Revenue Numbers Come In Low For Software VendorsRevenue Numbers Come In Low For Software Vendors

Enterprise software vendors' revenue for the June quarter is falling below expectations--far below, in some cases. Have IT buyers suddenly closed their checkbooks? Or are they striking more-favorable deals, delaying contract signings, and driving down prices on those that do get completed?

Last week, a number of major software vendors, including Computer Associates, PeopleSoft, Siebel Systems, and Veritas Software, said revenue and earnings for the quarter ended June 30 would fall short of earlier estimates. BMC Software, FileNet, Informatica, and JDA Software issued similar warnings.

"We were surprised by what's happening in the software space," says Kaushik Roy, an analyst with Susquehanna Financial Group who covers enterprise storage system vendors, including Veritas. Sales cycles--the time it takes vendors to close deals--suddenly got longer late in the quarter in the U.S. market, Roy says. Why that happened isn't clear, he says.

The reduced revenue and earnings estimates are partly the result of IT buyers negotiating more favorable deals, a Merrill Lynch report says. A competitive IT market gives buyers more clout, and the resulting pricing pressure means vendors get less revenue per sale, the report says.

And the days of mega-million-dollar software deals are past, says Merrill Lynch analyst Karen Russillo. IT users "aren't overbuying like they used to," she says. Companies are purchasing software in smaller increments for narrowly defined projects or turning to vendors such as Salesforce.com Inc. that provide hosted software on an as-needed basis. "The world is moving more toward an on-demand model," Russillo says.

The news wasn't all bad last week. On Friday, SAP raised its second-quarter sales estimates to $2.20 billion from earlier predictions of $2.17 billion.

Siebel stunned Wall Street last week, saying it expects to report revenue of $301 million for the quarter, a sharp drop from the $353 million analysts expected. License revenue, a key growth indicator, will be $95 million--far below the anticipated $120 million to $140 million. The customer-relationship-management application vendor will disclose final results for the quarter on July 21. "These disappointing results were primarily due to unexpected delays in purchasing decisions by certain prospects and customers near the end of the quarter," Siebel said in its warning.

PeopleSoft expects to post revenue of $655 million to $665 million for the quarter, down from its April forecast of $675 million to $695 million and analyst forecasts of $692 million. The vendor, which will disclose final results on July 27, reduced its expected earnings from between 20 and 22 cents per share to 13 to 15 cents per share.

President and CEO Craig Conway blamed PeopleSoft's shortfall on publicity generated by Oracle's antitrust trial, which stems from Oracle's protracted effort to buy PeopleSoft. "We believe the adverse impact to our business has been substantial, with even greater impact this past month," Conway said in a statement.

Testimony at the trial showed that vendors offer deeper discounts to potential customers when more software companies are competing. Michael Gorriz, VP of IT business systems at DaimlerChrysler AG, testified that he negotiated favorable prices for PeopleSoft products by threatening to choose SAP software.

Veritas was one of the first to warn of poor results last week, saying sales for the quarter would be $475 million to $485 million, below its $490 million forecast. Veritas, like Siebel, blamed lower-than-expected results on a slowdown in U.S. orders at the end of the quarter. Computer Associates ended the week of bad news Friday by saying quarterly revenue would be between $830 million and $850 million, below the $860 million to $885 million it previously estimated.