No News Is Good News for FileNet

Analysts see a positive from the company setting its earnings release date.
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Shares of software maker

FileNet

(FILE)

surged Tuesday after the company announced its earnings date, suggesting to some investors that the company won't preannounce disappointing results.

The stock jumped to as high as $23.54 on trading that was more than 5 times average volume. Shares closed up $3.99, or 20.9%, at $23.12.

After the close Monday, FileNet, which preannounced weak second-quarter results three months ago, said it plans to release third-quarter financial results on Oct. 20. In a note upgrading the stock Tuesday, Robert W. Baird & Co. analyst Steven Ashley said the announcement means the content management software maker is "apparently avoiding the pre-release shortfall that had been widely speculated."

"Similar to a year ago, FileNet appears to have followed a 2Q shortfall with as-expected 3Q results," wrote Ashley, who raised his rating to outperform from neutral. "Avoiding a pre-release shortfall in 3Q04 removes a meaningful potential negative from the story." (His firm has done investment banking with FileNet.)

Indeed, Rich Parower, portfolio manager of the

(SHGTX) - Get Report

Seligman Global Technology Fund, said he believed FileNet's earnings date announcement prompted some short-covering, contributing to the stock climb Tuesday. Seligman holds shares of FileNet, which Parower noted has a strong position in what he called the "attractive" content management space.

Short interest in FileNet has been growing leading up to the end of the quarter, probably partly in anticipation of a negative preannouncement. Days to cover short interest, for instance, grew to 4.67 by Sept. 15, from 2.88 days a month earlier and 1.84 days two months earlier, according to

Nasdaq

.

But Standard & Poor's equity analyst Scott Kessler, who maintained his "avoid" rating on FileNet Monday, noted the recent rise comes after the stock was severely beaten down during the third quarter, when it sank from the $30s to high teens. "People weren't expecting much out of them," Kessler said.

Rather than short covering, he believes the newfound bullishness on FileNet may be driven by the earnings date announcement combined with other software news, including stronger-than-expected results from companies who reported results last month, recent upside surprises from

PeopleSoft

(PSFT)

and

Siebel Systems

(SEBL)

, and anticipation of more consolidation in software as

Oracle's

(ORCL) - Get Report

hostile takeover of PeopleSoft looks increasingly likely.

But Kessler argued that "doesn't necessarily change the facts" for FileNet and the

content management space, which he believes is getting more competitive with giants

IBM

(IBM) - Get Report

and Oracle stepping into the field.

In addition, content management vendors did so well last year that they face tough comparisons this year, while demand -- initially expected to be driven by the landmark corporate legislation Sarbanes-Oxley -- is turning out to be less robust this year than previously anticipated, Kessler said. Recent warnings from vendors

Vignette

(VIGN)

and

Mobius Management Systems

(MOBI)

could be symptoms of such trends.

"Companies could say they're picking up share from weaker players, but my sense is if the market was good everyone would tend to do well," Kessler said.

Finally, Kessler argued that third-quarter results are probably the least important for software companies anyway. "Really it's all about the fourth quarter and next year, and I think more challenges lie ahead in those periods," Kessler said. (His firm doesn't do investment banking but may have provided other services to FileNet that Kessler is unaware of.)

Ashley, however, believes software companies in general will post solid fourth-quarter results. He acknowledged investor frustration with FileNet's low-single-digit operating margins, but he said he believes the company's long-term growth prospects remain above average and it can improve its margins through stronger relationships with systems integrations and resellers.