B] EARNINGS PREVIEW: Few software sector surprises expected
Updated Fri Apr 16, 1999 21:12 GMT
By Susan L. Thomas, Bridge News San Francisco--April 16--Disappointing earnings announcements will come asno surprise to observers of the enterprise resource planning (ERP) market, butinvestors can expect better news from front-office applications vendorsand companies selling software to help businesses connect to the Internet. Earnings announcements for the software sector pick up in earnest next weekwith Network Associates, PeopleSoft, Siebel Systems, Sybase, Informix, I2technologies, Broadvision and Vignette all reporting.ERP WEAK, FRONT-OFFICE SECTOR STRONGER "We have seen an historic number of pre-announcements," in the enterpriseapplications area, said Bob Austrian, a senior analyst with Nations BancMontgomery Securities. Particularly noteworthy is the trail of bad news from those companies thatsell business software that automates corporate processes, such as humanresources, inventory, accounting and manufacturing. PeopleSoft, which makes human resources applications and similar ERPsoftware, late last month estimated first-quarter revenues of $275-305 million,which would be flat to up 10 percent from a year ago. It will be the first ofthe ERP companies on the March quarter cycle to report earnings, but SAP hasalready said it expects "sluggish" first-quarter revenues, and Baan has alsowarned. J.D. Edwards and Oracle, which announced in February and Marchrespectively, also posted weaker-than-expected results. "The malaise in the sector goes back to last fall. The problem has picked upin Q1," Austrian said. ERP companies that target the high end commonly attribute their woes to theircustomers diverting resources for enterprise applications deployments to fixingtheir systems to handle the year 2000 date change. But Austrian believes that isonly half the story. "I think the malaise is only half attributable to Y2K," Austrian said. "Theother half relates to the lack of Internet readiness." Austrian explained that customers have wanted to move more quickly to theInternet than ERP companies had prepared their products for. He doesn't expectthis sector to pick up again until late this year, or next year. On the other hand, Austrian said companies like Siebel Systems are doingquite well. First Call puts consensus estimates for Siebel, the market leader insales-force automation software, at 15 cents a share. Competitors Vantive andClarify are expected to post 6 cents and 9 cents a share respectively, accordingto First Call. These types of companies focus on sales and customer services, which isoften a corporate buying priority, according to Austrian. "It's mostly because,Internet-ready or not, customer facing applications are very powerful in theInternet world," Austrian said of the positive outlook for that softwaresegment. Hambrecht & Quist has increased its March quarter estimates for Siebel from13 cents to 15 cents and noted in a recent research report that demand andcustomer activity appear to be "robust." "One key to this growth is that Siebel is continuing to build on itsposition as one of the premier applications companies in the market bysolidifying key system integrator commitment and capacity," noted analyst JimPickrel in the report this month. "Our earnings outlook is driven by an increasein product revenue assumptions by $2 million, as well as nominal adjustments incosts and share count." I2 Technologies, a maker of supply chain management software applications,also reports Wednesday. First Call consensus is at 5 cents a share. DATABASE SECTOR SEEN LACKLUSTER Companies in the traditional database sector reporting next week areexpected to produce lackluster results as database sales have slowed,particularly among smaller vendors competing with Oracle and Microsoft in thatmarket. But some analysts see room for growth for those companies as nicheplayers. First Call consensus is that Informix Wednesday will report earnings of4 cents per share, while competitor Sybase will post the following day earningsof 1 cent a share. Neither of the two has pre-announced. Rob Tholemeir, an analyst with First Albany Corp. research group reportedrecently that the enterprise database business will look "sluggish with slightoscillations due to seasonality and variable year over year comparison." First Albany is rating database maker Sybase accumulate, and noted thecompany has promised to break out revenue by divisions. "We think these disclosures will highlight the break-up value of Sybase andcould jocky the stock up to a reasonable or take-out or break-up price,"Tholemeier wrote in his report. "At a minimum, the services group alone is worth1 to 2 times revenues v($450 million). Cash is $249 million, and we expect amodest improvement this quarter." Database maker Informix is receiving mixed reviews from at least 2 analysts.Hambrecht & Quist analyst Pickrel, who met with executives in March, said in areport that "Informix is in good shape to meet March numbers," and that thecompany is "building an increasingly compelling story in e-commerce,datawarehousing, and other specialized database markets. The research investmentfirm rates Informix a Buy. Thoelmeier, however, is not so optimistic about Informix, which First Albanyhas rated underperform. "While the stock has been cut in half in the past twomonths, we still can't figure out what it holding it up in the mid-singledigits. Informix remains a distant competitor in the high-end complex databasemarket," reports Tholemeier. Key to future growth for companies in that sector looks to bespecialization. Marshall Leisten, an analyst who covers a range of enterpriseinfrastructure companies for Dain Rausch Wessels, told Bridge News he believesthat some of the database companies are "undervalued." "All these companies are really trying to redefine themselves," Leisten said. In the coming months, he added, database companies will move into otherareas to become more competitive. Those areas could include building applicationservers, data mining technologies and e-commerce software. Broadvision, which announces Thursday, is also already in an area at leastone database company hopes to encroach upon. The company makes software thatpersonalizes marketing and sales to customers on corporate Web sites. Informixrecently announced products that put the two in a more competitive mode.Consensus estimates are at 9 cents a share for Broadvision, according to FirstCall. Pervasive Technologies, an example of a company carving out a role foritself, sells small footprint databases and Web servers. The company is set toannounce third quarter earnings Thursday after the market. First Albany expectsthe software maker to beat revenue estimates due to its "high degree of revenuevisibility and conservative guidance." First Call earnings estimates are at 8cents a share, a penny over last quarter. MIDDLEWARE BENEFITING FROM INTERNET BEA Systems, which sells a Web server software similar to Pervasive'soffering, is also expected to do well, at least in the mid-term, as demand forso-called "middleware" software accelerates. The company reports first quarterearnings in May, and consensus estimates are at 2 cents a share. "Their pipeline is very, very rich," said Leisten, who added that he isstill unsure how the numbers will shake out. Middleware comprises products that "glue" different applications together sothey can exchange information. This is becoming increasingly important tobusinesses as they move to new Web-based applications. BEA Systems, for example,has both Web server and enterprise application integration (EAI) middlewaresoftware. Kimberly Knickle, an analyst who covers the EAI market for AMR Research,said EAI companies are experiencing "significant growth" and that should bereflected in this quarter. The caveat, however is a company's ability to offer acomplete set of EAI products. An example, might be TSI Software or New Era ofNetworks. First call estimates for those two companies are at 5 cents and 10cents respectively. At the same time, those companies not offering all the pieces won't do aswell, Knickle added. HIE Inc. for example, already pre-announced it would missconsensus estimates of 2 cents a share and would instead post a 5-7-cent loss.Knickle said the company has not yet been able to position itself in marketsoutside EAI software for health care providers. HIE is scheduled to reportWednesday. Also reporting next week will be network management software maker NetworkAssociates, which pre-announced earlier this month that first quarter revenuesof between $245-250 million, which resulted in downgrades from several analysts. Newly public Vignette, a maker of software that lets users publish contentto Web sites and personalizes Web site marketing, is scheduled to announce itsfirst quarter earnings, April 21. First Call estimates are at 33 cents a share.End
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