Earnings Season Opens With a Thud

No news was good news for our Partner Index during most of May. But an extended industry rally finally reversed itself last week, when EMC announced staff cuts and Sun Microsystems issued an earnings warning that spooked investors.

The double whammy pulled our index down nearly 7 percent for the week ended Wednesday, May 30. (Though some stocks rebounded as this went to press on May 31). The hardest-hit companies included C-bridge Internet Solutions, DiamondCluster International and Sapient.

C-bridge was a late scratch from our recent Smart 100 Companies issue. We ultimately didnt include C-bridge in that issue because of the companys weak Q1 results. C-bridge since has announced merger plans with eXcelon.

Industry consolidation is expected elsewhere. Though rumors about a potential combo involving Hewlett-Packard and Scient have quieted, there are strong indications that HP is taking a look at Sapient, Sm@rt Partner has learned. The report has yet to reach Wall Street, where Sapients stock has been losing ground of late.

Sapient suffered a $48 million loss in Q1, but the company remains among the more widely respected Internet consulting shops.

Wall Street remains cool on most integration companies but sees great promise in outsourcing opportunities.

“We continue to see no near-term catalyst for overall systems integration and IT consulting spending,” says Mark DAnnolfo, an analyst at Deutsche Banc Alex. Brown. Still, DAnnolfo notes that “many companies are seeing growing pipelines, which is a meaningful change from the first quarter.”

DAnnolfo says few big integration deals have closed in Q2, and Europe overall is weakening. He believes the competitive landscape is returning to that of the mid-1990s, which was dominated by larger-tier players and only a handful of specialized systems integrators and IT consulting firms, including Affiliated Computer Services, Electronic Data Systems and KPMG Consulting.

Shares in EDS, for one, have held steady most of this year. The company hired 7,000 employees in Q1 and has recorded eight straight quarters of record earnings. Chairman and CEO Dick Brown discussed EDSs hiring spree and upbeat outlook during a shareholder meeting on May 22.