Hard Rain on Software Sector

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.

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