Computer Associates, BMC shares plummet on profit warnings

After opening at $51.13, Computer Associates stock fell sharply to $28.50, setting a new 52-week low. By the close of regular trading, the shares had recovered some, closing down $21.63, or 42 percent, at $29.50.

BMC also set a new 52-week low, closing down $14.19, or almost 40 percent, at $21.31.

Houston-based BMC was the most heavily traded stock on the Nasdaq this morning, and Computer Associates was the most heavily traded on the New York Stock Exchange.

Computer Associates, which is based in Islandia, N.Y., and BMC join the scores of companies taking a beating in the quarter ended June 30. While many of the hardest hit have been dot-coms, the profit warnings signal that hard times could be waiting for the older vanguard of large server and mainframe software makers.

Those hard times are likely to last at least another quarter and maybe more, said Gartner analyst Ray Paquet, who referred to the problem as "the Y2K hangover."

Computer Associates attributed its revenue shortfall to slow mainframe software sales, soft sales in Europe, and the collapse of several deals as the quarter ended. But Paquet said just one area is to blame.

"The biggest issue is slow mainframe sales," he said.

Gartner has seen a general slowing of mainframe software sales, a market where Computer Associates and BMC compete. Part of the problem is a "surplus of mainframe computers used for Y2K testing that are being put into production," Paquet said. "We don't see this problem as much on the distributed world as the mainframe world."

Instead of buying new mainframes, many corporations are putting those they bought for Y2K testing into service. This has created a short-term slowdown in mainframe software sales that will last well into the September quarter, according to Gartner.

Merrill Lynch analyst Chris Shilakes agreed.

"We believe the mainframe weakness will persist into the fall and possibly" into winter, Shilakes wrote today. "In our view, this is more than a (first-quarter) issue."

Sales of servers costing over $1 million took a big hit last year, with revenue down 18 percent because of Y2K, according to International Data Corp. First-quarter shipments gained in the United States but remained down worldwide. Revenue declined 16.9 percent, and unit shipments fell 9 percent.

Both companies agreed that slow mainframe sales compounded their problems.

"We depend each quarter on a high percentage of license revenue closing in the last days or day of the quarter," BMC chief executive Max Watson said in a statement. "We experienced weakness in our mainframe business at quarter end. We attribute the shortfall in mainframe license revenues to a lack of a sufficient number of customers committing to enterprise license transactions."

Computer Associates CEO Sanjay Kumar spoke with financial analysts in a conference call this morning.

"Historically, our quarters are back-end loaded," Kumar said. "Our expectations going into the end of the quarter were we would meet our number." But as results came in from various business units, Kumar added, it was clear "that we would be short."

Computer Associates issued its warning yesterday, estimating revenue of $1.25 billion to $1.3 billion, compared with analyst estimates in the $1.65 billion range.

BMC said its revenue for the quarter would be less than half of analyst estimates, or between $365 million and $375 million.

Wall Street reaction was swift and brutal.

Morgan Stanley Dean Witter analyst Charles Phillips downgraded Computer Associates to "outperform" from "strong buy." Wendell Laidley of Credit Suisee First Boston cut the software maker from "strong buy" to "buy." Goldman Sachs analyst Anne Misner issued a "market perform" downgrade from "market outperform."

Dain Rauscher Wessels downgraded Computer Associates to "buy-aggressive" from "strong buy-aggressive" and, like Gartner, warned that "problems do not appear to be one-quarter issues, while investor confidence could take even longer to rebound."