U.S. software companies face European demand | VailDaily.com

U.S. software companies face European demand

NEW YORK- Unfriendly foreign-exchange rates and weak European markets could have combined to dampen the effect of the usual end-of-year budget flush for U.S. software companies, resulting in solid, if unspectacular, fourth-quarter earnings.Technology buyers typically spend large chunks of their budgets as the year winds to a close, making the fourth quarter the seasonally strongest period for software makers. While the trend appears intact, the dollar’s rise against the euro, which decreases what U.S. software companies get for their products in Europe, will likely amplify the effect of a weak European market.”We expect the December quarter to come in largely in line with expectations supported by the strength of the seasonal budget flush,” said Bear Stearns analyst John DiFucci in a note. But foreign-exchange rates and weak demand in Europe “could potentially dampen the overall growth rate of software companies … and could be issues that will likely weigh on software companies’ results for the next couple of quarters.”The trend was evident in Redwood City, Calif.-based Oracle Corp. earnings for its fiscal second quarter (ended Nov. 30). In the period, Oracle’s software license revenue in the Europe, Middle East and Africa, or EMEA, region were flat on a constant-currency basis, compared with a 12 percent rise overall. When figuring in exchange-rate moves, license revenue in EMEA declined 7 percent, dragging down overall license sales growth to 9 percent.But these factors have largely been taken into account. Goldman Sachs analyst Sarah Friar notes that estimates are “fairly conservative,” which “should limit the downside risks in the stocks.”Although there is some optimism this year, analysts expect software vendors to be conservative amid economic uncertainty, which could damp technology spending.”Although we believe sales pipelines are generally in good shape heading into 2006, current economic concerns … may cause management to remain conservative heading into the new year,” said Kirk Materne, an analyst with Banc of America Securities.Software giant Redmond, Wash.-based Microsoft Corp. will report earnings for the quarter that ended in December, amid concerns about the initial pace of Xbox 360 shipments. Goldman Sachs estimates that lower-than-expected shipments will result in a revenue shortfall of about $200 million. But that should actually help earnings, since the gaming console is unprofitable for Microsoft.In a note, Goldman Sachs analyst Rick Sherlund wrote that pent-up demand should drive Xbox revenue for the next two quarters. Goldman Sachs has an investment-banking relationship with Microsoft.While demand for security software remains robust, vendors in the sector are likely to continue to face pricing pressure and concerns about Microsoft’s entrance into the market.”We believe 2006 could prove to be a pivotal year in (computer) security, especially with Microsoft rearing its head higher,” said Bear Stearns analyst Shaul Eyal in a note.Meanwhile, consolidation and corporate scandals are thinning the numbers in the sector. Shareholders in San Mateo, Calif.-based Siebel Systems Inc. will vote Jan. 31 on a takeover by Oracle, while Mountain View, Calif.-based Mercury Interactive Corp. was delisted last week as it continues to grapple with a stock-option scandal that has delayed filings of second- and third-quarter earnings reports.Despite its troubles, Mercury has seen a limited effect on its performance, announcing that it expects a rise in fourth-quarter revenue of 22 percent to 24 percent, just slightly below a July forecast of 23 percent to 27 percent. It also went on the offensive, agreeing to acquire Burlington, Mass.-based Systinet Corp. for $105 million on Monday.For its part, Siebel’s preliminary figures soundly beat Wall Street expectations. The maker of customer relationship management software expects to post a 20 percent rise in sales to $469 million – a year-on-year decline was expected. The performance is likely more the result of sales people vigorously closing deals ahead of the merger with Oracle, rather than a sign of stronger-than-expected spending. Company/Thomson Financial Estimate/Net Year-Ago/Reporting Date Citrix Systems Inc. 31c 30c Jan. 18Siebel 8c 10c Wk of Jan. 23Computer Associates International Inc. 24c 6c Jan. 24Microsoft 33c 32c Jan. 26Check Point Software Technologies Ltd. 35c 30c Jan. 30Symantec Corp. 25c 22c Jan. 31BMC Software Inc. 27c 16c Feb. 7McAfee Inc. 38c 23c Feb. 9 The Thomson Financial estimate and year-ago net may not be comparable due to one-time items and other adjustments.Vail, Colorado

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