Despite difficult macroeconomic conditions, U.S. software makers are expected to post solid, if unspectacular, results for the third quarter.
Higher oil prices caused by hurricanes Katrina and Rita added extra complications to the seasonally soft quarter, and the future remains uncertain, with concerns that the sector could face weak spending in the fourth quarter, which could in turn lead to cautious IT budgets next year.
"Overall, the macro-environment was somewhat challenging for software vendors in the third quarter, but we are expecting to see in-line quarters from most of the companies," said Karen Haus, an analyst with WR Hambrecht, in a note.
"Looking forward into the fourth quarter, at this point we are not highly optimistic that there will be a huge end-of-year budget flush and expect year-over-year growth rates for most companies to be modest — 5 percent to 10 percent at best," added Haus.
The fourth quarter is traditionally the biggest period of the year for software vendors, as companies spend what's left of their annual budgets. Macroeconomic conditions, however, could lead to restraint. But with 2005 budgets already in place, this restraint could be felt more next year.
"We believe that overall indicators of demand point to a steady budget flush in the fourth quarter, but our sense is that '06 spending could face some headwinds given current economic factors," said Banc of America Securities analyst Stephen Mahedy, in a report.
Oracle Corp.'s software license sales were weak for the quarter ended Aug. 31, and the company issued conservative guidance, but the period was the software bellwether's traditionally weak fiscal first quarter and analysts cautioned not to read too much into the results.
"History would tell you that it is extremely difficult to draw broad sector conclusions from Oracle's fiscal first quarter ... given the significant degree of seasonality," said UBS analyst Heather Bellini.
Mercury Interactive Corp. and Siebel Systems Inc. have so far both released preliminary third-quarter figures, which provided mixed signals.
Mercury, which makes software that tests and monitors corporate applications, warned that it expects revenue in the range of $198 million to $203 million, lower than July guidance of $205 million to $215 million. The company was vague on the effect on earnings because of an ongoing investigation into stock-option accounting, which will lead to the restatement of earnings for the past three years.
Siebel, meanwhile, surprised on the positive side. The company, which is being acquired by Oracle, pointed to employees' pride and better execution behind a better-than-expected 9 percent rise in revenue to $346 million. But analysts suspect sales people were draining the pipeline ahead of the company's pending acquisition.
Microsoft Corp. is expected to post solid results, but the focus will be on upcoming product launches rather than near-term earnings.
Company Estimate/Thomson Financial/Last year's 3Q/Reporting Date
Citrix Systems Inc. 25c 22c Oct. 19
Siebel Systems Inc. 4c 4c Oct. 26
Microsoft Corp. 30c 27c Oct. 27
Mercury Interactive Corp. (a) 32c 21c Nov. 2
Computer Associates International Inc. 24c (16c) N/A
BMC Software Inc. 23c 6c N/A
a. Mercury has said it plans to restate past earnings because of additional charges related to its stock-based compensation program.
Items in parentheses are losses.
The Thomson Financial estimate and prior year's net may not be comparable due to one-time items and other adjustments.