Software Sector Gets a Nod of Approval - TheStreet

Software stocks received a boost Thursday after two analysts offered glimmers of hope for the battered sector.

But don't get too optimistic yet. Wall Street is still bracing for the possibility of software bellwether


(ORCL) - Get Report

warning on Monday.

The first good news Thursday came from SoundView analyst Jim Mendelson, who issued a note titled "Enterprise Applications: Some Signs of Life." Mendelson said that the software business remains challenging, but that there have been "definite signs of improvement in May."

In a ranking of enterprise application stocks, Mendelson placed



at the top of his list, followed by Oracle,


(SAP) - Get Report


Siebel Systems


. Mendelson has strong buy ratings on PeopleSoft and Oracle, and hold ratings on SAP and Siebel.

Shares of PeopleSoft soared $1.65, or 8.5%, to close at $21.04, and rose to $21.28 in after-hours trading. Siebel followed with a gain of $1.06, or 5.8%, to close at $19.46. Siebel fell to $19.43 in after-hours trading. SAP gained only 40 cents, or 1.5%, to close at $26.50, and remained flat in after-hours trading. And Oracle barely budged, gaining 2 cents, or 0.2%, to close at $8.42. Shares of Oracle rose to $8.46 in after-hours trading.

Shares of


(VRTS) - Get Report

also rose Thursday after A.G. Edwards reiterated its bullish take on the storage software maker following a conference call with its CFO. Shares of Veritas rose $2.06, or 9.8%, to close at $22.99. Veritas fell a penny in after-hours trading.

The long-awaited positive news came as a departure from previous dismal forecasts for the software sector, which many predict will not begin to recover from the economic downturn until

next year. Last quarter was punctuated by a seemingly endless series of disappointing warnings, started by Oracle, whose quarter ends one month earlier than those of most other software companies.

Investors may get a signal of how the current quarter is going on Monday, which would likely be the day that Oracle would warn if it is going to miss its all-important fourth quarter, which ends Friday. In past quarters the company has warned of missing estimates on the first business day after its quarter close.

Some Wall Street analysts initially held out hope that the software bellwether wouldn't warn because a week ago it

announced the date -- June 18 -- that it planned to report earnings.

But Oracle quickly quashed any hopes that the announcement guaranteed good news. Company spokeswoman Jennifer Glass said the company has a policy of announcing its earnings date five business days before the close of the quarter. Although it did not appear to be widely known on Wall Street, Glass said that policy has been in place since the beginning of the fiscal year.

That, of course, leaves open the possibility the company may warn. And if that happens, it's likely to be viewed as a signal of how the rest of the sector is faring.

In his note, Mendelson said he believes his $920 million estimate for license revenue for the fourth quarter, up 19% sequentially, is sufficiently conservative and that Oracle is unlikely to miss it.

However, in its last earnings call, the company's guidance was for license revenue to decline 25% to 30% from a year ago, which would bring it to between $1.16 billion and $1.24 billion. Oracle's fourth-quarter is typically its strongest, but that guidance would still be a significant jump from the $789.6 million in license revenue reported by the company in the third quarter.

On PeopleSoft, Mendelson said the software maker's quarter appears to be on track, though there are no signs of a major improvement in close rates. He said PeopleSoft continues to do well with existing customers but is struggling to develop new ones.

Mendelson said SAP continues to perform well as it benefits from its large customer base and strong relationships with third-party firms. But he said optimistic guidance -- 15% revenue growth for the full year -- is still an issue for the company.

Siebel is beginning to cave on pricing, Mendelson said. The customer-relationship management software maker has a comparatively large amount of shelfware in the market but still offers advantages over the competition, including industry-specific specialization.

In the software storage market, meanwhile, A.G. Edwards analyst Shebly Seyrafi said he continues to be very bullish on Veritas. After hosting a storage conference call with Veritas CFO Kenneth Lonchar on Thursday, Seyrafi issued a note saying that the second quarter will be the trough of the company's cycle, followed by a third quarter that benefits from strong OEM sales, larger deals and rolling deferred revenue into revenue.

Seyrafi has a strong buy rating on Veritas, and his firm hasn't done any banking business with the company.

Seyrafi said rumors of excess employee turnover, increased competition from

Sun Microsystems

(SUNW) - Get Report

and weak server sales have hurt shares of Veritas in the past few weeks. But he said that has created an attractive valuation, with the stock trading at 30 times the consensus earnings estimate for 2003.