Business Objects Plunges After Guidance Disappoints

Fourth-quarter projections are well under current Street estimates.
Author:
Publish date:

Updated from Nov. 3

Upset by weak fourth-quarter guidance and a slowdown in new license revenue, investors on Thursday hammered

Business Objects

(BOBJ)

.

In recent trading, shares of the French-owned, business intelligence software vendor, were off $4.25 a share, or 16.8% to $21.01, continuing a rout that begin after the company released third-quarter financial results on Wednesday.

With the notable exception of license revenue, which missed expectations by about 5%, the September quarter was roughly in line with estimates. The company's third-quarter revenue results were at the high end of guidance, and a penny above analyst's EPS predictions.

Business Objects earned a third-quarter pro forma profit of $16.7 million, or 19 cents a share on sales of $219.5 million. Analysts polled by Thomson First Call were expecting a profit of 18 cents and revenue of $219 million in the September quarter.

Including items, the company earned a profit of 12 cents a share, down from 17 cents a year ago.

But guidance for the fourth quarter was far off the mark. Saying that customers are "pausing" purchases as they wait for the next release of Business Objects' flagship software, the company told investors to expect pro forma earnings of 14 cents to 20 cents a share on sales ranging from $230 million to $240 million. Analysts had been expecting EPS of 34 cents and revenue of $251 million.

Losing some sales while customers wait for a new release is an old story in the software business, but the magnitude of the miss on guidance was surprisingly large. Moreover, said PiperJaffray analyst Tad Piper "rather than clarifying as the product release gets closer, customer confusion is getting worse," he said.

With several major new releases scheduled for next year, Piper said customer confusion could persist through 2005. (His company does not have a current banking relationship with Business Objects).

The new software will likely be released before the end of the year, but won't make an appreciable fiscal contribution until early next year, the company said.

The company didn't give guidance for license revenue, a measure of new business. But in the third quarter, license revenue was $105.7 million, compared with $58 million a year ago. However, the numbers are not comparable, because the just-completed quarter includes revenue from newly acquired Crystal Decisions while the 2003 quarter did not. On a sequential base, license revenue was off 9.7%, which the company attributed to seasonally weaker sales in quarter. September license revenue was below the informal Wall Street consensus of about $111 million.

" BOBJ continues to struggle and we believe it could get worse before it gets better, therefore we are lowering our rating

to under weight," wrote analyst Patrick Mason of Pacific Growth Equities. " About one year ago we downgraded from Over Weight to Equal Weight when data points were negative around the Crystal acquisition. Since our downgrade, the company has guided below estimates every quarter in FY04." (Mason's company does not have a current investment banking relationship with Business Objects.)

In August, Business Objects said it had received a Wells Notice from the

Securities and Exchange Commission

, indicating that

regulators may file civil charges over the company's disclosure practices. There was no reference to the notice during the earnings call, and a company spokeswoman said later that "there's no update," on the matter.

Shares of Business Objects had been on a roll since early August, gaining 42% and easily outperforming its direct competition as well as the broader technology market.

But it has yet to make up the damage caused by a spate of bad news earlier in the year. The stock is off 27% since the beginning of January (excluding Wednesday's downward moves), while competitor

Cognos

(COGN)

is up 27%, and

Hyperion

(HYSL)

has gained 36%.