"Shows improvement" is a comment that looks good on your kid's report card -- but it doesn't cut much muster on Wall Street.

Consider the rough treatment that Salesforce.com ( CRM - Get Report) got this week. The San Francisco-based software company quadrupled its net income, boosted revenue by 77% and added 41,000 new subscribers in the second quarter. Sound good? Well, it wasn't good enough.

Wall Street's famous whisper numbers were much higher, including a target of 50,000 new subscribers in the quarter, and investors knocked 9% off the stock.

Similarly shares of InterVideo ( IVII), a hot, small-cap provider of DVD and video-editing software, were pummeled after the company reported pro forma earnings that merely doubled and revenue that grew by only 70%. The result: a 21% hit.

Even more egregious was the drubbing meted out to eBay ( EBAY - Get Report) in April when it reported that revenue grew by 36% and EPS jumped by 4 cents a share.

"That kind of reaction is just ridiculous," says Jim Fisher, a portfolio manager at Univest Wealth Management & Trust. "Expectations have become a real problem," he says.

To be sure, investors had some legitimate issues with eBay's performance, though the stock made a great recovery in July, and the others.

But concern over the price of oil, a still-tepid information technology spending environment, and the lack of killer products -- especially in software -- means that it may be time to lower expectations a bit.

"I don't see a major catalyst driving technology stocks right now," says Ola Folarin, a software analyst with PNC Advisors, which manages some $22 billion in assets. "I think Q3 will be pretty much an in-line quarter."

Last year, for example, security companies such as Symantec ( SYMC - Get Report) and McAfee boomed, as a wave of widely publicized virus and hacker attacks scared businesses and consumers into spending more on antivirus software, firewalls and related products. The threats are still there, of course, but the hysteria has passed.

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Fisher sees a number of positive macro factors -- he expects GDP growth of 4% by the end of the year -- but says the market is troubled by worries over oil and a lingering distrust of technology stocks. "We're still recovering from the end of the bubble."

Fisher figures the year will end on a positive note but it will likely be a stock-pickers' market. Falorin anticipates the same and warns that smaller technology companies will continue to suffer as enterprises trim their lists of vendors.

The ranks of security software vendors shrank by at least two this week, and news that Google ( GOOG - Get Report) might use its $4 billion stock offering to make a major acquisition was widely discussed.

Symantec said it plans to purchase Sygate Technologies, a privately held vendor ofendpoint security and network access control products, for about $175 million in cash. The small acquisition won't have much of a financial impact, but it poses a direct competitive threat to Check Point Software Technologies ( CHKP - Get Report) says Merrill Lynch analyst Edward Maguire.

"The new competitive landscape could also pressure McAfee to either accelerate internal development or look closely at acquiring other leading private vendors such as InfoExpress, Stonesoft, Norman or EndForce," said Maguire in a note to clients, and whose firm is seeking investment banking business with Symantec.

And Secure Computing moved to take out a competitor, announcing Friday its intention to acquire CyberGuard in a stock deal valued at roughly $270 million.

  • With everyone's attention focused on small electronic gadgets, its easy to forget how important refrigerator-size mainframe computers are to the technology industry.

    IBM (IBM - Get Report), which just released its new Z9 line of mainframes, rang up $5.2 billion in big iron sales last year, according to longtime Big Blue watcher Bob Djurdjevic of Annex Research. (IBM does not break out sales by product.)

    And industrywide sales of mainframe-related software were $40 billion to $48 billion in 2004, a sizable chunk of the $160 billion in enterprise software sales, says Joanne Correia, a vice president of market research company Gartner.

    The Z9 launch prompted Piper Jaffray analyst David Rudow to issue a note this week, telling clients that the new machines, which have enhanced security capabilities, are likely to push software sales for vendors BMC (BMC) and Compuware (CPWR).

    Rudow doesn't cover Computer Associates (CA), but the Long Island, N.Y.-based company is another likely beneficiary of IBM's move. Mainframe software accounts for roughly 50% of CA's revenue, which totaled $3.5 million in the last fiscal year.