Terrorist Attacks Alter Landscape for Tech Companies

Although the technology industry hasn't been affected by the Sept. 11 terrorist attacks to the same degree as airlines, insurers or financial firms, the assault changed the playing field for many tech companies.

Due to the broad and diverse nature of the tech industry, the attacks have impacted different sectors in different ways.

Software and PC firms likely will get hit harder in coming months than semiconductor makers and biotech companies, analysts said, while some tech sectors — such as telecom and storage — have seen increased sales since the attacks.

Here's a look at how eight key tech sectors have fared since the attacks, and what analysts say is in store for them.

Software | Storage | Biotech | Personal Computers | Semiconductors Online Travel | Telecommunications Security

Software: Hit Hard by Air Travel Slowdown

For software companies, the last three weeks of the third quarter are critical, and the Sept. 11 terrorist attacks made a bad situation worse, analysts said.

Most software companies book 50 percent of their sales in the last month of the quarter and as much as 40 percent in the last two weeks.

"Over the next two weeks, it's going to be very difficult for software firms to travel and conduct face-to-face meetings to close multimillion-dollar deals," said Rob Black, money manger of Gib Investment Management.

"You need to get the sales guy from the West Coast to the East Coast to close the deal. Flights are down, tensions are high right now," Black said. "There's going to be a lot more corporate layoffs. So buying software is a very low priority right now."

Business software companies are expected to be the hardest hit in the industry because of the already slowing demand for their products. Some customers are either delaying upgrades because of the shaky economy or are buying security software instead.

Software giant Oracle, for example, is forecasting lower revenues and more uncertainty in the sector because of the attack. Company executives said sales of its software license fees for the fourth quarter will drop about 15 percent from a year ago — lower than forecasts made before the attack.

In addition, the attack prompted analysts at Goldman Sachs to downgrade the stocks of several software companies this week, including Oracle, Microsoft, PeopleSoft, Siebel, and BEA Systems.

Storage: Demand for Data Storage Surges

While analysts predict a mixed picture for tech companies in the wake of the Sept. 11 terrorist attacks, there seems to be a consensus that the tragedies might mean more business for firms in the data storage business. As companies look to protect and backup their data, analysts expect the demand for data storage products to increase.

Stocks of storage hardware and software makers posted sharp gains this week as investors bet corporations across the country will begin revamping their data backup systems.

Out of all the tech sectors, storage might be the only one to see a rise in sales due to the attacks, said Todd Kort, an analyst with Gartner.

But even before the attacks, storage was getting a lot of positive buzz. Storage is a $30 billion-a-year business and growing rapidly.

In 1998, most companies required an estimated 116,000 terabytes of network data storage space, and today, it's closer to 1.4 million terabytes. According to IDC, the need for storage has grown 80 to 100 percent per year for the past decade.

Some of the largest players in the sector include EMC Corp. — the leader in storage hardware — new arrival Compaq, and software firm Network Appliance.

Biotech: Bargain Prices

Looking at fundamentals such as sales and debt, analysts said biotech companies should weather the terrorist attacks and their aftermath just fine. But psychologically, investors look for safety in times of crisis and tend to avoid higher-risk stocks such as biotechs, driving down their price.

However, according to financial analysts, larger, established players such as Amgen and Genetech should be largely unaffected by the attacks.

More speculative companies may face a tougher road because of the economic uncertainty. Companies such as Millennium Pharmaceuticals and Gilead Sciences, for example, don't have steady revenue streams, and could be exposed to the whims of the market.

But the bottom line, biotech analysts said, is to consider this month an opportunity to get into some good names at depressed prices due to the shaky market.

Personal Computers: Prices Could Slide Further

Before the Sept. 11 attacks on the World Trade Center and the Pentagon, the PC industry was in a slump. Now it's bracing for even more bad news.

If the economy falls into a recession, the industry could experience more pain than other sectors. One reason is simple bad timing: Most PC sales in the quarter take place in the last two weeks of September. Now with the attacks in the minds of consumers, sales in every industry are expected to drop in the near term.

Two weeks ago, Intel CFO Andy Bryant said PC demand appeared to be stabilizing. But he warned that any unexpected events in September could lead to order cancellations and a decline in sales.

But an even bigger issue will be the reaction of corporations during the fourth quarter, as many are expected to cut budgets. One analyst said people and companies will likely delay PC purchases until next year.

Research firm IDC said it expects to lower its PC sales forecast as a result of the attacks. It had been hoped that the launch of Windows XP and an upgrade cycle would spark sales, but now IDC said those forecasts won't hold up.

