In a typical earnings season, investors tend to see the glass as half-empty during preannouncements and see it as half-full during the actual reporting period.

But this may not be a typical earnings season for software companies, and the glass could very well remain half-empty. That's because current estimates for the third quarter still may be too high, positioning the market for more disappointment when companies offer what is expected to be guarded guidance for the third quarter and beyond. (For a look at a similar dynamic afflicting semiconductor stocks,

click here .)

"I don't think we can necessarily count on a glass half-full during the reporting period, as we usually get," said Chuck Hill, director of research at Thomson Financial/First Call. "The danger this time is, will we see the glass half-full given the environment with all the scandal stuff, and there is a good chance that the comments about the outlook going forward may be fairly negative."

Hill noted that current estimates on software stocks forecast an 8% year-over-year increase in earnings in the third quarter and a 6% year-over-year increase in the fourth quarter. "I wouldn't be surprised to see the 8% come down," said Hill, who says third-quarter software earnings may have growth in only the low single-digit percentages.

A growing chorus of software analysts has been warning to expect the third quarter to be sequentially flat to down. But that chorus may not be large enough. Thomson Financial/First Call consensus estimates on 18 of 20 software stocks still are forecasting a sequential increase in earnings and/or revenue in the calendar-year third quarter.

That includes stocks in a variety of software areas, such as

Siebel Systems


in customer relationship management,

i2 technologies


in supply-chain management,

Vitria Technology

in integration and

RSA Security


in security.

In his note Tuesday initiating coverage on Siebel, Bear Stearns analyst Chris Kwak suggested that overly optimistic estimates on the company may extend beyond merely the third quarter to as far as 2003 numbers. In his note, Kwak echoed a growing sentiment that the IT recovery will not arrive in 2003, as previously thought, but rather in 2004.

Kwak estimated Siebel will earn 6 cents a share on $413.1 million in revenue in the third quarter, compared with a reduced consensus estimate of 10 cents in earnings on $444.1 million in revenue.

Kwak projected Siebel will earn 34 cents a share on $1.76 billion in revenue in 2002 and 37 cents a share on $1.8 billion in 2003. That compares with the consensus estimate of 43 cents a share on $1.85 billion in revenue in 2002 and 51 cents a share on $2.05 billion

"Our estimates reflect our belief that IT spending for enterprise application software may not improve in the foreseeable future (read: two years)," wrote Kwak, whose firm hasn't done any banking business with Siebel. "We believe the largest purchases of enterprise applications software (telecom, technology and financial services) are facing challenges that may persist for years."

Kwak also cited Siebel's dependence on new customers for his low estimates. Kwak argued that Siebel does not deserve its current valuation premium of 39 times his 2003 earnings estimate. Using Siebel's historic price-to-earnings-to-growth multiple, he set a six- to eight-month price target of $9 -- about 28% off Tuesday's closing price of $12.49. A trough-multiple analysis suggests downside to $8, Kwak said.

Wedbush Morgan Securities analyst Nathan Schneiderman, whose third-quarter estimates on Siebel also fall below the consensus, first encountered the notion that IT spending won't recover until 2004 at an AMR Research conference in May. When asked who thought an IT recovery would arrive in 2004, about half of those in the audience of more than 500 attendees raised their hands -- about the same number who raised their hands for 2003, Schneiderman recalled.

"The mood ... was decidedly bleak, at times bordering on depressing," Schneiderman wrote in a note after the conference. "A lot of us looked at that and said we really need to start rethinking our 2003 numbers and paring back our assumptions," he added Tuesday. Schneiderman has a buy rating on Siebel, and his firm hasn't done any banking business with the company.

Of course, the companies that still haven't warned, such as Siebel,





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, could be at a larger risk when they announce results.

"Even if they

software companies make their numbers this quarter, it will have been a struggle," said Bill Schaff, portfolio manager of Berger Information Technology.

And the market isn't paying as much attention to fundamentals these days anyway, Schaff added. "I have no doubt sentiment is going to drive it over the next few weeks to a month," he said. "This is the way tech becomes devalued: People get disgusted and don't want to own it. We're almost there."

The question is whether that's a view of the glass as half-empty or half-full.