Software waits another quarter before celebrating

By : |January 26, 2002 0



Ilaina Jonas

NEW YORK: The software business is showing signs of life again, after a
disastrous fall that left some tech companies among the walking wounded.

Still, analysts, investors, and even software makers themselves are reluctant
to declare that a recovery is on the way or that the stubborn technology
spending slowdown is over.

"We’re not out of the woods yet," Goldman Sachs analyst Thomas
Berquist said. "But if the economy continues to show signs of life versus
going into the other direction, and if March comes in line or hopefully better
than the estimates out there, then I think it will become increasingly clear
that we’re past the bottom."

In the past two weeks, many leading software companies reported quarterly
earnings. Nearly all said that while they were markedly down from the year-ago
quarter, most of the results were better than the quarter that ended in
September. "Those that weren’t better, you have to wonder," Berquist
said.

Some companies — SAP AG, Mercury Interactive Corp., and Siebel Systems Inc.
— stunned Wall Street, reported strong earnings and issued positive comments or
forecasted growth in the coming year. "The good news is 2001 is over,"
Siebel chief executive and Chairman Thomas Siebel said. He predicted a 15 per
cent rise in sales and issued guidance for the quarter and year that were higher
than the average of analysts’ outlook.

While turning in performances that met their guidance or even caused
expectations to be boosted, some companies backed away from predicting an end to
the downturn in corporate spending on technology that began about a year ago.
No. 1 software maker Microsoft Corp. posted sales that topped Wall Street
expectations, but said it foresaw more sluggishness in the personal computer
market, where its Windows software is by far the dominant operating system.

Wall Street slammed PeopleSoft Inc. when it posted profits that beat
expectations but issued tempered guidance. Micromuse Inc., whose results met
expectations, said customers, mostly large telecommunications providers, were
spending money. But the company issued flat guidance, citing a still uncertain
economy.

"Things improved in the fourth quarter," Morgan Stanley analyst
Charles Phillips said. "People see signs of recovery. But very few are
willing to say for sure what the timing is. I would say they’re cautiously
optimistic looking for a midyear recovery of the economy and the buying
environment. But few are willing to sign up for acceleration near-term."

Future looks better
Some rays of light brightened the between-the-lines optimism. Large deals, which
faded away in the slowdown, returned to the income statements of some companies.

"The size did increase substantially over the September quarter, but we
don’t see customers doing the larger deals to the same extent that we saw 12
months ago," Phillip Merrick, CEO of integration software vendor webMethods
Inc.’s, told analysts during a conference call.

BMC Software Inc., whose software manages computer systems, reported 29 deals
over $1 million and three over $5 million. Still companies, such as Interwoven
Inc. and Computer Associates International Inc. said they would look for smaller
deals, or "antelope-sized" versus "elephant-sized," as
Interwoven Chief Financial Officer Dave Allen said.

Yet analysts said the fact that the December quarter topped the previous one
does not indicate a turnaround. First, by the end of the year, companies are
looking to spend whatever money they have left in their budget, so the December
quarter is traditionally the strongest.

More importantly, following the Sept. 11 attacks, business came to a
screeching halt and stayed that way in the final two weeks of September. The
final two weeks of a quarter are when most software companies close 60 per cent
to 80 per cent of their deals.

When the business community got back on its feet, deals that had been
expected to close in September were pushed into the fourth quarter. "It was
really a four-month, fourth quarter since nothing happened in September,"
Phillips said. "And it was year-end, so that being budget flush I’m
reluctant to extrapolate too much from that one quarter."

Although the current, March quarter tends to be the weakest quarter of the
year, most are looking to its performance as an indicator of the health of the
industry. "If March comes in line with what people are saying now, then it
will become increasingly evident that the worst is behind us," Berquist
said. "If March is worse, that will raise questions about have we hit
bottom."

(C) Reuters Limited.

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