AOL Time Warner makes US corporate history

Last week saw AOL Time Warner posting the largest ever loss (almost $100 billion) in US corporate history and the US SEC filing civil fraud charges against KPMG LLP.

Warnings also had a less dramatic impact on share prices than in earlier periods.

Paul Booth, GM, Global Research Partners

At home, the happenings at MGX, ICASA`s recommendation that government reject both second national operator (SNO) bids, which the government subsequently endorsed, and the issuing of the Telkom SA initial public offering (IPO) prospectus stole much of the local ICT headline space.

• .         we saw satisfactory interim figures from Connection Group (revenue up slightly and net profit well up);
• .         very poor half-year figures from Interconnective Solutions ( but revenue significantly up and back in the black - just); and
• .         interim losses from Prism (revenue up a little) and Zaptronix (revenue also well down).

[Local]

Other local news included:

• .         Rubico lodged an application for a creditors` voluntary winding-up, as part of its restructuring process;
• .         the launch of M-Five Software, a software distribution company specialising in enterprise resource planning systems;
• .         the appointments of Reggie Berkowitz as non-executive chairman of Comparex, Buyisile Nkosi as CEO of SBS, Dave Shepherdson as chairman of SBS, Peter Watt as CEO of Comparex and Wandile Zote as corporate communications head at SITA;
• .         Treacle Venture Partners increased its stake in ERP.com;
• .         Chris Hills, former CEO, has not been re-appointed to the MGX board;
• .         ICASA`s recommendation that government rejects both the SNO bids, a proposal that was subsequently endorsed by the minister;
• .         the Telkom SA IPO prospectus was issued, with the IPO date set as 4 March;
• .         Beget Holdings/Lanitor established an SMS centre in the Seychelles;
• .         government has announced it wants some more time to consider its options re the SNO; and
• .         Goldleaf Trading has revealed that it is to go to court to halt the SNO selection process.

Additionally, there were several other announcements emanating from MGX. These included its intention to sell-off Business Continuity Solutions and MGX Solutions; the settlement of the long-outstanding EC-Hold acquisition issue; the appointment of two new non-executive directors and the resignations of Patrick Landey and Raymond Dalais; the disposal of three expensive properties including the building in Midrand originally intended to house the Orca operation; and the completion of a restructuring by June 2003, that will include a BEE stakeholder.

• .         the SEC filed civil-fraud charges against KPMG LLP for its role in auditing Xerox, as indicated was likely last week;
• .         AOL Time Warner sold off of its 8.4% stake in Hughes Electronics, the expected $800 million going towards slightly reducing its massive $26 billion debt;
• .         Hynix Semiconductor sold off of some $1 billion of its non-core assets;
• .         Hitachi announced that it will exit those businesses that only account for 20% of its sales;
• .         the name changes of FreeStar Technologies Inc, to FreeStar Technology Corp, and Storage Access technologies to BluePoint Data Storage; and
• .         the move by the European Commission that has forced Microsoft to change its .Net Passport program, since as it stands it could breach European law.

Additionally, look out for a possible take-over of First Data by Ireland-based Alphyra; the floating by NEC of its chip-making subsidiary; an IPO filing by AOL`s cable TV unit; the possible write-off by AOL Time Warner of some $66 billion; the announcement of the new CEO at Orange; the possible `surgery` at AOL following its massive losses; and the announcement of the new top executives at Sprint following some top level departures/resignations.

[International]

Other international news included:

• .         the appointments of Bharat Dave as acting-CEO of GRIC Comms, Chi-Ping Hsu as president of Get2Chip, John Hsuan as chairman of Silicon Integrated Systems, Santhana Krishnan as CEO of InteQ, Joseph Simrell as interim president and CEO of Primal Solutions, Ho-chen Tan as chairman of Chunghwa and Cheryl Traverse as president and CEO of Covigo;
• .         the resignations of Mao Chi-kuo as chairman of Chunghwa, William Esrey as chairman and CEO of Sprint, Hong Chen as CEO of GRIC Comms (stays on as chairman), Norio Ohga as chairman of Sony, Peter Ragnarsson as CEO of Axis AB, William Salway as chairman, president and CEO of Primal Solutions, and Ted Turner as vice-chairman of AOL Time Warner;
• .         the retirement of Don Babick as CEO of CanWest; and
• .         job loss announcements from Comcast, Computer Network Technology, Corvis and EarthLink.

