New Year, Same Problems

It may be a new year, but last quarter's slowdown continues to haunt the e-services sector. Even Sapient, one of the sector's star performers, has stumbled.

It may be a new year, but last quarters slowdown continues to haunt the e-services sector. Even Sapient, one of the sectors star performers, has stumbled.

The companys surprise earnings warning last Thursday delivered a harsh reality one day after investors cheered the feds interest-rate cut.

For the week ended Jan. 4, our Partner Index climbed 4.3 percent to 510.02. But the indexs rise does not reflect Sapients warning, which the company issued after our Index closed on Thursday night.

Sapient says Q4 earnings and revenue wont meet market expectations and Q1 performance will be flat compared with Q4. The company estimates Q4 earnings at 10 cents a share vs. a 12 cents forecast, and revenue of $139 million vs. earlier estimates of $143 million.

"The Sapient warning is significant because it shows that everyone is getting hit, not just B- and C-tier companies," says George Price, analyst at Legg Mason. It also shows that not all the bad news has been priced into the market yet, says Price.

Indeed, Sapients stock fell 26 percent at Fridays open, then recovered some of those losses once investors realized that the companys cup remains half full—the earnings miss is only a couple of cents and Sapient remains profitable.

Other companies arent quite so fortunate. Breakaway Solutions in late December issued a Q4 earnings warning and said staff cuts will triple in size, from 10 percent of its workforce to 30 percent. Its Q4 cash loss is expected to be near 26 cents per share and revenue will come in at about $118 million.

Only a few e-services firms have avoided earnings warning this quarter. The survivors include DiamondCluster, Digitas and Inforte. The first two have actually reaffirmed analysts earnings expectations for the latest quarter.

Inforte was among the winners in our indexs last week, as was Tanning Technology, which specializes in the back-end integration work that is in strong demand.

Earthlink, an ISP that inked a deal with Time Warner, also staged a comeback. The deal allows Time Warner cable customers to sign up with Earthlink—rather than Time Warner—for Internet services. The move aims to ally anticompetitive concerns related to the AOL-Time Warner merger.

Please note that our index has added Ingram Micro, Qwest and Tech Data. They replace Intelligroup, PCOrder and US Interactive.