VRTS (up $59 1/2 , short back $54 1/2) Meets Expectations, but Backs Off the Bold Talk
By Joe Bousquin
Senior Writer
4/17/01 7:29 PM ET
Updated from 4:50 PM
Veritas Software (VRTS:Nasdaq - news), the data-storage and availability software maker that continued to give rosy updates during the quarter despite the technology spending slowdown, beat Wall Street expectations when it reported official results Tuesday afternoon.
But that's where the cheering ended. The company took down its financial guidance for the rest of the year, saying that it would grow 35% to 50%, instead of the 45% to 50% growth estimate it issued previously.
The company earned $87 million, or 21 cents per share, on revenue of $387 million in the first quarter ended March 31. Analysts were expecting earnings of 20 cents per share on $385.2 million in revenue, according to Multex.com.
The company said it saw strength across all its product lines and regions, but that the uncertain economy, bigger challenges in closing deals and sagging numbers at data storage hardware makers, caused it to go more conservative in its financial outlook.
"The selling environment during Q1 was clearly more difficult," Gary Bloom, CEO at Veritas, said in a conference call with analysts. "Given a modest decline in [hardware makers'] revenues going forward, when we combine it with the economic uncertainty, we think it's prudent to lower the low end of our growth range."
Bloom added he thinks 45% to 50% growth is attainable, but wanted to play it safe with the numbers. So safe, in fact, that Veritas CFO Ken Lonchar then told analysts that oh, by the way, that means our earnings will probably be lower, too.
Lonchar said that second quarter revenues would grow by only 1%, and that earnings per share should be around 19 cents. Analysts were expecting 21 cents per share. For the year, Lonchar said EPS would come in at 84 cents. That's 6 cents lower than analysts are projecting.
The market reacted accordingly.
After gaining $2.91, or 5.3%, to finish at $57.58 during the regular session, Veritas shares dipped down to $55.24 in after-hours trading, a 4% drop.
Because of its repeated reassurances that everything was on track throughout the quarter -- its mid-quarter conference call was a hit on Wall Street -- Veritas shares have weathered the technology sell-off better than others. And in the no-way-is-this-based-on-fundamentals rally that has driven the market of late, the stock has soared. It gained 54% over the eight trading sessions ended Friday, before selling off 10% on Monday.
Now, with its guidance lowered, Veritas is looking like it may have set itself up for a fall.
"There was some sentiment in the market that they would be immune to this, and they probably perpetuated that," says Dane Lewis, an analyst at Robertson Stephens who has a long term attractive rating on the stock. "But it's pretty clear that if the U.S. market slows down, it's somehow going to impact them." (His firm hasn't done underwriting for the company.)
That said, he still thinks Veritas is a great company that showed good execution during a tough economic period. It's just the valuation of the company's stock that leaves him concerned.
The shares' resilience has ensured that Veritas stock remains expensive. At Tuesday's prices, the stock trades at more than 63 times 2001 earnings. Of course, that's down slightly from the 67 times earnings that investors paid as recently as Friday. To look at it another way, Veritas trades at 13 to 14 times 2001 sales.
"For a software company, that's a big number," Lewis says. "The markets were telling us last week that they don't care, we're going to buy tech stocks again. Now, I don't know what you pick as a valuation -- I don't think anyone does -- but I think a lot of people are paying up, expecting big growth. They grew over 70% last year, and now they're talking 35% plus. They cut it in half. They're not immune."
Investors should remain cognizant of Veritas' rich valuation, especially in light of the warnings hardware storage companies EMC (EMC:NYSE - news) and Network Appliances (NTAP:Nasdaq - news) issued last week.
If a slowdown in spending on storage hardware catches up with storage software, Veritas' stock could be at risk. That's why analysts took down price targets on Veritas last week, though they highlighted storage software's relative strength while doing so.
And on its conference call, management said it was exactly those soft hardware numbers that were causing concern now.
"When you look at the numbers for the key hardware vendors, you have to assume that our [reselling] numbers are going to come down a bit," Bloom said.
Investors should also know that Veritas' revenue from its distributors -- anywhere from 25% to 40% of its sales -- are recognized one month in arrears. That means if a slowdown in storage hardware does affect storage software sales, it won't be felt until later. At the same time, though, analysts regard Veritas' delayed revenue recognition as a positive, because it gives the company better visibility to what lies down the road.
Mark Fernandes, an analyst at Merrill Lynch who rates the stock an accumulate, noted the stock's ability to rally as a potential reason to buy it, should it take a dive.
"Since the stock is up 54% in the past eight days, we recommend that investors use any pullback in the market to aggressively accumulate this franchise software name," wrote Fernandes. (His firm hasn't done recent underwriting for the company.)
Of course, that's assuming that Veritas can dodge the economic slowdown. From its new outlook, its seems less confident that it can do so. |