We saw excellent* figures from L-3 Comms, Lexar Media, PCTEL (back in the black), SafeNet, Telular (back in the black) and WebSense.

Very good* numbers were posted by Altiris (back in the black), BearingPoint (formerly KPMG Consulting), Cognex, Foundry Networks (back in the black), Cray (back in the black), Digitas (back in the black), Electronic Arts, Micronetics, Nuvo (back in the black), OSI Systems, Partner Comms, Power-One (back in the black), Sonic Solutions (back in the black) and United Microelectronics (back in the black).

Good figures* were recorded by Alltel, AU Optronics, CGI Group, Cognex (back in the black), CompuCom, Crystal Decisions, Digital Insight (back in the black), Digital River (back in the black), Equant, Exponent, FNIS, GRIC Comms (back in the black), Group 1 Software, John H Harland, Intrado, Kronos, Latitude Comms (back in the black), Maxim Integrated Products, NetIQ (back in the black), PC Connection, Quest Software (back in the black), Sanyo Electric, Schick Technologies, Sina.com (back in the black), SS&C Technologies, TALX, Tandberg and Timberline Software.

Satisfactory* results were posted by Actuate, Advanced Fibre Comms, Avid, Avocent (back in the black), AXS-One, BCE (back in the black), BEI Technologies, BindView, Canon, DST Systems, FileNet, GTSI, Harte-Hanks, Hyperion, Inet Technologies, Intergraph, MEMC Electronic Materials (back in the black), Mentor Graphics (back in the black), Micros, Oce, SAP, Sony, SpectraLink, Verizon Comms (back in the black) and Zoran (back in the black).

Mediocre* returns came from Anaren Microwave, ARM Holdings, Autonomy, Borland, Business Objects, CNET Networks (but back in the black), Covansys, Creative Technology, CSG International, Danka Business Systems (but back in the black), Diebold, Epicor (back in the black), ESS Technology, Forrester Research, Imation (but back in the black), Ixia, Kana Software, Mapics, MicroStrategy (but back in the black), NDS Group, Novellus, O2 Micro, Opnet, Pitney Bowes, Qualstar, RadiSys (back in the black), Renaissance learning, SBC, Taiwan Semiconductor Manufacturing, Tessco Technologies, Universal Electronics, Verilink (but back in the black) and VISX.

Very poor results* came from Banta, Exult (but back in the black), Microlog (but back in the black), MSL (but back in the black), PinkRoccade, Xerox and Zygo (but back in the black).

Losses* were reported by 8x8, Adtegrity.com, Akamai Technologies, Alliance Semiconductor, AltiGen Comms, Amkor, AML Comms, Anadigics, AOL Time Warner, Artesyn Technologies, Asanti, Ascential Software, Aspen Technology, Asyst Technologies, AT&T Wireless, AudioCodes, Avanex, AvantGo, Avici Systems, Belden, Bottomline Technologies, BSQUARE, CAM Commerce, Celestica, Centra Software, Chartered Semiconductor, ChipPAC, Coherent, Cohu, Com21, Commerce One, Computer Access Technology, Concerto Software, Corio, CoSine Comms, CSP, Cymer, DiamondCluster International, Docent, Documentum, Dot Hill Systems, Dow Corning, EarthLink, eGain Comms, EXE Technologies, FEI, Fujitsu, Gateway, Giga-tronics, Harvey Electronics, Helix Technology, Honeywell, Hynix Semiconductor, i2 Technologies, InFocus, InfoSpace, Input/Output, Insight Enterprises, InterNAP Network Services, InterWAVE, Interwoven, Intrusion, ISSI, IXYS, Jaco Electronics, Larscom, LightPath Technologies, Macronix International, Magnetek, Marimba, Metalink, Micrel, NEC, Netegrity, Network Engines, Newport, Nuance, Occam Networks, Onyx Software, Optical Comms Products, P-Com, Paradyne Networks, Perle Systems, Persistence Software, Photon Dynamics, Pinnacor, Powerwave Technologies, Quantum, QuickLogic, Radcom, RadView Software, Read-Rite, RealNetworks, Resonate, Retek, RiT Technologies, Sapient, SciQuest, SeeBeyond, SEEC, Semitool, Sierra Wireless, Somera Comms, SonicWALL, SoundView Technology, SpeechWorks International, ST Assembly Test Services, StorageNetworks, Sunrise Telecom, Sybase, Synplicity, Tekelec, Tellium, Terayon, Toshiba, Tripath Technology, Tut Systems, ValiCert, Vastera, Veritas Software, VINA Technologies, Vitesse Semiconductor, Vitria, Vitrix, Vixel, WJ Comms, XATA and Zarlink Semiconductor.

