I recently looked at some of the enterprise software calls to get a check on tech spending. Today I take a look at hardware. The big (and most recent) news came from Cisco (CSCO):

Our balanced product momentum across our core technologies and advanced technologies continues to be the best I have seen in a number of quarters….
Let me approach it from a broad perspective. First is what we are seeing is the importance of balance on a global basis. I have been in this business for 30 years — Jim, I think you have been there that long or maybe a hair longer. It’s the strongest global economy I have been a part of.

(Excerpt from full CSCO conference call transcript)

It was funny that nobody challenged him on this, as anyone who has been in the business for long must surely remember Chambers’ comments in 2000. According to a CIO Magazine case study called “What Went Wrong at Cisco:”

Xilinx’s Wall Street warning came two months before Cisco Chief Strategy Officer Mike Volpi told The Wall Street Journal in November, “We haven’t seen any sign of a slowdown.” Volpi told The Journal that Cisco hadn’t changed its internal plans since the beginning of its fiscal year in August. “We have guided [Wall Street] accurately, and we can execute to plan.”
On Dec. 4, CEO Chambers crowed to analysts, “I have never been more optimistic about the future of our industry as a whole or of Cisco.”
Eleven days later, CIO Solvik says, the company saw the problem for the first time.

In case you were wondering, Xilinx (XLNX) lowered its guidance in June, then missed the lower estimate. However, they didn’t pin the blame on Cisco. On their call, they said:

During last quarters’ call, we forecasted that all geographies extension plan would be up sequentially. Japan was down sequentially as planned, but so was Europe, which turned out to be surprise. This quarter our top 10 European accounts, which represent 45% of total European sales were up 16%, but the main remaining channel accounts were down 19%. The weakness was mainly in the distribution channel across a few end markets including industrial, audio and video broadcast and data processing.

(Excerpt from full XLNX conference call transcript)

Turning to some other companies, EMC (EMC - Annual Report) is certainly having no trouble.

Looking quickly at the IT spending outlook for 2007, we see a positive environment in all major geographies and we believe there is opportunity for us to beat our annual financial targets for revenue, earnings per share and cash flow. EMC’s positive results and momentum are obviously only possible because customers are embracing our strategy, our leading products, our services and our solution sets at each of our four businesses — storage, content management and archiving, RSA security and VMware.

(Excerpt from full EMC conference call transcript)

Other tech companies aren’t so lucky. Sun (a href="http://stockmarketbeat.com/blog1/category/tech/sunw/">SUNW - Annual Report) said:

Sun’s total revenues for the fourth quarter of fiscal year 2007 were $3.835 billion, an increase of 0.2% as compared with $3.828 billion in revenue reported for the fourth quarter of fiscal year 2006.

(Excerpt from full SUNW conference call transcript)

The largest technology distributor, Ingram Micro (IM) had a mixed quarter - overall sales were reasonably strong but currency fluctuations played a big role:

On a regional basis, North America sales where $3.3 billion, essentially, flat versus the prior year or 40% of total revenues. As we described at last quarter warranty sales on behalf of our vendors are now recognized as net fees rather than gross revenues in cost of sales as reported in the prior year period. We saw a negative impact on year-over-year sales comparisons of approximately 5%. European sales were $2.78 billion or 34% of total revenues, an increase of 16% versus a year ago. The translation impact of relatively strong European currencies contributed an 8 percentage point positive impact on comparisons to the prior year.

Asia pacific sales were $1.76 billion, an increase of 31% over the prior year and 22% of our total sales. Finally Latin America sales were up 4% versus last year to $344 million representing 4% of our total sales.

(Excerpt from full IM conference call transcript)

Much like the software conference calls, the outlook appears reasonably positive. However, I’m not ready to break out the champagne and say were past the tech spending doldrums. Results are mixed, the financial sector is very important to tech spending, and Cisco’s forecasting track record doesn’t help my confidence level. While I’d love to see tech spending improve, I’ll have to see it to believe it.

