In Light of Japan's Quake, Anticipating Aftershocks in Tech Earnings

by: Shlomi Cohen

Two weeks before the end of the first quarter, I recommend laying low - this is the beginning of earnings warning season. There hasn't really been too much of that since the end of the crisis, because for the extended exit from recession, expectations were low, so that each quarter we were pleasantly surprised.

But this time we entered the quarter with relatively high expectations, seen in the high levels of indexes. However, during the quarter the Middle East began to burn, and right at the end of the quarter - the last three weeks, which are the most important for technology firms in terms of meeting expectations - Japan's important market braked suddenly, because of the catastrophe.

When share prices are high, earnings warnings can be quite painful. Last week, I pointed out several stocks that began to fall hard because of investor fears that they were very highly priced, called "priced for perfection"- when today it is clear that because of the disaster in Japan, there is almost no stock that will not be hit in results and / or guidance. The most outstanding is F5 (NASDAQ:FFIV), the leader in Radware Ltd.'s (Nasdaq: RDWR) sector. At its height earlier this year, F5 was at $145, and on Friday it fell through the $100 level, for the first time since October. Even at a price of $100, it is still trading at an exaggerated price to sales ratio of 8 times trailing twelve months sales, while its competitor Radware trades at a multiple of 5.

According to Goldman Sachs, who rate F5 a "Sell", the company only has 6% exposure to the Japanese market, but, as mentioned, when a share is priced for perfection, a small potential glitch in sales can deflate it.

The "Japanese factor" will be heard of on Thursday, when two "gorillas" - Oracle (NASDAQ:ORCL) and Research in Motion (RIMM) - publish their results for the quarter ended in February. For the first time after the catastrophe, we will hear estimates from executives of giants in the software and telecommunications sectors of how the following quarters will appear in Japan.

Besides the Japanese aspect, the results of the two companies will also impact to some extent two companies whose shares I hold in my portfolio tracked by "Globes" - Mellanox Technologies Ltd. (Nasdaq:MLNX) and Marvell Technology Group (Nasdaq: MRVL).

Oracle is set to be a major customer of Mellanox this year, possibly with more than 10% of Mellanox's sales, because it adopted Mellanox's InfiniBand solutions for two hardware solutions with which Oracle hopes to capture large segments of the cloud computing field which is only beginning -- Exalogic and Exadata.

The second company to report on Thursday is Research in Motion, which buys most of its Blackberry processors from Marvell. Marvell has fallen 14% since reporting in its results at the beginning of this month that a drop in its dealings with RIM will last 1-2 quarters.

The potential contribution of Exadata to Mellanox's results over the coming years can be seen from estimates last week by Piper Jaffray analyst Mark Murphy, as he reiterated his "Buy" recommendation on Oracle ahead of its results. In checking with 32 Oracle distributors, he got the impression that sales of the platform are very strong, better than Oracle's internal forecast, and in his opinion can bring the platform within 1-2 years to 5% of Oracle's annual revenue, or $1.7 billion.

Marvell investors hope that on Thursday, with RIM's results, the picture will become clearer as far as the expected sales of Marvell processors for the various Blackberry devices in the next two quarters. Marvell was hit because RIM has recently been selling more 2G handsets in developing markets. These do not include Marvell processors, as opposed to the 3G ones of which the majority include its processors.

In addition, in the beginning of the year, RIM switched its policy with regard to holding inventory of its components, which impacts one or two quarters for Marvell.

Published by Globes [online], Israel business news - - on March 22, 2011

Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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