NEON falls with downgrades; Goldman drops coverage

Analyst reports for New Era of Networks (Nasdaq: NEON) were anything but glowing after the company warned late Friday that it will miss analyst' sales estimates by $18 million and post a huge loss in its fourth quarter. Some brokerages lowered ratings while Goldman Sachs gave up on the stock entirely.

Shares in the application integration company plunged 34 percent, or 1,85 to 3.66.

The company said it would not make either top or bottom line estimates for its fourth quarter, citing its inability to close several large deals within weeks of the quarter's end due to customers' softening IT budgets. It also didn't give clear guidance on 2001, causing analysts to suspend estimates.

New Era said it expects to record restructuring costs this quarter in order to match expenses with the slowdown in revenue growth.Details and new guidance will be provided on Jan. 23, the company said.

Goldman Sachs analyst Anne M. Meisner dropped coverage of the stock entirely "as part of an effort to streamline... research focus in the infrastructure software space" she said in a statement.

Limited visibility

Bear Stearns analyst Rich Scocozza downgraded the company to "neutral" from "buy" and put estimates under review.

"During a conference call, NEON refused to give much guidance as to what the prospects for 2001 look like," he said.

Scocozza also noted customers are starting to become uncomfortable buying technology from anybody but the largest vendors, including BEA Systems (Nasdaq: BEAS) and TIBCO (Nasdaq: TIBX).

Prudential Securities analyst David Breiner maintained his "hold" rating on the stock, and said the company's warning and lack of visibility indicate "execution problems in the business."

He expects forward guidance in the company's January 23 report "will offer limited value as we suspect the lack of visibility will persist."

Competitors...

SG Cowen Securities analyst Rehan Syed, who maintained his "neutral" rating on the stock, said the company was in deeper trouble than other companies like Vitria (Nasdaq: VITR), Talarian (Nasdaq: TALR) and Inktomi (Nasdaq: INKT).

"NEON saw softness across the board, not just in the telecommunications vertical, which had been the cause of misses by (its competitors)," Syed stated in a report.

Syed anticipates the restructuring will include both staff and facilities reductions. "This is a steep reduction from the earlier cash (earnings per share) guidance of 50 cents," he added.

Limited cash

Syed noted that NEON currently trades at the same level as its calendar year 2001 revenue, with over $1 per share in cash, which is historically cheap vs. other software companies that have stumbled in the past. He said this suggests the downside may be limited, but only if the company is able to meet its 2001 plan for break-even and conserve cash.

Syed also noted that the fact that a large portion of the company's revenue stems from deals made with companies that NEON had equity investments in. These non-monetary transactions have nothing to do with their miss this quarter, but could be bad news for balance sheets, Syed wrote.