Updated from 1:57 p.m. EDT
climbed Wednesday, despite at least two analyst downgrades a day after the company said it expects the third quarter to be virtually flat sequentially.
Shares of Veritas closed at $18.99, up $1.90, or 11.18%.
In a postclose press release Tuesday, Veritas said it
expects third-quarter revenue to range from $350 million to $370 million and third-quarter pro forma earnings to range from 11 cents to 13 cents a share. That compares with 14 cents a share in pro forma earnings and $364.7 million in revenue posted by the data-storage software company in the second quarter.
"I think the Street was expecting a lot worse," said Credit Suisse First Boston analyst Michele Laverty, who has a buy rating on Veritas. Laverty said she believes short-covering was largely responsible for the boost in Veritas stock Wednesday. Her firm has done banking with Veritas.
Deutsche Bank analyst Sabrina Ricci agreed that one explanation could be that the results and guidance could have been a lot worse, but she was still surprised by the pop. "There was nothing in the call that would warrant it," Ricci said.
In a research note, Ricci pointed out that Veritas is hesitating to cut expenses. "Maybe the fact they didn't cut costs might say they see more than we do and have a sense that things are going to get better more quickly," she said Wednesday.
But "these stocks are very reactionary," Ricci cautioned. "Tomorrow this could be down twice of what it's up today." Ricci has a buy rating on Veritas, and her firm hasn't done investing banking business with the company.
On Tuesday, Veritas reported net income of $26 million, or 6 cents a share, in the second quarter, compared with a net loss of $129 million, or 32 cents a share, in the same period a year earlier. Revenue declined 6.5% from $390.2 million a year earlier and fell 1.6% from $370.5 million in the previous quarter.
The results and guidance prompted analysts across the board to lower estimates, while Prudential Securities and Punk Ziegel analysts went farther, downgrading the stock. Punk Ziegel analyst Steve Berg lowered his rating to accumulate from buy, calling the company's third-quarter guidance "anemic." His firm hasn't done any banking with Veritas.
Prudential analyst John McPeake lowered his rating to hold from buy. In the accompanying note, he wrote that he believes that until visibility improves, investors won't be willing to pay more than 30 times 2003 earnings for the stock, since its PEG ratio of 1 is based on an "increasingly dubious" long-term growth rate of 30%. McPeake added that
may be a looming competitive threat to Veritas and sliced his price target to $17 from $47. McPeake's firm hasn't done banking with Veritas, but he or a member of his household does own shares of Microsoft.
Lazard Freres analyst Luke Fichthorn, meanwhile, pointed to another weakness in Veritas' numbers: declining margins. Service revenue accounted for 33.7% of revenue in Veritas' second quarter -- up from 31% last year. While that helped bail out its revenue in the second quarter, services have a gross margin of about 64%, compared with software license gross margins of 96%, Fichthorn said in a note.
"As long as license revenues continue to be flat to down, the increased services component of the Veritas story will continue to result in lower overall gross margins," he said. Lazard has offered banking advice and other services to Veritas.