Hard Rain on Software Sector
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Goldman Sachs (GS) software analyst Rick Sherlund spearheaded a hard rain on the software parade Tuesday when he and his colleagues lowered estimates for a slew of companies in that sector.
Some are cuts with the short term in mind; some with the long term in perspective, but none of them, they say, should come as a surprise. Cut companies include those that provide enterprise/ERP applications, customer management applications, supply chain/supplier management applications and PC software.
Goldman Sachs last issued a statement on the plight of software in April, but things have gone downhill a bit since.
"When we last reduced numbers in April, our overall assumption was that we would see a flat to down June 2001, a flat to down September 2001, and then a fundamental bounce back in December 2001 and for most of 2002," the report said. "Based on the assumption of a slower pace of recovery, we believe December 2001 and calendar 2002 will be slower to accelerate."
While the firm reduced long-term and secular growth rates, it did not reduce ratings because it had already done so piecemeal in previous months.
As for specific company downgrades, GS said Oracle proved to be the most disappointing in the ERP space, with applications down a rough 24 percent. However, the firm said it believed more ERP-centric firms such as PeopleSoft and SAP will make the quarter.
A key question on many peoples' minds, not surprisingly may be: What about PC software? With all of the talk about Web software services and wireless devices making the PC obsolete in the future, PC skeptics abound. The leading company on everyone's' minds? Microsoft Corp.
"PC unit demand is coming in slower than when we last forecast earnings for Microsoft," the report said. "We believe demand is down about 5 percent sequentially. Microsoft's mix of business can shift around, so it is difficult to use PC unit forecasts as a reliable indicator of the company's revenues. "We have earlier modeled revenues to be flat sequentially for the June quarter at $6.45 billion, but have reduced this to a 2 percent decline with no net effect on earnings. For fiscal (June) 2002, we have reduced our revenue growth rate to 12% from 14% previously and reduced our earnings estimate to $1.88 per share from $1.92."
One area of software that is taking a pummeling in particular is the customer management app facet. Noting that eCRM was hammered in Q1, GS said it believes the "continuing sluggish economy, depressed corporate profits, and slower international make the second half the year less predictable even if this quarter shows some improvement."
In part because of this cooling economy, firms like Broadvision Inc. and Vignette Corp. are altering their strategies to create new app capabilities, which ultimately leads to new products to sell into the installed base; however, it introduces additional execution risks. Siebel Systems Inc. remains the preferred favorite of GS in this sector.
In the supply chain software arena (think Ariba and Commerce One Inc., which architect vertical market and other e-business software), it seems the firms' installed customer base may prove to be the saving grace, according to GS. For Ariba, GS lowered estimates to $405 million from $438.3 million in 2002, while reducing estimates by 1.4 percent for fiscal 2001. As for the other major player and industry leader, Commerce One, GS lowered 2002 estimates by 5 percent to $775 million from 815.6 million, while also reducing 2001 estimates 1.7 percent.