Oracle''s warning sends software stocks reeling

News that the software giant Oracle will miss third-quarter expectations sent its stock reeling in heavy volume as most software stocks followed.

Though investors had expected Oracle (Nasdaq: ORCL) to be affected by an economic slowdown, the company's profit warning and talk about how executives were delaying information technology spending rattled Wall Street. Oracle warned revenue for the quarter would grow about 9 percent compared to a year ago, which puts total sales at about $2.67 billion, below First Call's expectation for $2.89 billion.

Shares in Oracle were off $4.18 to $17.18, or 20 percent, as nearly 140 million shares exchanged hands at midday. The news also brought down other software stocks. The downgrades were too numerous to mention, but the biggest losers were Siebel (Nasdaq: SEBL), off $7.25 to $37.25, Commerce One (Nasdaq: CMRC), off $1.87 to $16.18, Ariba (Nasdaq: ARBA), down $1.56 to $15.5, and i2 (Nasdaq: ITWO), down $4.31 to $23.25. Other stocks including Vignette (Nasdaq: VIGN) and BEA Systems (Nasdaq: BEAS) also slumped.

The most damning of Oracle's statements was lack of visibility to upcoming quarters. When questioned how the pipeline looked coming into this quarter relative to prior quarters, CFO Jeff Henley admitted it was hard to tell. Oracle said the source of its woes was a number of customers who delayed closing deals at the end of the quarter due to economic uncertainties.

Analysts said Oracle's warning indicated trouble ahead for every software company. Oracle provides a suite of e-business applications to help customers cut costs by using the Internet. Oracle, along with its software peers, were supposed to be resistant to an economic downturn.

"Oracle was one of the last generals left standing on a brittle technology battlefield, and in the end couldn't avoid the bullets and hand grenades that were showering down from above. It has become clear that in an environment like this one, there are no bulletproof vests," wrote Morgan Stanley analyst Charles Phillips, who slashed his rating from "strong buy" to "neutral."

Deutsche Banc Alex Brown analyst James Moore cut his rating to "buy" from "strong buy," and said the "shortfall was far worse than expected, even with expectations ratcheted down by the Street throughout February."

Goldman Sachs analyst Rick G. Sherlund cut the stock to "market outperform," taking it off Goldman's "Recommended List."

Oracle's warning shook investors because it was last minute. At its applications conference, Oracle delivered an upbeat message, which was based on a robust pipeline on the second to last Tuesday before the quarter closed. Then, in those last few days, CEOs and CFOs suddenly pulled out of deals that had already been negotiated, said Oracle CEO Larry Ellison.

The fact that Oracle had been confident in its projections up until even a week ahead of the warning caused great concern in visibility for Oracle and other stocks.

"Visibility is low and we probably cannot rely on other software vendors to close their pipelines at the end of their quarters as they may expect. This applies more to those vendors that are more dependent on end- of-quarter deals, particularly larger deals, Sherlund said.

"The cracks in Oracle's pipeline did not appear until the final days of the quarter. Events like these highlight the risks of low visibility and the last minute nature of software sales," Phillips said.

Phillips was one of many analysts to shift gears on the entire sector. He downgraded his remaining "outperform" rated companies to a "neutral."

Phillips' list of software stocks now graded "neutral" includes 14 companies: BEA Systems (Nasdaq: BEAS), Click Commerce (Nasdaq: CKCM), Computer Associates (NYSE: CA), Epiphany (Nasdaq: EPNY), i2 Technologies (Nasdaq: ITWO), Informatica (Nasdaq: INFA), PurchasePro (Nasdaq: PPRO), Siebel (Nasdaq: SEBL), SeeBeyond (Nasdaq: SBYN), TeleTech (Nasdaq: TTEC), TIBCO (Nasdaq: TIBX), Veritas (Nasdaq: VRTS), Vignette (Nasdaq: VIGN) and WebMethods (Nasdaq: WEBM). All of those stocks took a tumble Friday.

"This is worse than past downturns in the suddenness and severity," said Phillips, who sees a prolonged downturn. "A shock to the system of this magnitude is only repaired by time."

Credit Suisse First Boston analyst Brent Thill also doled out downgrades to the sector, though with more discretion.

Thill lowered ratings on 12 companies. Stocks that went to "buy" from "strong buy included: Actuate (Nasdaq: ACTU) Art Technology Group (Nasdaq: ARTG), Commerce One (Nasdaq: CMRC), Epiphany, i2, Retek (Nasdaq: RETK) and Siebel.

Those that went to "hold" from "buy" included Documentum (Nasdaq: DCTM), Onyx Software (Nasdaq: ONXS), PeopleSoft (Nasdaq: PSFT) and Vignette.

While most analysts downgraded software stocks across the board, some cautioned against blind selling. Today's sell-off could prove to be a buying opportunity for Oracle and others--especially if the worst is over.

Merrill Lynch analyst Christopher C. Shilakes lowered Oracle only slightly--to "accumulate" to "long-term accumulate"--and said that while the software sector will be pressured by the disappointment, he "caution(s) investors against selling blindly at current levels."

Software companies that were considered slightly more immune to the problems included BEA Systems, Veritas Software, Micromuse (Nasdaq: MUSE), Mercury Interactive (Nasdaq: MERQ) and Advent Software (Nasdaq: ADVS), Lehman Brothers analyst Neil Herman said.

"The buildup of a substantial backlog of business combined with smaller deal sizes," should make them better off, Herman explained.

Herman added that business is on track for Mercury Interactive and Veritas Software, and said he expects Veritas to indicate its solid position soon. BEA Software remained his "single best idea."