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Software Firms Brace for 'Spending Storm'

Even hot technologies such as virtualization and security software are facing a spending crunch.

With yet more clouds gathering over the global economy, software firms are facing a "category 5 spending storm," according to analysts who lowered their estimates on some of the sector's key players Wednesday.

Virtualization pioneer


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and security giant


(SYMC) - Get Symantec Corporation Report

are just two of the big-name vendors sailing into choppy waters, warns Jefferies analyst Katherine Egbert.

VMware, which was the darling of the tech sector when it completed its $1.7 billion IPO just over a year ago, now joins other firms scrambling for a share of the sluggish software market.

"Our September quarter-end checks indicate substantial spending weakness in markets around the world -- we don't expect the headwinds to abate until mid-2009," writes Egbert in a research note. "While domestic and some international government spending seems to be holding up, there are degrees of trepidation in nearly every vertical and geography."

Because software licenses offer a recurring revenue stream, vendors have typically been less vulnerable to spending downturns than their hardware counterparts, although customers are now changing their buying habits.

"Even the normally staid, recession-proof security sector seems to be taking on some water," writes Egbert. "Our checks with over 60

resellers around the world indicate increased caution around spending, with longer sales cycles, delayed purchasing decisions, deal downsizings, and deal delays."

Against this backdrop of uncertainty, the analyst cut her estimates on Symantec, VMware, and

Vasco Data Security


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. Egbert also lowered her Symantec target price from $30 to $28 and cut her Vasco target from $16 to $12.

Shares of Symantec and VMware were recently down 3.27% and 3.04% respectively. Vasco Data Security shares were down 3.57% today.

Citigroup analyst Brent Thill also described a gloomy outlook for the software sector in a note released Wednesday, cutting estimates on 11 of 22 stocks, including Symantec, VMware,


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"Set against a deteriorating global macro backdrop (credit crunch, FX trends, expectations for below-trend PC unit growth in 2009) industry checks are not encouraging," he writes. Thill says his firm's concern is less about third-quarter earnings than on fourth-quarter guidance, the 2009 outlook and a more pronounced slowdown in the first quarter.

More bad news came from a report from JMP Securities, which warned that next year could be the worst for enterprise software spending since 2001.

The firm, which recently surveyed 35 enterprises, revealed that some 74% of respondents expect their spending to be flat or down in 2009.

"The previous low point was our December 2001 survey when 72% expected their spending to be flat or down," writes analyst Patrick Walravens, adding that JMP is reducing its estimates for






















RightNow Technologies



According to Walravens, on-demand software, which is paid for only when customers are using it, is at least faring better than traditionally licensed software."On-demand software seems healthier, but not great," he writes. "Fifty percent of the enterprises surveyed expect their on-demand software spending to be up in 2009, and 50% expect it to be flat or down."