Updated from 1:20 p.m. EDT

For software makers, the historically strong second quarter is likely to come in even lower than the disappointing first quarter, and it looks like the whole of 2002 will be a bust for the embattled sector, new research indicates.

"Our recent IT surveys confirm that the second quarter is shaping up to be another very challenging quarter for tech companies," said Rick Sherlund, Goldman Sachs' software analyst, in a research note. "Also, budgets for the rest of 2002 are not likely to change much from current levels."

As a result, Goldman made further reductions to its 2002 and 2003 estimates for 26 software firms. "Survey results and anecdotal data points provide a composite picture of ongoing IT spending constraints and a likely general slower pace of recovery for the industry going through 2003," Sherlund said.

The investment bank cut estimates for application vendors and business analytics firms

Ariba

(ARBA)

,

Autonomy

(AUTN)

,

Business Objects

(BOBJ)

,

Dassault

(DASTY)

,

Documentum

(DCTM)

,

FreeMarkets

(FMKT)

,

HNC Software

(HNCS)

,

Hyperion Solutions

(HYSL)

,

Informatica

(INFA)

,

i2 Technologies

(ITWO)

,

Manugistics

(MANU) - Get Report

,

MatrixOne

(MONE)

,

PeopleSoft

(PSFT)

,

Sage Group

,

SAP

(SAP) - Get Report

,

Siebel Systems

(SEBL)

, and

Vignette

(VIGN)

.

Goldman also pared back forecasts for security software firms

Check Point

(CHKP) - Get Report

,

Entrust

(ENTU)

,

Internet Security Systems

(ISSX)

,

Symantec

(SYMC) - Get Report

and

Verisign

(VRSN) - Get Report

.

And it trimmed its 2002 and 2003 estimates for infrastructure software firms

Quest Software

(QSFT)

,

Rational Software

(RATL)

,

Software A.G.

, and

webMethods

(WEBM)

.

Those saved from the knife included

Oracle

(ORCL) - Get Report

and

Tibco Software

(TIBX)

because their numbers already have been reduced;

BEA Systems

(BEAS)

, which recently reported earnings; and

Microsoft

(MSFT) - Get Report

, which Sherlund said he visited last week and appears to be "OK."

Wednesday's reductions follow a joint poll by Goldman Sachs and Gartner of almost 400 executives and IT professionals between April 5 and May 14. At the time, two-thirds of them said normal technology spending was unlikely to resume until 2003 or beyond.

"There has likely been some under spending of IT budgets that will likely persist through the second and third quarter, with the potential for some budget flush in the fourth quarter," Sherlund said.

Other analysts have been predicting that the second quarter, usually software's strongest quarter after the fourth quarter, would be sequentially flat, followed by a seasonably weak third quarter and sequential growth in the fourth quarter fueled by year-end purchasing.

"I guess the only thing that surprised me is that it's taken this long for people to start throwing in the towel," said Allan House, a technology analyst at Pittsburgh-based Federated Investors, who has been underweight software. "Everybody has sort of been mulling over the idea that times were tough ...

but people were still hoping for something to come about."

"You just can't hope," House concluded.

The problem, though, is that as estimates finally come down, stocks are not following suit as quickly and multiples are rising, House noted. The only stocks he's found cheap enough to pick up recently are Oracle at $8 and Microsoft at $50.

Others like Siebel and Symantec are still trading at relatively high multiples, he said. Siebel is currently trading at 42 times trailing earnings, compared to a low of 19 in 2001 and high of 376 in 2000. Symantec is trading at 26 times trailing earnings, compared a low of 6 in 1998 and a high of 338 in 1995.

The largest estimate reduction by Goldman hit enterprise application software makers. Sherlund reduced his 2002 revenue estimate for Siebel by 5.8% to $1.9 billion and 2003's revenue estimate by 8.1% to $2.1 billion. "We believe the company has a particularly strong pipeline but the ability to close deals in this challenging environment may imply that Street estimates are simply too aggressive for the quarter and going forward," Sherlund said in his note.

Sherlund reduced Siebel earnings estimates for 2002 to 45 cents a share from 50 cents and 2003 earnings to 56 cents a share from 65 cents.

His estimates for SAP's 2002 revenue shrunk by 3.2% to $7.2 billion while SAP's 2003 revenue estimates shrunk 4.8% to $8.2 billion. Sherlund reduced revenue estimates for PeopleSoft by just over 3% in each of 2002 and 2003.

Goldman Sachs only modestly adjusted its estimates for business analytics companies such as Business Objects, suggesting that the sector's growth should outpace that of other software areas. Another bright spot will be security software, Goldman Sachs said, predicting it will be a "disproportionate benefactor of a return to normal IT spending levels."

Based on their poll, Goldman Sachs and Gartner said the top beneficiaries of current spending trends include BEA Systems, Microsoft and

Veritas

(VRTS) - Get Report

among enterprise software makers and Internet Security Systems among security software makers. Oracle remains the top database choice for large enterprises, the survey concluded.

The Goldman Sachs software index fell 2.3% Tuesday. Among the largest decliners: Shares of Siebel Systems were down $1.28, or 6.1%, at $19.70 in recent trading. WebMethods fell 90 cents, or 7.5%, to $11.10. Check Point Software dropped $1.50, or 8%, to $17.25.

Staff reporter Diane Hess contributed to this report