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Delano Technology sliced by warning, downgrades

Delano Technology (Nasdaq: DTEC) was cut in half Friday after a third quarter warning and a couple of downgrades.

Shares in the maker of eCRM (electronic customer relations management) software were off 2.5 to 2.25. The company announced Thursday night that its third quarter revenue would be about $9.3 million and loss before amortization of goodwill and stock-based compensation would be about 33 cents a share, much steeper than the loss of 25 cents a share expected by First Call Corp. The company cited the lengthening in some sales cycles and current budget constraints at many of its potential customers.

Some analysts found proof that the company's growth is still strong, but debated whether it will meet its target for profitability.

Positives

Ladenburg Thalmann analyst John Mills-Pierre said that the pre-announcement was no surprise given the short term slow down in overall technology spending. He maintained a "near-term buy" outlook, "realizing that this percentage slow down does not significantly affect the company's profitability horizon or fundamental strategy."

He also noted that the company has enough cash -- about $50 million, $1.50 per share, to make it there. The company's customer win-rate remains strong, and should improve, Mills-Pierre also noted.

U.S. Bancorp Piper Jaffray analyst Michael C. Marzolf lowered his rating to "buy" from "strong buy" and said that while clearly disappointing, "the company did still achieve 15 percent sequential growth from the September quarter." He also noted "the strong growth story remains intact with 32 new customers added during the quarter, representing 80 percent of revenue."

Negatives

On the downside, the company's annual growth rate is only about 10 percent, about 6 percent below expectations, Mills-Pierre noted. The selling cycle has lengthened because of the greater complexity of product offerings, and average selling prices have held flat.

Mills-Pierre also said he expects international revenue, which has held up so far, to be on the decline next quarter as he expects a "similar slow down in tech spending abroad, especially Europe." This has already been priced into estimates.

Robertson Stephens analyst Richard A. Juarez, who lowered his rating to "long-term attractive" from "buy," said that though Delano is suffering from an the overall weakness in the economy, it is also troubled by the effects of an increasingly crowded eCRM and customer service support market.

He added that the company is also expected to experience "greater challenges in selling its development platform to a market looking for more complete solutions."

Outlook

"Its really not that ugly for DTEC," Mills-Pierre said. "The recent 57 percent stock price decline in the last 10 trading days has factored in a much higher slow down than the company deserves, especially since we are still looking at 75 percent growth year over year."

"While the rate of growth has clearly contracted, we believe that more than 70 percent growth is attainable in fiscal year 2001," Marzolf wrote in his report. He lowered estimates into 2002 based not on company fundamentals, but "the slowing in demand in a slower economic environment."

Analysts were mixed on whether the company would achieve its profitability target. Mills-Pierre said that the profitability horizon has not changed- the company still plans to break even in March of 2002, ahead of many peers in the customer management relations space.

Marzolf said he now believes the company won't be profitable until September 2002 as a result of assumptions of continued spending in the areas of sales and marketing and research and development.