For now, most analysts agree that the sector will recover in the second half of 2002, at the earliest.

Semiconductors: A Mixed Outlook

Investors have sent semiconductor stocks tumbling in recent days. The Philadelphia Semiconductor Index has fallen below its previous low, set back on April 4.

According to analysts, the future impact on chip companies of the terrorist attacks depends on multiple factors.

First, the chip sector outlook depends heavily on how badly shipping has been disrupted by the attacks. New security measures taken by the Federal Aviation Administration, such as banning cargo from passenger planes, could cause bottlenecks for component makers. Much of that cargo is microchips heading from the United States to assembly plants in Taiwan, China and other parts of Asia.

A second factor that will impact sales is consumer demand. Any further weakening of PC sales could really hurt microprocessor makers, analysts said. "Consumer confidence was already stressed before the attack. It's going to get worse before it gets better," said Ashok Kumar, an analyst at Piper Jaffrey.

However, the attack's fallout on the chip sector won't be spread evenly, industry watchers said, and some niches in the chip sector will do better than others. For example, sales of flat-panel displays are expected to remain strong in the near-term. Genesis Microchip and Pixelworks are component suppliers to that industry and should benefit.

Also sales of cellphones are booming following the attack. This could boost sales for mobile chipmakers such as Triquint Semiconductor and Texas Instruments, which said cellphone chip orders began picking up in recent days.

Online Travel: Bookings Down

The online travel industry is expecting a huge drop in demand for airline tickets after last week's terrorist attacks. Some analysts said the American public will become more apprehensive about flying, and so they have lowered their expectations for Web travel stocks. But others said it's still too early to tell what the effects will be on the $14.5 billion industry.

On Monday, when the market reopened after a four-day interruption after the terrorist attacks, investors fled the online travel sector. Most of the top companies saw their market value slashed by about a third. Priceline fell almost 40 percent on the Nasdaq, Travelocity took a 43 percent dip and Expedia saw a loss of nearly 34 percent.

Also, travel bookings in the United States fell 74 percent after the attacks. But several online travel sites have reported that airline ticket bookings are slightly up compared with last week's numbers. Still, Expedia said its bookings were about half the volume of those before the attacks.

Some industry watchers said online travel sites may be better able to weather the downturn in the air travel because they also offer other services, such as cruises, hotel rooms and rental cars.

Telecom: Unexpected Help for Wireless Companies

Shares of wireless and telecom service providers have risen in trading since the terrorist attacks. Shares of Verizon, Sprint PCS, AT&T Wireless and Nextel have been up anywhere from 3 percent to 6 percent.

Sales in wireless phones and services have also risen, after a yearlong slump.

Wireless company vendors say people are rushing out to buy mobile phones and wireless service contracts. All major providers, including Verizon, Sprint and AT&T Wireless, said sales and services have surged since the attacks.

Some companies, such as Nextel, said it's too early to tell if the increase in sales will impact the sectors already sagging. But some analysts said this initial jump in sales will continue and could even lead to a long boom in cellphone adoption.

However, the real telecom boom will happen in the videoconferencing market. Before the attack, research firm HC Wainwright said that videoconferencing companies were poised to do well by the end of next year. But now the research firm sees the sector posting strong sales in the first half of next year.

The reason is tied directly to the attacks, Wainwright said. Companies are likely to cut down on business trips and will look to videoconferencing to keep in touch with customers and employees in the field.

Wainwright said it is very optimistic about the prospects of videoconferencing firms Polycom, Wire One, Gentner Communications and PictureTel.

Security: Safety in the Spotlight

Companies supplying technology for security systems have been doing quite well since the Sept. 11 terrorist attacks and they expect to receive a lot more attention and orders for their products in the future.

Security experts are especially bullish on face-recognition technology, and expect it to be one of the fastest growing security technologies over the next three years.

Currently used in casinos to catch card counters, security experts see potential use for face-recognition technology in airports, where it can be used to identify terrorists before they board a plane.

One company that provides face-recognition software, InVision, watched its stock soar more than 220 percent on the day stock markets reopened. The FAA is InVision's largest customer, accounting for nearly half of its sales.

Another company involved in face-recognition software is Viisage Technology . That stock soared more than 150 percent when the markets reopened. The company has seen a surge in sales during September.

Companies that provide metal- and bomb-detection technology, such as Osi Systems and Perkin-Elmer, are also enjoying a sales boost.

Osi receives most of its orders from the FAA, which just placed an order with the company worth nearly $7 million.