PeopleSoft Worries Pummel Software Stocks

Siebel and Microsoft slide in the wake of a warning from a recent star.
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Software stocks tanked Tuesday as

PeopleSoft's

(PSFT)

earnings warning fueled fears that an IT spending rebound remains remote.

The company's steep first-quarter revenue shortfall sent its stock plunging 29% and prompted a broad selloff across an already reeling sector. Observers said the news appeared particularly dire because over the past year, PeopleSoft has been among the few consistent performers in the face of a drastic spending pullback.

Now, other longtime standouts, such as

Siebel Systems

(SEBL)

and even giant

Microsoft

(MSFT) - Get Report

, are coming under fire as investors wonder which shoe will be the next to drop.

"For

PeopleSoft to miss the software number by 20% so late in the quarter, it definitely raises an eyebrow and it definitely raises concern about the software sector," said Eric Upin, an analyst at Robertson Stephens.

Top Line Woes

Pleasanton, Calif.-based PeopleSoft announced late Monday night that it expects to earn 14 cents from recurring operations and post licensing revenue of $130 million to $135 million in the first quarter ended March 31. The earnings guidance is in line with the company's own forecast but a penny below analysts' expectations. The company had previously forecast licensing revenue of $160 million.

Down Again
Three years of PeopleSoft

The announcement followed a warning Monday from customer relationship management software maker

E.piphany

(EPNY)

and disappointing revenue two weeks ago from

Oracle

(ORCL) - Get Report

. Catching hold of the trend, Goldman Sachs and Salomon Smith Barney issued negative notes Tuesday on Microsoft.

PeopleSoft shares fell $10.77, or 28.8%, to $26.60. Siebel dropped $3.03, or 8.9%, to $31.17, and Oracle lost 31 cents, or 2.4%, to $12.53.

SAP

(SAP) - Get Report

slid $2.10, or 5.5%, to $36.20, and E.piphany fell 70 cents, or 9.9%, to $6.36.

Upin said he had been expecting software companies to report numbers in line with expectations without much upward guidance. But now, "we're looking at a shortfall and downward revisions" from other software companies, he said. Upin has a hold rating on PeopleSoft, and his firm hasn't done any banking with the company.

When Oracle reported disappointing revenue, many analysts cast blame on company-specific problems, including growing competition in the database market. But in the wake of PeopleSoft's rainy March, they're bracing for more disappointments in the sector.

"They were the ones that outperformed when the environment was really bad last year," said Brent Thill, an analyst with Credit First Suisse Boston who cut the stock to hold Tuesday. "I think that's why you're seeing the magnitude of the downfall in the stock today." His firm hasn't done any underwriting for the company.

While E.piphany blamed just one deal on its miss Monday, Thill said multiple sales must have been responsible for PeopleSoft's problems. For the company to miss its license revenue target by so much, 25 to 35 deals must have slipped because the company's average sales price is about $750,000, he said.

CIBC World Markets also downgraded PeopleSoft, from buy to hold, and Goldman Sachs downgraded PeopleSoft from its recommend list to market outperform.

Watchtower

Now analysts will be closely watching titans SAP and Siebel Systems, which in the third quarter last year disappointed investors for the first time since going public in 1996. "I don't believe SAP and Siebel are completely insulated from what PeopleSoft saw," said Thill, who has a buy rating on Siebel; his firm has a buy rating on SAP. "We think there is a moderate risk in the second half of the year for Siebel."

He isn't the only one. Goldman Sachs analyst Rick Sherlund issued a note Tuesday reducing Siebel estimates to reflect a slower tech recovery. He said he believes Siebel will likely make its first-quarter estimates of $250 million in license revenue and earnings of 12 cents a share, but he has cut estimates for the rest of the year and 2003. "Business in general was probably tougher than expected in the quarter," he said. Siebel is on his recommend list, and his firm has done banking business with Siebel.

Meanwhile, Microsoft shares were falling $2.23, or 3.7%, to $58.15 after Sherlund cut his 2003 earnings estimate. Sherlund forecast Microsoft would earn $1.95 a share in fiscal 2003. "We believe the IT spending improvement is a bit tardy, lagging behind the broader economy, and will likely cause estimate revisions for tech companies going forward," Sherlund said. Microsoft is on his recommend list; Goldman Sachs has done banking business with Microsoft.

The problem for software stocks, analysts say, continues to be the weak economy. Soft conditions are prompting IT departments to be far more conservative in their spending. In addition, saturation from IT binges in the late '90s and a product lull -- a lack of a new compelling technology -- are to blame, they say.

"The whole industry is going through what we consider a digestion phase," said Thill. "Overall, the last two years it was all-you-can-eat buffet ...

Customers are now digesting past purchases."