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Analyst reports: Wall Street slams Portal Software

The company sees its stock cut in half a day after it announces tepid quarterly results and a revenue slowdown in North America.

Portal Software stock was cut in half Wednesday, a day after the company announced tepid quarterly results and a revenue slowdown in North America.

Analysts penned mostly negative critiques of the Cupertino, Calif.-based company, which develops customer management and billing software for e-commerce companies. Portal lets companies create new accounts, authorize and track orders, determine prices, and bill customers.

Portal stock slipped to $6.50 in midday trading on Wednesday. The stock, which hit a 52-week high of $86, is down 87 percent since the beginning of the year.

Even at those depressed prices, analysts warned against investing in Portal.

The "stock may have earnings support at these price levels, but we expect stock to mark time near-term 'till telecom spending concerns can be alleviated," wrote analyst Mark Fernandes of Merrill Lynch, who lowered his rating from "buy" to "accumulate."

Goldman Sachs downgraded Portal from "recommended" to "market outperform." Prudential downgraded it from "strong buy" to "accumulate."

Banc of America Securities downgraded it from "strong buy" to "buy," and analyst Kevin Trosian cut his 12-month target price to $27 from $51. CIBC World Markets analyst Hampton Adams maintained his "strong buy" rating but slashed his 12-month target price to $40 from $100 per share.

The downgrades came a day after the company announced higher-than-expected third-quarter earnings for fiscal 2001. But the good news accompanied the announcement of several problems relating to future revenue growth.

Net income for the quarter ended Oct. 31 was $7 million, or 4 cents a share, compared with a loss of $1.7 million, or 1 cent, in the same period last year. Analysts polled by First Call/Thomson Financial expected Portal to earn 2 cents per share.

Gross margins of 75 percent were the lowest in four quarters. Deferred revenues rose $8 million to a record $45 million. The company signed up 62 new customers last quarter, down from 83 new customers in the pervious three-month period.

Analysts were also concerned about the company's slowdown in the collection of licensing fees. Licenses comprised 65 percent of revenue, shy of analyst projections of 68 percent and 70 percent in the first half of the first half. Licensing revenue in North America was $41.3 million, nearly 15 percent below expectations of $48.5 million.

Company executives blamed the slowdown on financing concerns of telecommunications clients. North American revenues inched up only 2 percent in the quarter, and executives said 74 percent of unsigned deals were related to real or feared financing problems.

Robertson Stephens analysts Marianne Wolk and Malindi Davies were concerned about competition from Amdocs.

"Over the last year, Portal has successfully sold Infranet to many larger tier-one carriers in the sweet spot of Amdocs' market," Wolk and Davies wrote in a research note issued Wednesday morning. "Thus, it is no surprise to us that Amdocs is now aggressively moving to improve its positioning with tier-one data providers...relative to Portal...We are concerned that Amdocs FUD (fear, uncertainty and doubt) may be freezing some tier-one decisions, especially given Amdocs' new relationship with Andersen Consulting."

Another investment firm, Morgan Stanley Dean Witter, raised its rating on Portal's rival. Yumi Koh, David Raezer and Thomas Sze upgraded Amdocs from "outperform" to "strong buy," based on Chesterfield, Mo.-based Amdocs' "improving fundamentals and a substantially enhanced pipeline."

But not all analysts were bearish on Portal. Wit SoundView reiterated a "strong buy" rating, while Chase Hambrecht & Quist reiterated a "buy" rating.

Katherine Egbert and Allison Ruckey of Thomas Weisel Partners reiterated their "buy" rating. In a research note issued Wednesday morning, they predicted Portal would grab a large chunk of overall operations support systems, a market that is expected to hit $14 billion within the next several years.

"We look for Portal to continue to add to its platform and coalition of partnerships in pursuit of these new opportunities," they wrote. "We believe the current weakness and upcoming quarterly report represents a near-term buying opportunity."