William Lyon Homes ( WLS) reported a 10% increase in fourth-quarter net income, but the builder said new-home orders have been slowing of late. The company's 2006 guidance, which calls for a drop in revenue and profit, fell significantly short of analyst estimates. For the fourth quarter, net income increased to $88 million, or $10.11 a share, from $80.2 million, or $8.58 a share, a year earlier. The results handily beat Thomson First Call's mean analyst estimate of $9.18 a share, partly because of strong prices of the homes in the company's backlog. However, William Lyon's guidance shows that the company is moving from a growth phase to a dull phase, as business is expected to decline this year. The Newport Beach, Calif.-based builder reported in early January that new orders dropped 7% in the fourth quarter in its California, Arizona and Nevada markets. On Wednesday, William Lyon said this "softening" has continued into 2006, with new orders declining 31% in the first eight weeks of this year from the year-earlier period. This softening in the company's markets is continuing into 2006 as the company's orders have declined for the first eight weeks of 2006 by 31% over the comparable period in 2005, the company said. Not only are orders slowing, cancellation rates increased to 26% so far this year, compared with 12% year earlier. The company said it is also seeing increases in its standing and unsold completed inventory in 2006. In explaining the slowdown, William Lyon said competitors have been putting pressure on prices by initiating "aggressive incentive and discounting programs." As a result of the slowing market, the company now expects $1.65 billion in revenue for 2006, on the basis of 3,100 home deliveries. Analysts are currently expecting $2.03 billion. William Lyon recorded revenue of $1.86 billion for 2005. The company said it has lowered its expectations for additional price appreciation in certain markets and has factored in additional incentives to move product. These incentives will cut its gross margin, which is targeted to be 22% this year, compared with 23.5% in 2005. William Lyon projects 2006 EPS of $14 to $15 a share, below analysts' target of $20. The company reported earnings per share of $21.98 for 2005. The stock fell $2.58, or 3%, to $82.52 Wednesday.