RATL ( $16.50 up $20)meets expectations
(UPDATE: Adds byline, conference call details, CEO and analyst quotes)
By Siobhan Kennedy
NEW YORK, April 17 (Reuters) - Software development tools maker Rational Software Corp. (NasdaqNM:RATL - news) on Tuesday met previously lowered fiscal fourth-quarter expectations, citing strong sales of its software despite a flagging U.S economy, but admitted it was not immune from the tough climate.
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For the quarter ended March 30, Rational earned $45.9 million, or 22 cents per share, compared with $34.9 million, or 18 cents in the fourth quarter of 2000. The results excluded unusual items related to acquisitions.
``Despite excellent results and a relatively strong quarter, the final week and days of the quarter provided us with ample evidence of the severe impact of the economic downturn,'' said Paul Levy, Rational's chairman and co-founder, on a conference call with analysts.
Rational earlier this month lowered its earnings estimates and said they would be in the range 20 cents to 22 cents a share. Analysts on average expected Rational to earn 21 cents a share, according to research firm Thomson Financial/First Call.
In addition, the company said at that time it would cut its workforce by 10 percent and lowered forecasts for 2002.
Revenue for the quarter increased 34 percent to $241.7 million versus $180.40 million last year, and was just within the company's previously lowered range of between $240 million and $245 million. Analysts on average were expecting $246.38 million, according to First Call.
Including charges, the company said it earned $6.6 million, or 3 cents a share, compared with $25.9 million, or 13 cents a share in 2000.
Levy said that despite a ``significant degree of economic ucneratinly'' in the second quarter, the company was comfortable with the revised estimates it gave Wall Street earlier this month.
At that time, Rational also lowered its outlook for fiscal year 2002 to pro-forma earnings of between 50 cents and 60 cents per share, compared with the average 86 cents per share analysts had expected, according to First Call. The analysts' average estimate has now been adjusted to 53 cents per share.
``They were surprisingly upbeat given the fact that they'd guided down just a week ago,'' said Sarah Mattson, an analyst with Dain Rauscher Wessels. ``But this past quarter was certainly better than a year ago.''
Mattson said Rational had reason to be confident given the number of software orders was up from last year, as well as the number of customers and the number of big deals. ``They were 300 deals over $100,000 and 30 deals over $1 million,'' she said. ``Which certainly isn't bad considering the current conditions.''
Rational's April warning was a turnaround from the company's predictions during a conference call in January following its fiscal third-quarter earnings report. At the time, the company said it expected that the slowing U.S. economy would mean more demand for its products as customers worked to increase productivity.
It raised its revenue expectations for the first quarter to between $250 million to $255 million, up from $245 million.
However, on April 3 Levy said the U.S. slowdown in spending on information technology had hit the company, as deals at the end of the quarter failed to close.
Since Jan. 29, the day before Rational shares began their dive, the stock has lost nearly 70 percent of its value, underperforming the Standard & Poor's software index by 41 percent.
``We got beaten up a little bit last quarter,'' Levy said. ``Bookings certainly weren't as strong as we anticipated they would be.''
MODERATE TO GOOD VISIBILITY
Looking ahead, Levy said Rational had factored in the company's fourth-quarter sales squeeze into its future forecasting. ``As of today, the projection for business this quarter would lead us to conclude that our visibility is moderate to good,'' Levy said. ``Our targets are much more conservative than they were 30, 60 or 90 days ago.''
Levy said Rational was hit particularly hard by slowing sales to the telecommunications and datacommunications sector, which typically account for 30 percent of software license revenues, but which this quarter, only made up 20 percent.
``But frankly we've been able to foresee the challenges that ... the Cisco's of the world are confronting and we've fully factored that into our guidance,'' Levy said, referring to the No. 1 networking company Cisco Systems Inc. (NasdaqNM:CSCO - news)
Analysts also seemed confident about Rational's ability to execute going forward.
``The tone of this still remains very strong, but there's no denying the sales cycles have lengthened and it's tougher to close deals,'' Mattson said. ``But I very much like their story and once IT spending starts to accelerate, Rational will emerge all the stronger being given that it's a market leader in its category.''
Shares of Rational closed up 2.46 percent Tuesday at $17.50. In after-hours trading, following the release of the company's quarterly financial results, shares rose to $19 on the Instinet stock brokerage.
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