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webMethods Rises on Quarter's Outlook

Analysts think the current quarter is showing some strength.

Updated from April 29

webMethods

(WEBM)

got off to a fast start Wednesday, spiking more than 15% on the strength of several sell-side reports expressing confidence in the company's current quarter.

In recent trading, webMethods was off the day's high, but still up 72 cents, or 7.6%, to $10.19 a share.

On Tuesday the provider of enterprise application integration (EAI) software announced that it had narrowed its losses and that fiscal fourth-quarter revenue and earnings met the reduced guidance given by the company April 3.

Total revenue for the quarter ended March 31 was $49.1 million, compared to $50.7 million a year ago, a decline of 3.2%. Net income was $157,000, or break-even on a per share basis, compared to a net loss of $15.7 million, or 31 cents a share in 2002.

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License revenue in the quarter dropped 14.6% to $28 million, from $32.8 million a year ago.

Still, analysts noted that the high range of the company's guidance for the June quarter was a bit stronger than they expected, and Jason Brueschke of Pacific Growth Equities said: "We are upgrading WEBM to over weight from equal weight. We believe that significant deal slippage from FYQ4 already closed in Q1, giving the company solid momentum for the current quarter. Combined with the beginnings of a strong product cycle from the webMethods 6.1 release, we believe the Company is set to deliver a strong June quarter." Pacific Growth Equities does not have a banking relationship with webMethods.

During a call with analysts after the earnings announcement, the company said it expects total revenue in the June quarter to range from $45 million to $50 million, and pro forma net income will range from a loss of $3 million, or 6 cents a share, to a loss of $1 million, or 2 cents a share.

For the fiscal year ended March 31, webMethods reported total revenue of $196.8 million, an increase of $800,000 over fiscal 2002. On a GAAP basis, the company's net loss for fiscal 2003 was $8.6 million, or 17 cents a share. The company lost $82.7 million, or $1.67 per share, in the previous fiscal year.

On a pro forma basis, in 2003 the company lost $2.5 million, or 5 cents a share, compared to a pro forma net loss of $15.3 million, or a loss of 31 cents a share in fiscal 2002.

Earnings in 2002 excluded charges for amortization of goodwill and intangibles.

Underlying at least some of the problems suffered by webMethods and other EAI companies is a growing feeling in the industry that it overpromises and underdelivers. "EAI doesn't work as advertised. EAI requires a lot more work than initially depicted," said Rob Tholomeier, an analyst with research house Ramberg, Whalen.