Half-full or half-empty?

A smattering of positive financial news has optimists wondering if perhaps the worst is over for the beleaguered network industry.

On Wall Street, recent gains have pushed the Dow Jones Industrial Average, Nasdaq and Standard & Poor's 500 indexes up more than 20% in less than two months. Nortel and Hewlett-Packard have announced big customer wins, and Cisco said its backlog - orders received but not yet counted as revenue - is growing. On the job front, the Labor Department reported last week that the number of new people filing for unemployment benefits fell for the third consecutive week to its lowest level in nearly two years. There is even a glimmer of hope in the telecom equipment market, particularly in metropolitan optical networks, according to researchers at Infonetics.

But analysts caution against reading too much into these modest gains, which might not prove sustainable.

Gary Little, general partner with Morgenthaler Ventures, says that many companies have piled a lot of their ugly financial numbers into their recent filings, looking to start next year with a clean slate. That could result in some near-term stronger financial showings, he says. "But I'd look for three or so quarters of predictable revenue growth pulling along profits before you'll see IT budgets loosening up."

"The bright spots are still a very, very diffuse light," says Al Case, senior vice president at Gartner. "The exciting news is that we're not going backwards."

For their part, many vendors are taking a conservative, albeit cautiously optimistic, stance.

Cisco CEO John Chambers last week told analysts at the company's annual meeting that the gear maker's business will grow, although he stopped short of providing specific predictions for the current quarter. He highlighted new markets Cisco is targeting, including storage, network security and wireless LANs.

"Two years ago I was perhaps the pessimist in the industry. I thought, unfortunately, we were headed into a 100-year flood," Chambers told his audience. "Today, I'm the optimist."

At HP's analyst conference last week, CEO Carly Fiorina said HP is showing better than predicted performance in some areas of its business, including the expectation of $3 billion in cost savings for fiscal year 2003 as a result of the Compaq acquisition. HP had expected a total closer to $2.4 billion, Fiorina said.

A bright spot in HP's fiscal 2002 earnings is managed services, where revenue increased 14% over year-ago figures. Among the large outsourcing deals HP landed is a seven-year, $1.5 billion contract with the Canadian Imperial Bank of Commerce to manage its IT infrastructure, announced in September. HP also has won more than $920 million in services contracts in recent months, including deals with the State Treasury of Slovakia, Swedish Parliament and Michelin.

Nonetheless, Fiorina said she would not raise financial forecasts because of an uncertain economy. "I am not here to raise guidance," Fiorina said. "The reason we are not going to raise guidance today is because the economy continues to be uncertain, and we want to make sure we are not getting ahead of ourselves."