM, lifted our index 9.1 percent last week, its second consecutive steep gain.

Among the top performers were Internet consulting companies eLoyalty, Sapient and DiamondCluster, which surged 50 percent or more for the week.

Conventional market wisdom says such services companies are leading indicators of the strength or weakness in the technology sector. If thats the case, some pundits say the sector may soon rebound.

"Were getting close to the end of the bad news," says Christopher Penny, analyst at Friedman, Billings, Ramsey & Co.

Indeed, Cognizant Technology and other consulting firms released favorable first-quarter earnings reports last week that could be harbingers of a recovery expected later this year. Shares of Cognizant surged 40 percent last week, boosted by its 61 percent jump in Q1 net income and 60 percent increase in revenue from a year ago. Revenue and income also were higher than the previous quarter.

A few days earlier, Inforte reported a more moderate 14 percent rise in revenue from the prior year to $14.1 million. Its net income fell about 10 percent to $900,000. The company ended Q1 with about $84 million in cash, little change from Q4.

Penny at Friedman, Billings, Ramsey & Co. lists Inforte among the companies that will survive the slump in IT services. They all share four common traits, says Penny: a positive cash-flow position, strong balance sheet, loyal global 300 customer base and seasoned management.

Two companies that clearly fail Pennys test have moved closer to extinction. MarchFirst has filed for Chapter 11 bankruptcy and PSINet expects to do the same. Last week PSINet released its long-delayed results for Q4, which showed a $3.2 billion loss. The company had $3.7 billion of debt on its books as of Dec. 31, 2000, but only $520 million in cash on hand as of April 10.

Other winners last week included Exodus Communications, which surged on announcements of several new contracts and rumors that Cable & Wireless is interested in acquiring the company.

Investors will get a clearer picture of the future in IT services when more companies release their earnings over the next few weeks.

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