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Pervasive wants to Tango -- Investors say no

    Investors jumped ship from Pervasive Software Inc. (Nasdaq: PVSW) Friday morning, sending the stock down 63 percent after the company announced a major shift in its business model during its earnings conference call.

    Shares in the software company were down 22 5/8 to 13 7/16.

    The company's first quarter earnings, on target with First Call's estimate 9 cents a share, had traders jumping on message boards, as they scrambled to figure out the cause of the stock's fall.

    Net income for the quarter increased 58 percent to $1.5 million, and revenue also experienced strong growth, up 42 percent to $16.7 million, compared to $11.8 million for the same period last year.

    Pervasive announced on its earnings conference call last night it will lay out another $13 million on top of its previous plan to boost its Tango product line. The investment will put earnings per share at break even for the next four quarters.

    Hambrecht & Quist downgraded the stock to "market perform" Friday, saying that the "stock is likely to be hurt by major shift in market approach." Further details weren't immediately available.

    "Its an interesting corporate experiment" said Joseph Payne of Hoak Breedlove Wesneski & Co. He believes Pervasive's decision to spend $13 million to market its Tango 2000 mode, a move that marks a completely new business strategy for the company is "ultimately the right thing to do."

    "This business model works for IPOs, why can't it work for established companies?" said Payne, who compares Pervasive to Allaire (Nasdaq: ALLR) - which has spent more on marketing than it has brought in revenue for the past two years to develop server software that is used in Web applications. Allaire shares were up 6 3/16 to 78 9/16, since its January IPO.

    On evidence of Pervasive's strong past performance, Payne said he thinks they'll win. He's downgraded the stock from "buy" to "accumulate," but said "it's a real accumulate." He sees a possibility Pervasive could make a profit before its projected second quarter of 2000, if Tango gets a stronger than expected result. But, "in the short run, if you own the stock, it hurts."

    "Proliferation of the Web and mobile computing is fueling an explosion of Web-enabled e-business applications, and Pervasive is well positioned to provide the underlying software infrastructure for these applications," said Ron Harris, president and CEO of Pervasive Software in a company statement.

    During the quarter, Pervasive shipped its next-generation Tango 2000 product family, which received an award for the "Best Development Environment" from Solutions Integrator magazine. Tango 2000 simplifies the creation and deployment of Web applications, enabling developers to achieve faster time to market, Pervasive said.