Disclosure: Author is long IShares MSCI Japan Index (EWJ) at time of publication.

The Economic Calendar is quiet in the early part of this week but there are important reports at the end of the week. On Thursday is the Durable Goods report, for which the consensus estimates a 2.0% increase. On Friday is the Preliminary Estimate of 2Q GDP, which the consensus has pegged at 3.2%. That sounds a little high to me based on the economic data table I’ve been compiling.

EconomicData

The Earnings Calendar is as busy as it can get. Some of the names I’ll be watching:

Monday

• Altera (ALTR) - Xilinx (XLNX)  filed an awful report. Can Altera do any better? Consensus is $0.19 EPS on sales of $314 million.
• Hexcel (HXL) - This Small Cap Watch List (Track at Marketocracy) member was seeing rising estimates until last month, when they were cut from $0.20 to the current $0.17.
• Steel Dynamics (STLD - Annual Report) - The Mid Cap Watch List (Track at Marketocracy) member is expected to earn $1.04 on sales of $948 million.
• Texas Instruments (TXN - Annual Report) - expected to earn $0.42 on $3.45 billion in sales.

Tuesday

• CH Robinson (CHRW - Annual Report) - estimates have been rising and now stand at $0.47, but Landstar (LSTR - Annual Report) disappointed.
• CDW Corporation (CDWC) - stellar monthly sales reports have kept estimates rising. They now stand at $0.97.
• EMC Corporation (EMC - Annual Report) - The big news is still the VMWare IPO, but it is also a decent look at enterprise tech spend.
• Laboratory Corporation of America (LH) - The Mid Cap and Large Cap Watch List (Track at Marketocracy) member has been seeing positive earnings revisions and is now expected to earn $1.09 on $1.03 billion in revenue.
• Lexmark (LXK) preannounced and will probably offer poor guidance.
• Linear Technology (LLTC) - expected to earn $0.35 on $267 million in sales.
• Norsk Hydro (NHY) - The Large Cap Watch List (Track at Marketocracy) member has no analyst coverage right now.
• Plantronics (PLT) - my covered call position is now being cashed out so I’ve no skin in this one. But it is often volatile.
• United Parcel Services (UPS) is a great read on the health of the economy. Expectations are $1.03 on $12.23 billion in revenue.

Wednesday

• Arkansas Best (ABFS) - after Landstar’s (LSTR - Annual Report) weak quarter I’m expecting a poor showing. Estimates have come down to $0.67, but may not have come down enough.
• Colgate Palmolive (CL) - Large Cap Watch List (Track at Marketocracy) member unlikely to surprise much. Consensus is $0.83 on $3.31 billion.
• Corning (GLW - Annual Report) - is LCD supply/demand back in balance?
• Freeport McMoRan Copper & Gold (FCX - Annual Report) -Another Large Cap Watch List (Track at Marketocracy) member with dramatic positive earnings revisions, now standing at $2.71.
• Graco (GGG) is another Large Cap Watch List (Track at Marketocracy) member. Estimates have been coming down and are now at $0.61.
• MEMC Electronic Materials (WFR) - Is polysilicon supply catching up to demand for this Large Cap Watch List (Track at Marketocracy) member?
• Xerox (XRX) - can they make the numbers without asking investors to ignore a bunch of stuff? I don’t doubt they will earn $0.27 as expected but wonder how they’ll get there.

Thursday

• Federated Investors (FII) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.54.
• Ingram Micro (IM) is on the Small Cap Watch List (Track at Marketocracy) and expected to earn $0.36.
• KLA-Tencor (KLAC) - I know the semiconductor equipment fundamentals stink. I want to know how much and whether it is priced in.
• NII Holdings (NIHD) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.49.
• Western Digital (WDC) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.36.

Disclosure: William Trent has a long position in SMH.

