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Accounting deadline could kill software spending

Wall Street analysts debate whether year-end Sarbanes-Oxley deadline will sap demand for corporate software systems.

New accounting regulations that take effect in the United States at the end of the year could spell trouble for software makers that sell corporate accounting systems to American companies, according to a securities research firm.

Public companies must certify their compliance with a key section of the Sarbanes-Oxley Act when they close this year's books, noted JMP Securities analyst Patrick Walravens. The law, which Congress passed in 2002 following financial scandals at Enron and WorldCom, is supposed to make corporate accounting procedures more transparent to investors and regulators.

Ironically, the law was supposed to be a gold mine for software developers that introduced special programs to help corporate clients comply with it. Instead, Sarbanes-Oxley work may delay software purchases over the next few months, Walravens said.

As the compliance deadline draws nearer, companies will freeze plans to purchase and install new financial software, fearing that major last-minute changes to business systems could compromise their compliance efforts, Walravens predicted. The clampdown should begin in October and could last about six months, causing certain software companies to miss first and fourth-quarter earnings targets, he said.

SAP, the world's biggest supplier of corporate accounting programs, will be hit particularly hard by software spending disruptions, in Walravens' opinion. JMP Securities lowered its fourth-quarter and 2005 earnings estimates for the German company in a report it issued this week. Walravens' firm also lowered its rating on SAP from "market perform" to "market underperform," saying SAP's stock is set to tumble by as much as 19 percent.

"While we believe this fiscal-year-end deadline could impact license revenue for many software companies, we expect the impact to be the greatest for up-market enterprise resource planning vendors, of which SAP is the largest," Walravens said in the report.

SAP spokesman Bill Wohl disagreed with the report. "SAP continues to see strong demand from customers to invest in solutions that address the challenges of meeting regulatory requirements, like Sarbanes-Oxley," he said. "We have not seen any slowdown, nor do we anticipate one."

Oracle, PeopleSoft and Hyperion Solutions are also likely to be affected by the looming deadline, but not as acutely as SAP, according to Walravens.

Other stock analysts disagreed with Walravens' predictions, observing that it often takes companies six months or more to install a major new software program after purchasing it. With that kind of lag time, companies should not be deterred from purchasing programs in the fourth quarter, said Peter Coleman, an analyst at Schwab Soundview Capital Markets.

"If anything, you would see (the Sarbanes-Oxley problem) now," Coleman said, noting the deadline was still six months away at the beginning of the third quarter. "But SAP has seen none of that."

Indeed, SAP was one of the few major software companies to meet its earnings and revenue targets in the quarter ended June 30, reporting a 14 percent rise in profits and a 15 percent hike in software license revenue. A score of other software firms fell short of their targets and had to issue warnings. Some blamed the distractions of Sarbanes-Oxley work for their misses.

Complying with Sarbanes-Oxley requires more than just installing the right software, however. Since software packages from SAP, Oracle and others can be configured a thousand different ways, companies must certify their particular configurations, as well as business policies and procedures that aren't necessarily coded into software.

Yet any new business program a public company installs needs to comply with Sarbanes-Oxley eventually. By putting off a software project until next year, a company simply buys time until the next round of compliance certifications, which the Securities and Exchange Commission requires annually.

Some analysts are skeptical of any connection between the new accounting regulations and the software industry's woes. "This was one of the theories that everyone came up with to explain the second-quarter tank," said AMR Research analyst Jim Shepherd. "I don't think there's any validity to it."