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Tech Industry

'Tis the season for sales quotas

As if tech companies didn't have enough to worry about in a recession, now analysts have added job insecurity as a factor that could cause software companies to miss future quarters.

    Business software companies could end up missing Wall Street's estimates next year as edgy sales reps worried about losing their jobs rush to close deals in the fourth quarter, leaving the well dry for the first quarter, according to Wall Street analysts.

    As if technology companies didn't have enough to worry about in a recession, now analysts have added job insecurity among the sales force as a factor that could cause software companies to miss future quarters.

    "In an environment where unemployed sales reps are available and software companies are extremely cost-conscious, sales reps are more determined than ever to make their quotas," said Thomas Weisel Partners analyst Keith Gay. He explained that though software companies usually harvest more deals in the fourth quarter than in any other quarter, this year it's intensified due to the weak economy.

    The problem, analysts say, is that all this activity takes from future sales, which could make for even weaker first quarters than usual.

    Gay was speaking at his company's investor conference call to discuss "Tis the Seasonality for Software," a 55-page research report released by Thomas Weisel Partners on Wednesday.

    Other analysts have pointed out this magnification of the seasonal sales trend.

    "They've been trying to bridge a gap by draining their pipeline, but now the other side of the bridge isn't going to be there," said Bernstein analyst Charles DiBona.

    The phenomenon is accelerated by managers' incentives that can give salespeople up to three times as much commission on deals made once their quotas are surpassed. Large, savvy customers also feed the frenzy by agreeing to close the deals by a certain date so that a sales rep can make quota--often in exchange for a better rate later, analysts said.

    What to expect
    Though analysts usually take seasonal fluctuations into consideration when they make their earnings estimates, Thomas Weisel analysts said Wall Street hasn't fully accounted for the effects the fourth-quarter sales rush will have on the first quarter.

    "Street expectations do not adequately account for these software seasonality effects," Gay said. "This is where we differ from other takes on these stocks."

    According to Gay, the software stocks can be divided into two categories: those at risk of missing estimates, and those that are safe bets to hit their financial targets.

    Adobe Systems, BEA Systems, Business Objects, Informatica, RSA Security, SAP, Stellent and Vignette are in the risky category, he said, but Chordiant Software, Check Point Software, Citrix Systems and Interwoven should make their numbers because analysts have already cut estimates sharply.

    Gay said several of these stocks became overvalued after the Nasdaq's recent rebound and are likely to fall at the first whiff of disappointment. "In September we looked at valuations and said investors should increase their exposure to software stocks," he said. "We now see investors have returned back into them and several have doubled."

    Added Thomas Weisel analyst Tim Klaswell, "The third quarter may have been a bottom for the software sector, but (stock) prices have doubled, so you now have to look at each stock individually."

    What's all the fuss?
    Some analysts were skeptical that the fourth quarter would be any different from the previous two.

    "These salespeople have been scrambling for the last one or two quarters to save their jobs," said SunTrust Robinson Humphrey analyst William Chappell Jr. Indeed, several software companies have already warned that their first quarters will be weak.

    Analysts also cautioned investors about taking such a short-term view of stocks. "If investors are looking at this sector, they should be looking six months out," Chappell said.

    But most analysts admit that they look closely at the activities of a software company's sales force when determining financial estimates or longer-term views of the company.

    Chappell, for one, said he often looks at the percentage of sales representatives who make it into their companies' "president's clubs" or "chairman's clubs" as a reward for making quotas.

    "It gives me a better sense of the productivity of the sales force."

    But this year, seasonality is affecting Chappell's research, too. "Managers have lowered the bar for entry into presidents' clubs by at least 30 percent," he said.