Warnings from a bevy of relatively small software vendors -- plus large-cap

Siebel Systems

(SEBL)

-- have spooked investors who fear that the first quarter is far off track. But chances are those fears are overblown.

Although the quarter is likely to be seasonally slow, there are few indications of widespread trouble. "My

positive attitude won't change until I see larger players preannouncing," says Ola Folarin, a software analyst with PNC Advisors.

So far, that hasn't happened. With the exception of Siebel, the software companies that warned this week have market caps under $1 billion, and in most cases under $600 million. As for

Siebel's wide miss, its CEO, Mike Lawrie, and most of the analysts who follow the company say the wretched quarter was largely the result of poor execution and not an indicator of a sectorwide slowdown.

Consider these indicators, before you decide the quarter is a catastrophe:

Many software companies already have set their announcement dates, an unscientific, but generally reliable indicator, that they are unlikely to preannounce to the downside.

Despite the fuss, warnings from technology companies so far have been somewhat fewer than average, according to First Call, although there have been more warnings than there were in the first quarter of 2004, a notably strong period.

Most software stocks are holding up fairly well this month. The Goldman Sachs Software index is flat, which isn't much worse than the 2% gain of the

Nasdaq

.

However, it's worth noting that seasonal spending patterns in technology have been shifting. "Increasingly, the industry seems to be concentrating IT spending in the fourth quarter, leaving the first two quarters vulnerable to slower deal closure rates," says Goldman Sachs analyst Rick Sherlund.

And larger deal sizes also leave vendors vulnerable to missing quarters; in some cases it takes only a handful of deals that slip for a few months to push license revenue well below forecasts.

Whether customer relationship management software -- which is the bread and butter for Siebel and

Salesforce.com

(CRM) - Get Report

and an important line of business for

SAP

(SAP) - Get Report

and others -- will perform well is unclear. Market researcher Gartner is projecting growth of 6% (in license revenue) this year, and a compound annual growth rate of 8.6% though 2009.

But other analysts are less sure. "We get very mixed messages when we go out and survey buyers," said Sheryl Kingstone, who follows the customer-relationship management software sector for Yankee Group. "They care about solving the problems of managing customers, and are still spending money. But what seems to be slowing is the willingness to spend it with the traditional suppliers," she said.

While a sectorwide meltdown is unlikely, there aren't many voices arguing for significant upside. "There's not a lot here to get excited about," says Daniel Morgan, a portfolio manager for Synovus Investment Advisors. "If they

software companies can meet expectations, that would be decent." Morgan adds that many investors already have figured this out, and the tepid outlook already is priced into many issues.

Similarly, Merrill Lynch analyst Edward Maguire said, "Though the North American economic climate continues to firm and software spending forecasts remain on track, software stocks struggle to rouse enthusiasm from reluctant investors."

It's probably not a coincidence that most of the underperforming software companies are relatively small. Corporate technology consumers increasingly are moving to shrink the number of their technology suppliers. "This is now affecting the smaller players; even Siebel is being squeezed," said PNC's Folarin.

Goldman's Sherlund also noted that trend, and said his company's most recent survey of IT spending found that the largest gainers of "wallet share" were

EMC's

(EMC)

software group,

Red Hat

(RHAT)

,

Symantec

(SYMC) - Get Report

and

Microsoft

(MSFT) - Get Report

.

The survey found that overall IT spending will be an "anemic" 3.6%, but there's a general consensus that business intelligence and security software companies will do fairly well over the course of the year.

Because Microsoft doesn't report until April 28, few earnings previews from analysts have yet been published. Prudential Securities analyst Brent Thill, was an exception, writing in early April that he expects both earnings and revenue to come in at the high end of the company guidance. Prudential does not have an investment banking relationship with Microsoft.

Add it all up and it's fairly clear that the sky isn't about to fall on Planet Software this quarter. And the second quarter of 2004 was very weak, which means that achieving decent year-over-year growth in June won't be too hard. Beyond midyear, though, the best chance for good returns is probably the year's final quarter.