Xilinx, Inc. (XLNX) announced net revenues of $445.9 million in the first quarter of fiscal 2008, up 1% sequentially from the prior quarter and down 7% compared to the same quarter a year ago. First quarter net income was $84.3 million, or $0.28 per diluted share. The 1% sequential sales gain was at the low end of the guidance management gave when they admitted that the original guidance was too high. Earnings per share of $0.28 were a penny below the consensus estimate.

For what it’s worth, Xilinx also issued guidance for the September quarter (and it also looks pretty bleak):

– Revenues are expected to be flat to down slightly sequentially.
– Gross margin is expected to be between 62% and 63%.
– Operating expenses are expected to be up approximately 2% sequentially.
– Other income including interest expense is expected to be approximately $16 million.
– Tax rate is expected to be approximately 21%.
– Fully diluted share count is expected to be approximately flat at 303 million shares.

Given their track record on earnings guidance, I’m not sure why they bothered.

Hot on the heels of my switch to non-bearishness toward semiconductor stocks, Xilinx, Inc. (XLNX) released its business update for the June quarter of fiscal 2008.

– June quarter sales are expected to be at the low end of the prior guidance range, which called for sales to be up 1% to 5% sequentially.– Gross margin is expected to be 62% to 63%, up from prior guidance of approximately 62%.

– Operating expenses are expected to decrease approximately 5% sequentially, an improvement from prior guidance calling for a decrease of 4% to 5% sequentially.

I was impressed when Xilinx originally issued their guidance, and now I know why it looked so good - it was wrong. The slower sales fits in with overall industry trends. The higher gross margin fits in with my look at inventory trends. All in all, I am not surprised and not at all shaken from my not-bearish stance.

Disclosure: William Trent has a long position in SMH.

When Large Cap Watch List (Track at Marketocracy) member NII Holdings (NIHD) announced a convertible note offering my initial reaction was that it would probably benefit the bankers and noteholders more than the shareholders. Now that the details have been released, I think I spoke too soon.

NII Holdings, Inc. (Nasdaq: NIHD) today announced the pricing of its offering of $1,000.0 million principal amount of 3.125% Convertible Notes due 2012. The notes were privately placed with qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The sale of the notes is expected to close on June 5, 2007. NII has granted the initial purchaser of the notes a 13 day option to purchase up to an additional $200.0 million principal amount of notes.

The notes are convertible under certain circumstances into NII common stock at a conversion rate of 8.4517 shares per $1,000 principal amount of notes (equal to an initial conversion price of approximately $118.32 per share), subject to adjustment in certain circumstances. Upon a surrender of notes for conversion, NII will have the right to deliver, in lieu of shares of its common stock, cash or a combination of cash and shares of its common stock.

That conversion rate means the stock will have to return an average of 7.85% annually for the conversion option to be in the money at expiration. Although shareholders are likely hoping for far higher returns than 7.85%, that rate does provide an acceptable hurdle. Compared to Xilinx’ (XLNX) offering, which paid a higher interest rate and a conversion price that required just 0.7% growth per year it seems downright stingy.

NII intends to use up to $250 million of the net proceeds from the notes offering to purchase shares of its common stock contemporaneously with the sale of the notes as part of a $500.0 million stock repurchase program authorized by its board on May 29, 2007.

At current prices, the $250 million buyback would soak up 3.1 million shares, but over time the notes can convert into at least 8.45 million shares (depending on whether the overallotment is exercised.) In order to buy back the full potential dilution of the bonds, the company would have to shell out $686 million of the proceeds. The remaining $314 million, along with the 3.125% paid on the entire principal, means the effective interest rate assuming a full offsetting buyback would be 9.95%. This, in effect, is a most-conservative way of looking at the issue. While a bit high (again, this is the most-conservative estimate), 9.95% doesn’t seem exorbitant for a company with NII’s credit rating.

All in all, it looks to me now like NII negotiated an agreement that is fair to both noteholders and shareholders.

