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Oracle Warning Has Implications for Rest of Sector

Analysts Friday took Oracle Corp.'s Thursday evening third quarter profits warning as a troubling sign with implications for the entire software sector.

Oracle Thursday cited trouble closing already negotiated deals at the end of the quarter as a reason for the expected shortfall. The company said it anticipates third quarter earnings of 10 cents per share as opposed to the 12 cents per share analysts were expecting. Much of the problem had to do with lackluster U.S. sales of its flagship database software.

"We had expected slower database growth because of this issue, but this was worse than we had thought," Goldman Sachs analysts said Friday along with an announcement that GS was downgrading Oracle stock to market outperform from its U.S. Recommended for Purchase List. "We believe this will be a negative catalyst for the broader software sector and have reduced ratings on a number of stocks as a result. This follows estimate changes for a broad range of technology stocks earlier this week as evidence of a deteriorating economy continues to build.

"The slowdown in database business was worse than expected, and the sluggishness came from both the portion associated with packaged applications and in-house development projects. The slower growth in database and applications was attributed to the reluctance of CEOs and CFOs to sign deals at the very end of the quarter, despite the fact that many of these deals had already been negotiated. While this is not a complete surprise, the magnitude of the deferrals is and the extent to which management was surprised is of concern for other software companies that book large deals at the end of the quarter. The fact that management had expected the quarter to come in in-line with earlier guidance suggests that visibility is low and we probably cannot rely on other software vendors to close their pipelines at the end of their quarters as they may expect."

Goldman Sachs was not alone in downgrading Oracle or turning a nervous eye to other companies in the sector.

"We are trimming estimates for Ariba, Commerce One, i2 and Oracle in the wake of Oracle's lackluster 3Q, which we see as a leading indicator of the difficulties that applications companies might face closing sales at the end of March," said Mark Verbeck, senior analyst, Software with Epoch Partners. "We believe few software companies can surmount the cautious sentiment currently in the executive suite. Should this sentiment change, we believe demand will quickly rebound, but we have no visibility on when this may occur."

Verbeck said Epoch now anticipates fourth quarter EPS of 16 cents, down from its earlier estimate of 21 cents per share. Goldman Sachs reduced its fiscal 2001 estimate to 47 cents per share off its previous prediction of 51 cents per share. It has lowered fiscal 2002 EPS to 57 cents from its previous estimate of 64 cents per share. Citing low visibility, Epoch said it is not yet prepared to change its fiscal 2002 estimate.

J.P. Morgan H&Q, Merrill Lynch, Banc of America and Deutsche Banc AB also chimed in with downgrades.

U.S. software companies were not the only ones affected by Oracle's woes. European software companies took hits Friday, especially firms with strong U.S. presences. SAP AG, U.K.-based Autonomy and France-based Business Objects all slumped as a result of Oracle's warning.



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