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Mercury reduces annual growth forecast by 7%, fires 8% of staff

But meets analysts quarterly forecasts, with revenues of $16.2 million

Investors who sent

Mercury Interactive

(Nasdaq:MERQ) plummeting 11.4% today, apparently knew what they were doing. In company board meeting the cat was let out of the bag - the sector's fate has finally caught up with the firm. Although Mercury managed to meet its Q2 2001 expectations, the forecast for the entire year has been downgraded, and the threat of dismissal hangs over the heads of at least 8% of the firm's staff.

Mercury reported revenues of $96 million for the quarter, representing a 38% growth from the same quarter last year and a 6% growth from the last quarter. That's an impressive achievement at a time when budgets for info systems purchases have been cut severely. Analysts had forecast revenues of $95.6 million.

On the bottom line, the software performance and testing company reported a net profit of $16.2 million or a profit of 18 cents per share, deducting one-time expenses. The figures are in line with analysts' forecasts.

In the comparable quarter last year Mercury's profit was 14 cents per share, and in the previous quarter it was 18 cents. Counting the outstanding expense on the

Freshwater Software

acquisition, its profit came to $9.3 million, or 10 cents per share.

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"We are playing defensively now," said Mercury Chairman, President and CEO Amnon Landan, and explained this had not been an easy quarter for the company, as it felt the sharp sting of its clients' budget cuts. Though the company still has fairly high expectations for the third quarter, much uncertainty exists regarding the rest of the year.

Mercury has reduced its annual growth forecast by 7% to between 27%-32% for 2001. Since revenues last year were $307 million, the annual forecast for this year is $400 million.

This matches the forecast of

JP Morgan

investment bank, which had predicted that the firm would meet its quarterly expectations but report a cutback of 5%-10% in its annual expenses.

Merrill Lynch

analysts must be eating their hats now, having said earlier that expecting a forecast downgrade is based on unsubstantiated speculation.

Another forced to take back his words is Landan, who in a company convention two months ago said there would be no dismissals for the time being, though he hasn't completely ruled out that possibility. Today it became a reality when 8% of the company's employees, about 130 people, were shown the door as part of the firm's cost cutting efforts.

Mercury plans to implement other such measures. No salaries will be increased, senior executives pay will take a 15% cut, and certain less strategic activities will be downsized.