Bw's Info Tech 100: Who's Still Standing?

Our semiannual IT update finds champs--and chumps

Dot-com stocks may have melted down, but don't think for a minute that the e-business phenomenon is over. To the contrary, many outfits providing tools that help companies get onto the Web are still flying. Take Micromuse, a San Francisco-based seller of software that monitors and manages far-flung data networks. Its business is roaring because corporations moving to e-commerce insist on reliable, high-quality Internet connections--which Micromuse can help deliver. That has won it customers such as America Online, British Telecommunications, and Global Crossing, helping to more than double Micromuse's revenues this year. Crows Chief Executive Gregory Q. Brown: "Market demand has been very, very high."

He's not the only one smiling. Despite the tech-stock wreckage, companies ranging from e-commerce software makers to sellers of networking equipment are continuing to grow and profit mightily off the rush to e-business. The most successful among them are helping brick-and-mortar stalwarts get online. EMC Inc., for instance, ships scads of data storage machines to companies that are moving their operations to the Web, such as the 216-year-old Bank of New York, founded by Alexander Hamilton. After a slow start in e-business, Global 2000 companies "have started to play offense," says EMC Chief Executive Michael C. Ruettgers. While a slowdown in the Net sector might trim demand for storage and reinvigorated competitors such as IBM and Hitachi Data Systems could soon start wresting market share, for now, EMC is seeing boffo returns. Sales in the first half of this year climbed 32% from the same period in 1999, to $4.4 billion, and profits surged 52.5%, to $887 million.

Results that good or better are typical of the top-performing companies in the BUSINESS WEEK Info Tech 100. Our semiannual checkup of the top tech players finds 30 whose shares beat the Standard & Poor's 500-stock index during the past six months, including some that have appreciated more than 40%. The best-performing sectors: software and services.

It's not hard to figure out why. No matter what happens to the market or the economy, companies have to invest in Web technologies--or risk getting crushed by their competition. "There's tremendous pressure to Internet-enable business operations," says analyst David Breiner of Prudential Volpe Brown.

The rise of e-business enriches more than just sellers of Web tools. Consider the No. 1 stock performer on our IT 100 update, contract manufacturer Sanmina in San Jose, Calif. Its shares have soared more than 65% since May, thanks to blistering revenue and profit growth and Sanmina's focus on building the equipment that powers the Net. Unlike job shops that churn out low-margin PCs, Sanmina gets 80% of revenues from making pricey communications products for customers like Cisco Systems, Nortel Networks, Motorola, and Sun Microsystems. "We make bricks for building the Internet infrastructure," says CEO Jure Sola, who co-founded Sanmina in 1980.

Still, the aggregate performance of the IT 100 is a far cry from the glory days of the tech-stock boom. The annual BUSINESS WEEK list, released in June, uses a combination of revenues, revenue growth, profitability, and stock return to rank the 100 hottest technology companies on the planet. The 98 entrants still left from last spring's tally--two have been acquired--sagged by an average of 19% between May 12 and Nov. 13, compared with a 4.4% decline in the S&P 500 and the Nasdaq's 16% drop over the same period. A year ago, when tech issues were sizzling, our IT 100 companies rose 37% in six months.

CREAMED. Blame a loss of faith in the Internet. Although the dozen Net companies on the IT 100 posted revenue growth of more than 60% in the last two quarters, a third of them showed a loss and four others barely eked out a profit. Sales growth alone isn't enough for investors these days, who knocked an average of 38% off the group's shares. The worst performer on the list was New York-based e-mail marketer NetCreations, down 79%. Despite more than quintupling its revenues and tripling profits, NetCreations got creamed in the dot-com collapse and agreed in October to sell out to DoubleClick for $191 million. Its market cap peaked at nearly $1.1 billion in March.

Other down segments further underscore Wall Street's skittishness. The 26 semiconductor companies in this year's IT 100 together posted delirious 56% revenue growth in the first half of this year compared with 1999. They were led by memory-chip maker Micron Technology, contract fabricator Taiwan Semiconductor Manufacturing, and communications chip darling Broadcom. Yet investors, spooked by concerns that the industry is hurtling toward overcapacity and slower profit growth in 2001, drove shares for the IT 100's semiconductor makers down an average of 28%. So it went, too, for makers of computers and peripherals, whose 24% revenue growth was answered by a 22% stock plunge.

"PROFIT SIDE." So where were the most lucrative corners for tech stock returns? By all measures, the first place to look is among companies serving up software. The top of the IT 100 chart is loaded with them--and not just No. 4-ranked Micromuse. Siebel Systems, a maker of programs that help companies manage customer relationships, placed No. 7. And at No. 5, there's BEA Systems, a five-year-old company that started out making esoteric software plumbing for corporate networks and now has an estimated 70% share of the market for Web servers that run Java programs. Chief Executive William T. Coleman III exults that after 50 years of being viewed as corporate overhead, information technology finally is recognized as a strategic imperative. "Now, for the first time, we're on the profit side," he says. That's helping to drive explosive growth in Web software tools. BEA, for instance, saw sales climb 80%, to $340 million, in the last six months.

Some sellers of Internet hardware also remain Wall Street favorites, despite worries of a spending slowdown for communications gear. Tucked into the top of the IT 100 is Ciena (No. 9), a leading maker of optical networking systems. It saw sales surge 74%, to $419 million, in the past six months as carriers turn increasingly to speedy optical technology to handle their crush of Net traffic. No. 3 Network Appliance, meanwhile, makes specialized Net server computers that manage oceans of e-mail and other data flowing around wired businesses. NetApp registered 122% half-year sales growth, although some investors worry that it me get pummeled by giant EMC.

Don't ignore the contract manufacturers either. Four of them--Sanmina, Jabil Circuit, Celestica, and Flextronics International--rose into the top 20 of the IT 100 over the past six months. Why so hot? "In two words, Internet infrastructure," says analyst Jerry H. Labowitz of Merrill Lynch & Co. He argues that contract manufacturers are largely immune to the ebb and flow of demand. The reason: No matter what happens to the economy in the next few years, equipment sellers will outsource more production to cut costs.

At the other end of the scale are the scores of companies whose six-month stock performance lagged behind the S&P 500 and Nasdaq. Many are chipmakers, but some are providers of telecom services, such as WorldCom and Sprint PCS Group, which face rapidly eroding prices. The bottom 10 performers run the gamut from Internet companies to PC peripheral makers to Apple Computer, whose stock plunged 64% on fears that its comeback might be running out of steam. Most of the poorly performing companies were hammered for missing quarterly sales estimates or warning of slower growth. Web content syndicator InfoSpace (No. 94) and portal Yahoo! (No. 91) were hurt by fears of lower Net ad growth. No. 97, Viant, got dragged down by a collapse among Net consulting outfits--worsened by its overreliance on shaky dot-com customers.

The six-month returns of the IT 100 suggest a market that's awfully fickle. Even though the stock performance of many companies appears out of whack with their fundamentals, the market deserves some credit for consistency. Fourteen of the top 20 six-month performers also rank among the top 20 for the whole year, while half of the bottom 20 also are in the basement for 12-month stock returns. The trick for investors is to spot those patterns--and now, as always, they can hardly do better than by investing in companies that help other businesses make more money.

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