Storage and Security Software Spared the Worst of the Selloff

Updated from 6:38 p.m. EDT

Business software makers sold off more dramatically Monday than firms that make back-up and data recovery systems, and security software firms rallied during the first day of stock trading since terrorists attacked the World Trade Center and the Pentagon Sept. 11.

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Pure-play applications software makers, such as Siebel Systems(SEBL Quote), PeopleSoft(PSFT Quote) and i2 Technologies(ITWO Quote)fell sharply as analysts said there will be less demand for business-enhancing software in the months to come, because firms will concentrate on the basics of making sure their information systems are secure.

"Applications software is more of a longer term purchase for a company," says Tom Berquist, an analyst with Goldman Sachs, which cut earnings and revenue projections for several software companies Monday. "At a time like this when there are concerns over the infrastructure, they'll spend on back-up and recovery type things, not applications."

Software applications are systems that help firms run more smoothly by automating how they do their business. For instance, a financial software application makes it easier for a firm to keep its books in order, and human resources applications help companies better manage their employees.

While those processes are always important, in the wake of last week's terror, priorities have changed. The market, always a prism into how the world collectively views events, was reflecting as much.

Shares of i2 Technologies, which makes software applications that help manufacturers build products more efficiently, finished down $1.34, or 23.5% at $4.36. Shares of Siebel and PeopleSoft both traded down by about 14%.

But Veritas Software(VRTS Quote), which makes software to ensure companies always have access to their data systems, was only off 85 cents, or 3.5%, at $23.17. Oracle(ORCL Quote), which makes applications but has a much larger business in database software, was off 45 cents, or just 3.9%, at $11.01. It reported fiscal first earnings that were better than expected last Thursday, and hosted a conference call on the results Monday.

"Clearly, the priority hierarchy will shift to storage, security and data recovery in the near term," says Brent Thill, a software analyst at Credit Suisse First Boston. "You look at a company like Veritas, and it's only off 3% while i2 Technologies is down by more than 22%. That's because people realize that companies will be tightening their belts in one area, and spending in another."

Analysts explained that software companies will be particularly hard hit by the aftermath of the attacks, which brought American business to a standstill last week. That's because software companies do so much of their business during the last weeks of their quarters. The calendar third quarter ends Sept. 30.

"Historically during the [third] quarter, 60% to 80% of deals are closed during the month of September, and over half of the quarter's revenue is closed during the last two weeks of September," wrote Jon Ekoniak, software analyst for U.S. Bancorp Piper Jaffray in an email note to clients. "Software sales representatives indicate that pipeline prospects are not available or altogether not interested in discussing deals for the September quarter. We also note that many software sales representatives are stranded in remote locations given travel restrictions, and are naturally distracted."

That being the case, companies such as Oracle and Manugistics(MANU Quote), which both recently completed August-ending quarters, were viewed as somewhat insulated from the immediate fallout of the attacks. Basically, because their new quarters started in September, they'll have more time to make up for lost business. Manugistics stock was off 87 cents, or 10.9%, at $7.10.

"The fact that [Oracle] reported, and has another three months to make up September probably helped," said Bill Schaff, manager of the (BINVX Quote)Berger Information Technology Fund, which owns Oracle shares. He noted that many software firms, which had already sold off due to economic concerns before the terrorist attacks, were getting extremely cheap during Monday's session.

BEA Systems(BEAS Quote), which makes server software that lets companies run applications software, was off 11.5%, or $1.61, at $12.36. The company said Monday that it had adopted a "poison pill" clause into its corporate structure. Poison pills are designed to make firms less attractive to other companies that might try to take them over when their shares are weak. BEA said in a press release that it wasn't aware of anyone attempting to buy it. But Schaff, who owns BEA Systems shares, said it was a clear sign the firm is concerned about that possibility, and that the selloff today could trigger other buyouts.

"I think they're very fearful they will be bought, and they don't want to be forced to sell the company on the cheap," Scahff said. "i2's another company that's now trading under $5, and it's a great supply-chain company. I think i2, especially, will make a very intriguing product supplement for someone." (Schaff owns i2 shares as well.)

"It wasn't in response to any specific effort at the moment to acquire BEA," said Bill Klein, the company's CFO. "A lot of it had to do with current market conditions. The board felt that given where things are, it was time to put that in place."

An i2 spokesman said the company wasn't aware of any "imminent" possibility of a takeover, but that the company has discussed putting a poison pill clause in place as well.

"We've started to digest the impact on revenue and earnings for the third quarter, the fourth quarter and next year, even," said Bob Austrian, a software analyst at Banc of America Securities. But that's just waging a guess, and it's indeed difficult to know exactly where we'll come out."

That, of course, was just one more difficulty in a week replete with difficult endeavors.