A slew of e-business software companies warned after the bell Monday night, making Tuesday a dark day as Wall Street analysts slashed earnings targets and ratings for the entire sector. The recent profit warnings topped off earnings misses from similar companies such as i2 Technologies and Art Technology Group.
Among companies that warned Monday, Ariba was down $1.25, or 19 percent, to $5.25; BroadVision fell $1.25, or 28 percent, to $3.25; Epiphany shed $2.63, or 27 percent, to $7.13; and Documentum dropped $2.66, or 28 percent, to $6.88. MicroStrategy, which warned Tuesday morning, was off 34 cents, or 13 percent, to $2.22.
The companies all basically said the same thing: Customers are putting off big purchases amid their own layoffs and earnings problems. Software companies often rely on last-minute sales to make their quarters. Since those sales didn't come in, the companies had to come clean as soon as the first quarter ended.
The "common thread is CIOs are shutting down software spending regardless of value proposition," said Credit Suisse First Boston analyst Brent Thill, who noted that the magnitude of the group miss was a whopping 30 percent larger than had been expected, on average.
Regarding a timeline for a software rebound, analysts weren't optimistic. "We don't see a meaningful catalyst over the next three quarters to kick-start a recovery," said Credit Suisse First Boston's Thill.
Nevertheless, many said there's hope for the sector in the long run. "We remain bullish on the market segment long term, however, we believe that the IT buyers strike will remain through the June quarter," BofA Montgomery's Greg Vogel wrote.
Following is a summary of the downgrades:
B2B software company Ariba was downgraded to "market perform" from "buy" by analyst James A. Moore at Deutsche Banc Alex Brown, to "market perform" from "buy" by analyst Eric B. Upin at Robertson Stephens, and to "market perform" from long-term "buy" by analyst Ian M. Morton at J.P. Morgan Chase.
Ariba warned that its second-quarter loss is now expected to be 20 cents per share, excluding noncash charges, on revenue of $90 million. First Call consensus was predicting a profit of 5 cents per share on revenue of $180.3 million. Ariba also canceled its acquisition of Agile Software and plans to lay off about one-third of its work force.
E-business player BroadVision was downgraded to long-term "attractive" from "buy" by analyst Alex W. Baluta at Robertson Stephens and to "market perform" from long-term "buy" at J.P. Morgan Chase.
The company, which missed revenue estimates by 29 percent and said it will post a loss of between 14 cents and 16 cents a share, as opposed to First Call's expected profit of 2 cents a share, also said it will lay of 15 percent of its work force.
Documentum, which makes content-management software, was downgraded to "buy" from "strong buy" by analyst Christopher Mortenson at Deutsche Banc Alex Brown and was rated "neutral" in new coverage by analyst William Lennan at WR Hambrecht.
Based on preliminary data, the company said it expects to report first-quarter revenue of $43 million to $46 million, or a 26 percent miss on estimates. The company said it will report a net loss at that level of revenue. First Call had expected a profit of 7 cents a share.
Epiphany was downgraded to "market perform" from "buy" by analyst Jason Maynard at First Union Securities and to "hold" from "buy" by analyst George J. Godfrey at ING Barings. BofA Montgomery's Vogel also downgraded Epiphany to "buy" and gave it a price target of $12 a share.
Epiphany, which makes customer-relationship management software, said it would lose as much as 40 cents a share on revenue of about $38 million. First Call had expected a loss of just 9 cents per share.
The company seemed to be faring better than its peers and claimed that "longer sales cycles" rather than outright cancellations were the cause of its change in estimates. It said it was still on track to turn a profit by the fourth quarter and said it did not expect to have to lay off any employees.
Inktomi was reiterated "market perform" by analyst Michael K. Parekh at Goldman Sachs and was maintained "strong buy" by analyst Michael E. Stanek at Lehman Brothers. The price target was cut to $15 from $30 per share. SG Cowen Securities analyst Drew Brosseau maintained his "buy" rating on Inktomi but slashed estimates.
The network-caching software company said Monday that its second-quarter loss would be between 23 cents and 25 cents, excluding charges. That compares with a loss of 4 cents expected by First Call. Revenue is now expected to be between $36 million and $38 million, falling far short of the Street's consensus forecast for sales of $63.35 million. The company also said it will cut one-fourth of its staff.
The stock is dead, "but $2.50 (per share) in cash and valuable technology may fuel takeover speculation," noted SG Cowen's Brosseau.
MicroStrategy was downgraded to near-term "neutral" from near-term "accumulate" by analyst Christopher Shilakes at Merrill Lynch.
The customer-data software vendor said it would report first-quarter revenue of $47 million to $51 million and a loss of 31 cents to 37 cents per share, excluding charges. First Call had projected a loss of 30 cents a share. It also plans to cut one-third of its work force, or about 600 people.