The software sector declined Friday after behemoth
trimmed full-year guidance slightly, but a few bright stars still stood out following their own upbeat earnings reports a day earlier.
The Goldman Sachs Software Index fell 1.7% to 95.86 in recent trading. Microsoft, one of the most heavily traded U.S. stocks Friday, declined $1.43, or 2.8%, to $49.68 in heavy trading.
was down $1.40, or 11.6%, in advance of its earnings report release after market's close Monday.
reached a new intraday three-year low of $9.20 before going back up to $9.35, still down 27 cents, or 2.8%, from Thursday's close.
shares were down 31 cents, or 3%, to $9.74.
But there were also software gainers.
shares rose $1.44, or 9.9%, to $15.95 in heavy trading a day after the company reported second-quarter results that came in line with guidance but beat estimates. Other gainers reporting relatively strong results Thursday included
Internet Security Systems
, up 99 cents, or 8%, to $13.42 and
, up $1.15, or 4.9%, to $24.75.
Brian Salerno, a senior portfolio manager at Birmingham, Mich.-based Munder Capital, which owns 1 million Microsoft shares, characterized the market's reaction to the Microsoft report as "sleepy," much like the company's fourth-quarter earnings announcement.
"That's the way Microsoft is right now. There are not a lot of surprises," Salerno said. "It's just doing what the market is doing today: It's down 2% like the Nasdaq," Salerno continued. "That's the way we view Microsoft for the near term: It's going to trade with the market."
But while other software companies are reporting year-over-year declines in revenue, on Thursday Microsoft
reported a 10% increase in fourth-quarter revenue from a year earlier and net income excluding a one-time impairment charge that beat Wall Street estimates by a penny.
Those results, however, were tempered by slightly reduced guidance for the full year. Microsoft projected revenue to range from $31.4 billion to $32 billion and earnings to range from $1.85 to $1.91 a share. Previously, Microsoft predicted fiscal-year 2003 revenue will range from $31.5 billion to $32.4 billion and earnings from $1.89 to $1.92 cents a share.
But Salerno said he wasn't concerned about that change in guidance, noting that the midpoint of the ranges did not change dramatically. "They're pretty much coming through like they said they would," he said.
A Real Soft Spot
The market's reaction to PeopleSoft's
surprise results, meanwhile, was anything but sleepy. "The PeopleSoft quarter was pretty remarkable. I don't think I've ever seen a quarter where a software company's metrics were so similar to the quarter before," said Wedbush Morgan Securities analyst Nathan Schneiderman, who has a hold rating on PeopleSoft. "It just showed ... the business is pretty stable with the last quarter." His firm hasn't done any banking with PeopleSoft.
The results were particularly surprising given Siebel's
stunning miss a day earlier.
Credit Suisse First Boston analyst Brent Thill, who has a buy rating on PeopleSoft, estimated that supply-chain and customer-relationship management products drove about 50% of PeopleSoft's transactions. Supply-chain is the bread-and-butter of
, which reported disappointing
results, while CRM is Siebel's core product. PeopleSoft said six of its 80 CRM wins came at Siebel's expense. (Thill's firm hasn't done any banking with PeopleSoft.)
One anomaly in PeopleSoft's results that stood out was an increase in PeopleSoft's 7-digit deals to 30 from 25 the previous quarter and average transaction size to $650,000 from $600,000 -- contrary to the experience of most other software makers, Schneiderman noted.
On the downside, that could mean PeopleSoft is going to have a tougher time closing those kinds of deals in the seasonably weak third quarter, Schneiderman said.
Indeed, another analyst, Brendan Barnicle of Pacific Crest Securities, said he is skeptical of PeopleSoft's guidance for the third quarter, when business is usually weak in Europe because of summer holidays.
Barnicle said PeopleSoft told him that European sales, which account for 20% of license revenue, usually decline 50% in the third quarter. Assuming sales everywhere else remain constant from the second quarter -- which is unlikely -- that would lead to a decline of license sales to $118.7 million. But PeopleSoft projected license revenue would fall to $120 million to $130 million -- down 1.4% to 9% sequentially.
PeopleSoft's numbers also continued to reflect some fall-out from its controversial
Momentum Business Applications
. PeopleSoft excluded an $8.7 million charge for in-process research and development related to the acquisition, bringing its pro forma earnings to 14 cents a share, a penny above the consensus estimate. But those earnings would fall to 11 cents a share if the charge were included, something that Barnicle suggested would have been clearer accounting.
"Technically it's OK, but in terms of scrutinizing accounting it's a little sketchy," Barnicle said of the exclusion. The sketchiness arises from the fact that PeopleSoft previously controlled Momentum and all of the research conducted by Momentum was exclusively for PeopleSoft. So had PeopleSoft spun off Momentum and conducted R&D in-house, PeopleSoft would have accounted for it as an expense all along, said Barnicle, who has a neutral rating on PeopleSoft. His firm hasn't done any banking with the company.
Meanwhile, Mercury Interactive, which makes testing and performance software, shot up after the company reported Thursday that net income doubled in the second quarter from a year ago to $18 million. Mercury also reiterated full-year guidance, which other companies have been taking down or declining to provide.
Internet Security Systems also enjoyed a boost after it posted a second-quarter profit, meeting Wall Street estimates, on a 16% increase in revenue from a year ago. The intrusion detection software maker reduced its full-year earnings and revenue projections.