Software waits another quarter before celebrating

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.