Updated from 7:11 a.m. EDT
After suffering through a blizzard of first-quarter
warnings, software investors can breathe a sigh of relief that the second quarter is shaping up a little better.
There are a couple of key factors that explain the differences between the two quarters. First, the war in Iraq has ended, and many deals that fell through in the first quarter because of the conflict were sealed in the second one. Second, the threat from SARS did not come to fruition.
"There is a lot less uncertainty this quarter," said Pat Walravens, a software analyst with JMP Securities. "Mostly, I think the trend is up for these guys in general. For example, I had salespeople make their numbers at the beginning of the third month as opposed to the end."
Walravens noted that of the 16 software stocks he covers, only one --
-- has warned so far. Others such as
have released a date for reporting results, usually a sign a company will not preannounce disappointing results. Walravens has an underperform rating on Siebel, a strong buy rating on Chordiant and a market outperform rating on Hyperion. His firm hasn't done any investment banking for any of the companies.
Still, other software companies who aren't followed by Walravens have issued bad news. Warnings came last week from
kicked off this week with more warnings.
But "even the companies that missed cited some spillover from the first quarter, and I would assume the companies that made their numbers also saw that benefit," said Tony Ursillo, an analyst at Loomis, Sayles & Co., which manages $10 billion in equities.
Still, don't count on any major rally during earnings season. Guidance for the third quarter and the rest of the year is not likely to be particularly spectacular, Ursillo cautioned. "Company executives have figured out that it's better to be overly conservative until things are really humming. And that may be somewhat at odds with the expectations that investors appear to have right now," he said. "So my general conclusion is that I don't see Q2 earnings combined with Q3 guidance as a catalyst to drive further upward movement in the market."
He noted that, in the end, the SARS virus from Asia did not play as large a role in hampering performance as was feared about two months ago.
Preannouncements in the overall tech sector, including software, have been less negative than normal, agreed Chuck Hill, director of research at Thomson First Call. Year-over-year second-quarter revenue growth estimates in the technology sector have fallen only from 23% to 20% since the beginning of the second quarter, Hill said.
For the third quarter, software analysts are forecasting revenue will shrink 3% vs. a year ago, followed by 7% year-over-year growth in the typically strong fourth quarter, according to Hill. For the full year, the once high-growth software sector is expected to see a modest 6% increase in revenue, followed by a 15% increase next year. "I would suspect companies could come reasonably close to those numbers, if not beat them," Hill said.
"I think things continue to show some improvement," Hill said. But "we're still talking about most of the earnings improvement coming from cost-cutting, and you can only do that for so long."
That may start to change soon, if a recent survey of chief information officers by Goldman Sachs is any indication. In its survey released Monday, Goldman found increased optimism in second-half spending and early expectations of moderate growth in 2004. That amounts to a bounce from the April trough, Goldman said. "At last, the bleeding stops," the survey declared. Just don't throw away the bandages yet because the recovery continues to progress slowly.