Goldman: Software is in the Doldrums

Admitting that gauging high-tech company results has been like “catching a
falling knife” this year, Goldman, Sachs & Co. based its Friday trimmed
estimates on software powerhouses, claiming that the business climate would
only worsen.

It wouldn’t be fair to call them winds of change — software sales have been
stagnant for months — but bearish stories blowing overseas from Europe
reached GS; the research firm said that it doesn’t look good. Moreover, GS
claims the Street overall was a little too conservative in estimating cost
constraints through 2002.

For Oracle, GS reduced database server growth
assumptions to a decline of 5 percent from flat previously for the August
quarter and have slowed growth going forward as well, with no growth in the
second quarter and about 10 percent growth on relatively easy comparisons in
their fiscal second half (Feb and May of 2002). GS modeled applications with
no growth year over year for the next two quarters, where Oracle management
had previously indicated they thought they could show 15 percent growth in
the current quarter and we had modeled about 5 percent. EPS estimate
reductions are mitigated by expectations of ongoing cost controls, so GS
revised fiscal 2002 to $0.46 from $0.48. This compares to $0.44 last year.

While GS said Oracle management has been optimistic that business may have
hit bottom last quarter, GS said it had heard differently, particularly with
respect to anecdotes from overseas, which have led the research firm to
conclude that Europe is following the U.S. into the protracted slump. Still,
GS said the issue of how far Oracle will dip is tough to assess with just
stories and no precise data.

“We have little more than anecdotal data for Oracle and more broadly for the
tech sector to triangulate with and much of Oracle’s business this quarter
has not yet closed given the very backend nature of the enterprise software
business,” GS said.

As for the applications side of things, GS said a pending AT&T contract and
several other large deals could help.

GS said Siebel isn’t faring much better. The business
software firm’s management persists in issuing cautious assessments about
business, but the numbers still appear to GS to be a little too optimistic.
GS reduced EPS estimates for 2001 to $0.56 from $0.60 previously, and for
2002 to $0.60 from $0.70.

And while Oracle looks as though it has some sweet applications deals lined
up, GS isn’t sure Siebel will be able to close out the larger customer
relationship management (CRM) pacts.

“We have favored Siebel given the CIO spending surveys that show a high
priority for CRM applications, but the larger deals are increasingly
difficult to close and we are not sure that estimates adequately reflect the
likely magnitude of spending constraints,” the report said.

While Oracle and Siebel are just two examples, they are bellwethers. GS said
the industry can expect others to go through similar situations. Simply, the
tech sector has not hit rock bottom.

“We believe estimates for the software and broader tech sector are likely to
come down further, but in positioning portfolios for next year (which is
likely a recovery year but one in which the real growth will be skewed to
the second half) we would continue to focus on the larger and higher quality
names and likely have to weather another quarter of estimate reductions,
with the larger revisions to 2002,” GS said.

Lastly, GS said it sees growth to pick up in the latter half of 2002, which
should be a recovery year.

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