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Sybase earnings look good

The company hopes a first-quarter profit will convince investors that it's on its way back. Wall Street may not be so easily convinced.

Sybase (SYBS), bolstered by strong services revenue, today posted higher-than-expected earnings for its first quarter.

The company reported net income of $3.5 million, or 5 cents per share, compared to a loss of $6.9 million, or 9 cents per share, one year ago. Services fees led the income rise, jumping to $106.7 million from $95.7 million in last year's quarter.

Revenues, however, dipped slightly to $241.9 million versus $243.7 million in the first quarter of 1996. And Sybase's all-important license fees fell to $135.2 million, from $147.9 million one year ago.

Sybase executives are hoping that the profit, which easily beat Wall Street estimates, will send a clear message to customers and investors that, after a year of miscues, the company is solidly on the comeback trail. The company was expected to report a meager profit of 1 cent per share, according to a consensus estimate of 24 brokers assembled by First Call. Estimates ranged from a loss of 5 cents per share to a 5 cents-a-share profit.

But one Wall Street analyst wasn't so easily impressed. "Their earnings were better than expected, but revenues were down. So they got to the higher earnings through lower costs, not higher sales," said Sanjiv Hingorani, an analyst with Furman Selz. "Another important detail is that license revenues are down. So overall it's a mixed report."

Sybase's CEO Mitchell Kertzman said that cost-cutting, which led to higher profits this quarter, has been his goal for the past two quarters. "That's exactly where we have been focused. We said that we would spend three quarters cutting costs. The new products we are introducing later this year will help to grow revenues," he said. (Kertzman is a member of CNET's board of directors.)

"Sure we'd like more revenues, but we are encouraged by the cost cutting," said Kertzman.

Kertzman also said he expects license fees to accelerate in the second half of the year. For the quarter just ended, database license fees were flat, year-over-year, and middleware and tools license fees were down, he said.

"We are coming into a particularly strong product cycle," he said.

Sybase has posted a loss in three of the last five quarters. Last quarter, the company reported a $5.1 million profit, mainly because of restructuring that cut several hundred jobs and eliminated a handful of products unrelated to the basic business.

Now, Kertzman sees the company moving out of a recovery period and into a growth phase. Sybase earlier this month unveiled the ImpactNow Adaptive Component Architecture, a new component-based technology architecture for its flagship database software line that's heavily dependent on the Java programming language. The most critical piece of the plan, a revamped version of the company's core database server, also entered beta testing this month.

Sybase, which recently fell to the No. 3 spot among Unix database software makers behind Informix Software, hopes to soon regain the No. 2 slot, thanks to an Informix stumble. Hampered by a misfiring marketing plan for its Universal Server database and weak sales in Europe, Informix is expected to announce a substantial loss for the quarter, possibly as much as $100 million, when it reports on April 28.

Analysts said Sybase is on fairly solid ground, at least in the short term. Its SQL Anywhere mobile database leads the market, according to Dataquest.

The company also announced today that the accounting firm Ernst & Young has licensed SQL Anywhere for use in a mobile application to be distributed to 22,000 Enrst & Young auditors. The dollar value of the contract was not announced.

The Ernst & Young pact is the latest in a string of deals for SQL Anywhere. Also, Sybase's SQL Server Professional bundle is selling briskly and its Powersoft tools division is maintaining a lead in the client-server tools market.

But the company could face some stiff competition later this year from Microsoft, which plans to aggressively enter the mobile database market. A revamped release of Microsoft's SQL Server database, code-named Sphinx, will ship for the first time on a slimmed-down Windows 95 and Windows NT Workstation version specially tailored for mobile and embedded uses. That could threaten Sybase's lead in the mobile market, analysts added.

"If Microsoft comes into the market, it will certainly make an impact," said Carolyn DiCenzo, director of client-server software research at Dataquest. "If I were Sybase, I would concentrate on holding the lead in mobile and remote automation. That's a tremendous market for them."

Sybase's major advantage over Microsoft could be an established service and consulting organization, DiCenzo added. "The service model of Sybase is more focused on application-building services. It has a greater ability to support customers."

One other sore spot for Sybase is a lack of row-level locking support in SQL Server. The technology is essential for supporting packaged application software from SAP, Baan, and other makers. Company representatives said Adaptive Server should provide row-level locking in a second release sometime later this year.