Software firms hit by loss of last-minute sales

Ilaina Jonas

NEW YORK: In sales, it all comes down to closing the deal, and for software
companies from Oracle to Art Technology Group Inc. it usually comes down to the
last week of the quarter. This quarter, the make-or-break, end-of-quarter deals
just didn't get done due to a downturn in US technology spending. Some analysts
have started calling for software companies to look at new ways of packaging
sales, to eliminate the last-minute crunch.

One by one software firms have began announcing a shortfall in their
quarterly results below the expectations.i2 Technologies Inc. came first,
followed by Art, Ariba Inc. and then BroadVision Inc. The problem was that deals
in the crucial final days of the quarter, when about 60 per cent or more of most
software companies' deals close, did not materialize.

"Our quarters are typically very back-end loaded so it's difficult to
get visibility early in the quarter," said i2 Technologies chief executive
Sanjiv Sidhu. "The extent of the situation was clear only after the quarter
ended on Saturday." Until the last days of the quarter, companies could not
determine if they would miss, match, or beat Wall Street expectations.

"At the end of the quarter, we experienced a large unexpected drop-off
in our sales closure," Ariba's chairman and chief executive Keith Krach
said. "Spending decisions at the executive level were postponed as
customers evaluated their budgets in light of the prevailing economic
uncertainty," he said.

Oracle all over again

It was Oracle all over again. On March 1, Oracle Corp., the world's
second-largest software maker had said its fiscal third-quarter earnings would
fall short of expectations. In the final four days of the quarter, customers
failed to sign deals that had been nearly nailed down.

Minutes after warning, Credit Suisse First Boston analyst Brent Thill
predicted other firms would also fall like dominoes. Legg Mason analyst Paul
Krieg spent last week working the phones. Sales people and buyers of software
said the same thing: Deals they had expected to sign in the last few days
wouldn't be appearing on anybody's financial reports.

On Monday, the ax fell. The last few days of the quarter are crucial for
software makers because that's when, after weeks of haggling, the big deals get
done. "I'm keep hearing that people are really concerned about their
ability to close deals," said Miller Heiman Inc’s chief executive Sam
Reese.

The end of quarter crunch

The end-of-the-quarter crunch is a result of the means adopted by software firms
to record their revenue. Most use a license model in which the entire cost of
the license for the software product is recorded up front as one lump sum. The
system does not allow software makers to see far into the future to accurately
estimate their financial results in each quarter.

To top it all, the Computer Associates International Inc. in October decided
to change the way it books revenue and went from a license model to a
pay-by-the-month subscription model. The company wanted to rid itself of the ‘hockey
stick’ in which its revenue rises in tiny increments for most of the quarter,
then spikes upwards at the end.

In the subscription model, on the other hand, the size of each deal remains
the same but the revenue payments are cut into monthly pieces. That makes the
quarter's revenue lower but the sum is spread out over the lifetime of the deal.
It takes Wall Street a while to adjust to the change, however, Computer
Associates' stock price took a hit.

With revenue typically at about $6 billion a year, Computer Associates could
absorb the impact. Newer, smaller software companies cannot, Thill said.

Big deals are tougher to come by

Industry analysts at AMR Research suggest that to reduce their exposure,
software firms should stop relying on large deals to meet estimates for their
quarterly results. In fact, analysts believe that the bigger the deal, the lower
the odds of having a customer's chief financial officer approve it, Thill said.

"If you're selling a $50,000 deal you may get that one through. But if
it is $500,000, it's a lot tougher," he said. For its art, i2 said its $210
million software license sales in the quarter amounted to 100 large deals
averaging around $2 million each. But Art Technology Group Inc, whose stock lost
half its value on Monday, when it warned the company would turn in a profit
instead of a loss won't shy away from larger deals, said Chief Financial Officer
Jeet Singh.

"We are not adverse to large deals being signed. Do large deals make for
lumpier quarters and less predictability? It is only in relation to overall
revenue. It depends on how many you're doing. If you end up counting on a few
large deals, you're more exposed," he said.

(C) Reuters Limited 2001.