Updated from 6:06 p.m. EDT

Mercury Interactive


disappointed investors with lighter-than-expected guidance, after the market closed Wednesday.

Shares were off $1.98, or 5.9%, to $31.78 in after-hours trading. Mercury gained 26 cents, or less than 1%, to $33.76 a share in regular trading.

In reporting results for the first quarter, the company said revenue was $110.4 million, up 22% from $90.5 million in the same quarter a year ago, but nearly 3% below Wall Street's expectation of $112.29 million.

Net income for the Sunnyvale, Calif., company was $18.1 million, or 20 cents a share, compared to a profit of 17 cents per diluted share a year ago, according to generally accepted accounting procedures. The company's profit equaled Street expectations.

License fees were essentially flat at $44.78 million, but subscription fees jumped nearly 71%, to $19.27 million from $11.27 million and significantly, deferred revenue increased by 13.7% to $181.2 million.

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Mercury Interactive provides testing, optimization and monitoring services for enterprise software.

Chief Operating Officer Ken Klein said the company, like others in the enterprise software space, is moving from a traditional licensing model to a subscription model, which has the effect of pushing revenue and earnings out. "We put the pedal to the metal on the subscription model during the first quarter," he said in an interview.

About 56%, or $12 million, of the increase in deferred revenue came from subscriptions. "If all of that had been booked (as license revenue) it would have added 10 cents a share to earnings," Klein said.

Looking forward, the company expects revenue in the second-quarter to range from $110 million to $117 million; analysts polled by Thomson Financial/First Call were expecting $117.6 million. Earnings, the company said, will range from 16 cents to 22 cents a share, also on the light side of analyst projections of a 22-cent profit.

For the full year ending December 31, Mercury told investors to expect revenue to range from $460 million to $500 million, compared to Street expectations of $481 million. Earnings for the year will range from 82 cents to 97 cents a share, while the Street projection -- 91 cents a share -- is slightly above the mid-point.

Trip Chowdhry, who follows MERQ for Midwest Research, said that moving to a subscription model makes sense, "it gives companies more visibility into revenue, but it doesn't justify the low guidance.

"There's complete apathy by customers toward packaged applications," he said in an interview. "CRM and ERP applications are not being deployed because they are too expensive and the ROI is dubious."

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