Other financial news included share buy-back announcements from Computer Access Technology and Pomeroy Computer Resources; shareholders rights plans from Moldflow and Siebel Systems; and profit warnings from Applied Materials, ARM Holdings, Asyst Technologies, Borland, EarthLink, ESS Technology, Exabyte, Filtronic, Gemplus, InFocus, Kingston Comms, Northgate Information Solutions, Photon Dynamics, Quantum, RealNetworks, Tekelec and Verizon Comms.

There were share split announcements from BluePoint Data Storage and Critical Path; IPO filings from information communications technology company DigitalNet Holdings; InterVideo, a DVD software company; and wireless networking company, iPass; and the scrapping of the planned IPO by Verizon Wireless. Additionally, DICE has entered an agreement to restructure under Chapter 11; the SEC has begun an investigation into possible accounting irregularities at i2 Technologies and has asked for its financial statements for 2000 and 2001 to be re-audited; and Carreker is to re-state its results from 1999.

Locally

AST (-16%)
Cape Empowerment Trust (+66.7%)
CCG (+100%)
Elexir (-33.3%)
Idion (+20%)
Maxtec (-37.5%)
Paracon (-20%)
Pinnacle (-23.1%)
Stella Vista (-20%)
Zaptronix (+100%)

Internationally

American Superconductor (+29.3%)
Auspex Systems (-32.4%)
DA Consulting Group (-40%)
DICE (-55.6%)
Elcom International (-37.5%)
FSI International (-29.5%)
Merix (-30.3%)
Meta Group (+33.2%)
PCD (-61.5%)
Rambus (+155.8%)

A recent UK study by Ernst & Young indicates that UK software and computer service companies made far fewer profit warnings in the last three months of 2002, and that companies` forecasting may increasingly be coming into line with "the external reality rather than internal aspirations".

Ernst & Young said there were only 12 warnings issued by 169 listed companies in the sector in the last quarter of 2002, compared to 16 in the previous three months, and 19 a year earlier. This meant that software and services was no longer the sector issuing the highest number of warnings.

Warnings also had a less dramatic impact on share prices than in earlier periods. In the third quarter, profit warnings led to an average 32% fall in the share price of software and service companies compared to 23% for the market as a whole. By the fourth quarter, profit warnings produced an average share price fall of 24.25%, in line with the drop of 24.03% for the market as a whole.

Nick Powell, a partner in Ernst & Young`s technology, communications and entertainment practice, said that further restructuring of the sector is inevitable. With delays to contracts and negotiations still being cited as the most common reason for warnings in the fourth quarter, followed by difficult market and trading conditions, he said that it is clear that corporate IT spending remains tight.

* NB

Guidelines for the categorisation of results are as follows. The figures are always in comparison with the equivalent period for the previous year; pro forma numbers are ignored (the terminology may vary slightly from country to country).

* Excellent: Both revenue and net income growth are in excess of 50%.
* Good: Both revenue and net income growth are in excess of 10%.
* Satisfactory: Revenue is within 10% of previous year and net income is up.
* Mediocre: Either revenue and/or net income is down.
* Very poor: Net income is less than 1% of revenue.
* Loss: A loss has been recorded.