EARNINGS PREVIEW: The hard road ahead for software
By Storme Street
Washington, April 16 (BridgeNews) - Since most of the sector has already
pre-announced its results, the software industry's first-quarter earnings will
lack much of the element of surprise. After Oracle Corp. started the bad news
ball rolling March 1, "zero visibility" has become the mantra of the group, and
layoffs, downward revisions and talk of global economic downturn are all the
rage. But forget the first quarter, most analysts said; listen to the guidance
in the coming weeks.
* * *
"Next week we're going to hear about the all-important outlook from several
companies, including Siebel, i2, and to some degree, SAP," Bob Austrian, an
analyst with Banc of America Securities, told BridgeNews. "My sense is that the
outlook is going to be soft -- maybe softer than people expect."
The thinking is that those companies that have avoided pre-announcing --
including BEA Systems Inc., PeopleSoft Inc., SAP AG, Siebel Systems Inc.,
Veritas Software Corp. -- will meet the numbers expected of them. In fact, this
expectation is already priced in to most of these stocks, so the Street is
unlikely to give them much credit for achievement.
What everyone wants to know is whether they think they can do it again next
quarter.
Merrill Lynch said in a recent research note that it believes the stage is
set for a "continued malaise" in enterprise application software stocks. With
more vendors chasing fewer deals, it said pricing pressure could escalate. In
addition, second-quarter pipelines are likely to look shrunken after the
struggle to close first-quarter deals, and the economic slowdown is showing
signs of spreading to Europe.
"No one knows how long the malaise will last," said Austrian. "We think
there is a higher probability than most would like [to believe] that the
malaise will last well through the fall for the software sector."
Doug Augenthaler, an analyst at CIBC World Markets, said he'll be looking
at whether the guidance offered in the coming weeks is believable.
"From my perspective, I'm going to be looking for companies to be more
realistic," Augenthaler told BridgeNews. "I want the hurdles set low enough
that we don't have to go through another round of warnings every quarter this
year."
In addition, analysts said they will look at how the companies that meet
first-quarter expectations do it. If a company meets its revenue estimate but
reveals lower deferred revenues or negative cash flows, it could struggle to
keep up the pace next quarter.
NO MORE SAFE HAVENS
When software stocks first began to look vulnerable -- long after many
other segments of the technology market -- the thought was that market leaders
selling "essential" products would be able to avoid most of the economic
potholes. This pointed to supply chain management, customer relationship
management, and procurement -- in other words, Ariba, i2 and Siebel.
Ariba has since offered up a 50% revenue shortfall, a loss rather than a
profit, layoffs of one-third of its employees, and the disintegration of its
deal to buy Agile Software Corp. In addition, the company's market cap, which
at about $23 billion was a third more than its nearest competitor's a year ago,
S
is now low enough to make the company the target of acquisition speculation.
I2 has also warned and announced layoffs, though its pre-announcement was
not as bad as it could have been. Indeed, supply chain management seems to have
been hit less brutally than other areas, as Manugistics, i2's primary rival in
the space, managed to beat expectations in late March. However, some analysts
said Manugistics' bullish view of the future might have been a little too
optimistic.
Siebel is still hanging in there but is no longer considered the shelter it
once was.
"A falling tide lowers all ships," said Austrian. "Everyone will have to
pay homage to the slowdown."
MORE STAFF CUTS?
There are fears the sector is in for another round of layoffs after
earnings season.
"A lot depends on what they expect for the June quarter," said Richard
Davis, an analyst at Needham & Co. "If they're saying revenues will be down,
there will have to be more cuts."
Banc of America's Austrian has the same concern. "The next 50 to 100 days
are going to be pivotal for the industry fundamentally," he said. "Forget stock
prices. If we go another 50 to 100 days with more of the same cold environment,
there would be another rash of cuts in staff and estimates."
Even those companies that meet estimates or aren't feeling the pain as much
could make some "strategic" layoffs, said Mark Verbeck of Epoch Partners. |
