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Rational boosts 2002 targets

Amid a field of tech companies hurting from a slowing economy, Rational Software (Nasdaq: RATL) expects to come out of it even stronger than originally anticipated.

"It's clear there is an economic slowdown out there," Rational Chairman Paul Levy said, during a Wednesday afternoon conference call with analysts. "It's also clear that the rate of growth in IT spending will slow down this year compared to last year. And as I say, we have factored all of that into our business planning. ... The best time to sell productivity is when your customers have to do more with less."

The maker of Internet software development tools on Wednesday not only reported better-than-expected third quarter results, but also told analysts to raise their estimates for the next fiscal year.

Rational now sees earnings of 85 to 90 cents per share in fiscal 2002. Analyst consensus was predicting a 2002 profit of 80 cents per share, according to earnings tracking firm First Call.

Broad economic downturns help companies like Rational, Levy said. Once the economy recovers and weaker players are shaken out, Rational will be "at a fundamentally different quantum level in terms of our market power," Levy told analysts. "Our competitive position has never been better."

Shares of Rational traded at 41.375 in afterhours activity on the Island electronic communications network, immediately following the release of quarterly results. Rational rose 2.3125 to 39.125 in Wednesday's regular trading ahead of the earnings report.

Rational reported fiscal third quarter net income of $40.2 million, or 20 cents per share, excluding goodwill writedowns and expenses from Rational's recently acquired Catapulse unit. First Call consensus predicted a profit of 18 cents per share on revenue of $204 million.

Including all charges, Rational earned $26.5 million, or 13 cents per share.

Third quarter revenue increased 47 percent year-over-year to $215.5 million. Much of that growth was fueled by sales of the company's flagship Rational Suite product, Levy said.

Rational Suite orders increased 85 percent year-over-year to constitute 30 percent of total bookings, Levy said.

Technology and communications infrastructure companies generated 45 percent of Rational's third quarter bookings. About 30 percent came from customers developing business and financial applications. Developers of software for embedded devices were responsible for 25 percent of bookings.

About 60 percent of Rational's orders came from the Americas, followed by 30 percent for Europe and 10 percent for Asia, Levy said.

Analysts generally expected Rational to slightly exceed their published estimates. "Rational Software should continue to benefit from increasing demand for high-quality and fast software deployment cycles required into today's e-business environment," wrote Sarah Mattson, analyst with Dain Rauscher Wessels, which has a "strong buy, aggressive" rating on Rational.

Rational hadn't given any reason to worry about earnings estimates, SG Cowen analyst Rehan Syed said in a research note released ahead of the third quarter repot.

"Management was particularly confident going into their quiet period and our sources suggest followed through with a strong close to the quarter," Syed wrote. "We believe the strong execution prowess of this company would have sailed past some of IT spending disruption evident in smaller companies in this space."

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