Lest you think we were going soft, we hereby balance our earlier enthusiasm for semi stocks with our more customary caution. The five reasons to avoid semiconductor stocks right now include:

1. The fundamentals will get worse before they get better. While supply indications grew slower than demand in April, the turn followed 16 months of too much capacity being ordered. As that capacity comes on line, the inventory situation will worsen and margins will get hit more. It is not at all certain that estimates reflect this.
2. It is May. Sure, sell in May and go away is a cliche. Things often become cliches for a reason.
3. Demand? What demand?
4. Valuations are too high because investors are hoping for more premium buyouts. They will happen, but not to every name in the sector.
5. The last bear may no longer be standing.

Food for thought.

Disclosure: William Trent has a long position in SMH.

A reader complained yesterday that we have been too negative. While we aren’t going to go crazy and have a whole positivity day, we will take the time to outline the bull case for the industry on which we have been most negative: semiconductors.

1. The bad news is known. When we started harping about oversupply, it was the farthest thing from anyone’s mind. Like Heisenberg’s uncertainty principle, the act of observation can alter the experiment.
2. The market is ignoring the fundamentals. Related to point 1, the market knows about the bad fundamentals and doesn’t care. Often this means that the bad news is sufficiently well known to be priced in. This is of course the weakest reason, as the market ignored the fundamentals in 2000 as well.
3. Demand may be ready to pick up. Double-digit growth from a tech distributor for the first time in a long time should not be ignored. The Vista hoopla has passed, now the nuts and bolts work may be beginning.
4. Supply and demand will soon realign. For the first time since 2005, orders for new equipment grew at a slower rate than semiconductor end demand. The longer this situation continues, the healthier it will be for future industry sales, pricing and profit margins.
5. The game has changed. Forget private equity buyers. For the first time a semiconductor management team decided it was more important to take capital out of the industry than to add more. This is a sea change in semiconductor management-think, and the strong positive reaction from investors ensures that the wave will continue to build.

There. That wasn’t so hard, was it? Stay tuned for our five reasons NOT to buy semiconductor stocks today.

Disclosure: William Trent has a long position in SMH.

Maxim (MXIM) Reported Third Quarter of Fiscal 2007 Revenues in Line With Same Quarter a Year Ago:

Maxim Integrated Products, Inc. (NasdaqGS:MXIM - News) reported net revenues of $475.8 million for its fiscal third quarter ending March 24, 2007, a 4.4% decrease from the second quarter of fiscal 2007 and a 0.5% decrease from the third quarter of fiscal 2006.

Analysts were expecting revenue of $475.7 million per share. Analysts were also expecting the company to report earnings per share of $0.27. However, as has been the case for several quarters, the company reported no earnings at all.

Maxim is not providing detailed GAAP and non-GAAP financials for the quarter ending March 24, 2007 due to the previously announced need to restate its historical financial statements for the fiscal years 2000 through 2005 and the related interim periods through March 25, 2006, to record additional non-cash, stock-based compensation expense related to past stock-option grants. Consequently, limited financial data is being presented at the present time.

With no earnings, no balance sheet, no cash flow statement and no idea whether the last five years of earnings are even close to what investors thought they were, why were the shares up 3% in after-hours trading?

Good question, especially when investors can buy companies like Xilinx (XLNX) which beat estimates, issued better than expected guidance, reported complete financial statements and trades at a similar multiple of earnings.

Xilinx Announces Fourth Quarter and Fiscal Year 2007 Results: Financial News - Yahoo! Finance

Xilinx, Inc. (XLNX) today announced net revenues of $443.5 million in the fourth quarter of fiscal 2007, down 2% sequentially from the prior quarter and down 6% compared to the same quarter a year ago. Fourth quarter net income was $87.6 million, or $0.27 per diluted share, and included stock-based compensation expense of $20.1 million.

