If you're a software investor looking for some good news, our condolences. For
the rest of you, read on.
With Oracle (ORCL:Nasdaq - news) set to report disappointing results
Thursday, investors are watching the rest of the software world to see which
companies will issue profit or earnings warnings. The likely answer: probably
most of the ones you're invested in.
"I think the appropriate response is to say that everyone's at risk of missing
numbers this quarter," says George Santana, an analyst at Wedbush
Morgan Securities. "At least, that's what the equity market is discounting
right now, that everyone is going to miss." Santana couched that statement
by saying that he didn't think the economy is as bad as some think, and that
the recent selloff in software was likely a buying opportunity.
Software's harbinger for this coming season of discontent was Oracle. A day
after its February quarter closed, the second-largest software company said it
would miss consensus earnings expectations by 2 cents, and that its revenue
would be short by, oh, a quarter of a billion dollars. More details will come
when it reports official results Thursday afternoon, but basically, in the face of
the deteriorating economy, the software giant struggled to close deals during
the last week of its February quarter.
Now, with most other software firms slumping toward the end of their March
quarters, watch for that pattern to repeat.
"In terms of which companies have the highest probability of missing Street
expectations, I'd put Ariba (ARBA:Nasdaq - news) right at the top of the list,"
said Jim Moore, an analyst with Deutsche Banc Alex. Brown who rates
Ariba a buy. "They still have 75% or 80% of their quarter left to do." (Moore's
firm has done underwriting for Ariba.)
An Ariba spokeswoman didn't return a call seeking comment.
Other companies that Moore sees at risk include Commerce One
(CMRC:Nasdaq - news) and i2 Technologies (ITWO:Nasdaq - news). (He
rates both a buy, and his firm hasn't done underwriting for either.)
"I think we're in the same boat as everyone," says Brent Anderson, director of
investor relations at i2. "We'll do our damnedest to make sure that we hit our
plan, but we're obviously operating in an economy that's not where it was last
year, and a more challenging environment overall."
A spokesman for Commerce One declined comment, citing its quarter-end
quiet period mandated by the Securities and Exchange Commission.
Moore's not picking on those companies without reason. Ariba and
Commerce One executives made cautious statements about their quarters at
recent investment conferences. And i2 CEO Sanjiv Sidhu took the opportunity
to relay uncertainty about i2's quarter when it announced its planned
acquisition of RightWorks last week.
From Moore's perspective, this is as bad for software as it's ever been.
"In 20 years in the software business, I've never seen demand dry up like this
so precipitously," Moore says. "If this economy stays bad for another six
months, these stocks could easily come down another 50% to 60%."
Ariba and Commerce One are already 90% below their 52-week highs, and i2
is off 79% from its 12-month peak. Oracle is down 66% from its respective
Other software companies that are on analysts' lists of potential
warnings-issuers include Siebel Systems (SEBL:Nasdaq - news),
PeopleSoft (PSFT:Nasdaq - news) and E.piphany (EPNY:Nasdaq - news).
That said, most analysts still have generally high hopes for the likes of BEA
Systems (BEAS:Nasdaq - news), which is on an April quarter and Veritas
Software (VRTS:Nasdaq - news), which reiterated its guidance recently for
its March quarter.
But even if some companies do manage to get out of their March quarters
unscathed, the rest of the year is anything but a given. Which is why, in some
observers' eyes, these stocks have been sinking steadily for weeks with the
rest of technology.
"I think the market's discounted any warnings we would have through the end
of the year," says David Garrity, an analyst for Dresdner Kleinwort
Wasserstein. "[March quarter warnings] are a nice idea, but the market's
looking way beyond that at this point."
It's that sort of sentiment that has led analyst after analyst to lower revenue
and earnings expectations across the software board. Which means that as
software share prices have sunk, they haven't necessarily become less
expensive, because the numbers they're judged against are smaller, too.
"We went through a painful process over the last few months of resetting
multiples as we move to the historical PE-to-growth valuations in software
land," says Deutsche Banc's Moore. "The next part of the torture is to reset
growth rates and earnings expectations, which could further drag down market
Take that as fair warning, before they come