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Rational Software plans for second-half rebound

Rational Software slashed jobs and financial targets, but the company is planning on a rebound in the second half of its fiscal year.

On Tuesday, the maker of software development tools told Wall Street to expect a profit of 70 to 72 cents per share on fiscal 2001 revenue of $813 million to $818 million. Analyst consensus had predicted a 2001 profit of 72 cents on sales of $814 million, according to earnings tracking firm First Call.

For fiscal 2002, beginning April 1, revenue will be between $900 million and $950 million and earnings will be between 50 cents to 60 cents a share. Analysts had been expecting a profit of 86 cents a share on sales of $1.13 billion.

"This is one where we understand that visibility is challenging," said Paul Levy, Rational co-founder and chairman, during a conference call with analysts. "We understand that the economy is in a state of flux right now. And yet we feel very good about our fourth-quarter bookings momentum. We feel very good about our relationships with customers."

Shares of Rational traded at $12.25 in after-hours activity on the Island ECN, following the conference call. Rational stock fell $3.13, or more than 18 percent, to $13.94 amid a broad market downturn during Tuesday's regular trading, before the news was announced.

Rational (Nasdaq: RATL) joined the chorus of companies blaming a U.S. economic slowdown for their financial woes. The company sees earnings of 20 to 22 cents per share for the fourth quarter of the company's fiscal 2001, which ended Saturday. The company expects to report fourth-quarter revenue of $240 million to $245 million.

First Call consensus predicted a profit of 22 cents per share on revenue of $249 million for Rational's March quarter.

"It's a little bit surprising that Rational management felt compelled to take down fiscal 2002 numbers so significantly," said Sarah Mattson, analyst with Dain Rauscher Wessels. "Especially coming off a quarter where they reported relatively strong results."

The company said it would take a one-time charge of $20 million to $25 million in the second quarter, to pay for the elimination of 400 jobs, or about 10 percent of the company's total staff. Some observers questioned whether Rational should cut more, but analysts and executives said the company needs to maintain a strong sales force for the long-term.

"To some extent, they're betting on some sort of recovery toward the second half of the year," said Damian Rinaldi, analyst with FAC/Equities. "I think they're right. This is a reasonable risk for them to take."

Levy told analysts to expect earnings of 18 to 20 cents per share with revenue growth of 8 to 14 percent in the first half of the fiscal year, and 32 to 40 cents per share on revenue that could increase 9 to 16 percent in the second half. Forecasts for the latter part of the year could be surpassed if the economy is strong enough, "but I think the time to really focus on that is a quarter or two from now," Levy said.

Rational's board has extended its stock buyback plans. That program has been expanded to repurchase up to 20 million shares, Levy said. Rational last reported more than 190 million shares outstanding, according to Market Guide.

Despite the slowing U.S. economy, Rational's revenue backlog did not decline in the fourth quarter, Levy said. Many of the companies who buy Rational's development tools use money from research and development budgets, which have not been cut as much as technology infrastructure budgets recently, he added. But uncertainty about the economy compelled Rational to lower its expectations, analysts said.

"It's the prudent thing to do," Mattson said. "Companies really don't understand what's going to happen in the next six to 12 months.">