Analysts were expecting the company to earn $0.23 on $441 million in sales. In our own preview we called it “Altera (ALTR) with more risk to the earnings target.” It turns out that risk was to the upside. The company also issued the following guidance:

Business Outlook — June Quarter Fiscal 2008
– Revenues expected to be up 1% to 5% sequentially.
– Gross margin expected to be approximately 62%.
– Operating expenses are expected to be down approximately 4% to 5% sequentially.
– Other income including interest expense is expected to be approximately $15 million.
– Tax rate is expected to be approximately 21%.
– Fully diluted share count expected to decrease to approximately 302 million shares.

Let’s see… carry the three… looks to be about $0.29 on $457 million in sales, which compares favorably to the previous consensus guesstimate of $0.25 on $453 million. Xilinx thus becomes the first semiconductor company reporting this quarter (that we’ve noticed) to earn its likely strength in tomorrow’s stock market. With both accounts receivable and inventories down sequentially, we even believe their comments that things are looking up for them.

Disclosure: William Trent has a long position in SMH.

The Economic Calendar is relatively light this week. Potential market movers include:

• Wednesday’s Durable Goods report (consensus 2.2%)
• Friday’s advance report on Q1 GDP (consensus 1.8%)

Earnings are another story. We are in the peak part of earnings season this week. A few of the stocks we follow:

Monday

• Altera (ALTR) - valuation is rich but looks set up to beat on earnings.
• Texas Instruments (TXN - Annual Report) - March and June quarters have both had significant downward revisions. Will day of reckoning be forestalled?

Tuesday

• AU Optronics (AUO) - Forecasting losses, but panel business may have bottomed out.
• CDW Corporation (CDWC) - 14.6% sales growth doable given Berbee acquisition.
• CH Robinson (CHRW - Annual Report) - Could beat.
• CSG Systems (CSGS) - earnings should be a piece of cake. If private equity buyers don’t take them out they’ll do it themselves the slow way.
• Lexmark (LXK) - Estimates are doable but we’re always waiting for this company to trip up.
• ST Microelectronics (STM) - Doing the right thing. Hopefully will pay off.
• AT&T (T - Annual Report) - Estimates and stock both keep rising.

Wednesday

• Apple (AAPL) - Hunch: company will blow away earnings, issue horrible guidance and blame it on iPhone build.
• Arkansas Best (ABFS) - We’re staying away from truckers who own trucks.
• Corning (GLW - Annual Report) - current quarter ok, guidance at risk.
• LSI Logic (LSI) - May blame their poor guidance on Agere.
• Maxim (MXIM) - Company is out of gas but focus will be on whether they might sell out.
• Qualcomm (QCOM) - Nokia Nokia Blah Blah Nokia ad nauseam (excerpt from pending conference call transcript)
• Silicon Laboratories SLAB - Sold wireless just when biggest customer began to recover. What other surprises may be in store?
• UPS (UPS) - They shouldn’t have trouble beating the estimates (but that doesn’t mean they won’t).
• Xilinx (XLNX) - Altera with more risk to the earnings target.

Thursday

• Curtiss Wright (CW - Annual Report) - PPI data suggests they should beat big, but it suggested the same last quarter.
• KLA Tencor (KLAC) - Another place we’d rather not be right now.
• Microsoft (MSFT - Annual Report) - Vista is still not living up to expectations.
• MEMC Electronics (WFR) - Earnings surprises have been getting bigger each quarter. Now that we’ve put a semiconductor name on our Large Cap Watch List (Track at Marketocracy) it will probably stop just to spite us.
• YRC Worldwide (YRCW) - See Arkansas Best.
• Sandisk (SNDK - Annual Report) - Will take more than one quarter to clear the channel inventory.

Friday

• Dassault Systemes (DASTY) - We like Ansys (ANSS) better but don’t see why this name wouldn’t beat.
• Ceradyne (CRDN)  - Earnings could be anywhere and don’t really matter.

Enjoy!

Disclosure: William Trent has a long position in SMH.