Veritas Shares Plunge After Profit Warning

NEW YORK/SAN FRANCISCO – Veritas Software Corp. (VRTS) Tuesday warned that quarterly profit and revenue would miss Wall Street estimates due to sluggish U.S. demand for data storage products, sending its stock down more than 35 percent.

The news, which sent shares to about a 15-month low, follows similar warnings last week by other software companies such as Sybase Inc. (SY) and WebMethods Inc. (WEBM). Other software stocks also fell on Monday.

Analysts say the 20 percent earnings estimate miss at Veritas indicates the technology spending recovery is much slower than they anticipated.

Veritas, based in Mountain View, Calif., said it expects a second-quarter net profit of 17 cents to 19 cents a share. It estimates profit, excluding items, of 18 cents to 20 cents a share, lower than analysts' average estimate of 24 cents a share, as compiled by Reuters Estimates.

JP Morgan downgraded Veritas to "neutral" from "overweight" after the company released its new outlook. Analyst Adam Holt, in a research note, said "we feel management credibility and internal controls will be questioned" as a result of the new outlook and the company's recent earnings restatements.

Holt said Veritas' new forecast on license revenue, a key barometer for future growth, was "puzzling" as the company had previously been providing "more positive than negative data points about pieces of Veritas' businesses."

A Veritas spokesman would not comment beyond the company's press release. He declined to comment whether the new forecast was related to Veritas' announcement in March that it would restate three years of financial results after an internal probe found problems with the way service revenue was recognized.

At the time, Veritas said it did not expect the accounting problems to have an impact on its fiscal 2004 results. It said then that the restatements — revealed less than a year after two earlier restatements — were expected to lower reported revenue between 2001 and 2003 by between $1 million and $15 million.

Analysts said Veritas might be suffering from slow demand for data backup software, an area in which it specializes.

"The technology budgets' recovery will be a lot slower than Wall Street originally expected," said Amy Feng, an analyst at JMP Securities. She added that expectations have been set too high following a strong first quarter, in which there was a record-low number of earnings warnings.

The shortfall may also have something to do with increasing competition from Legato Systems, which was recently acquired by hardware maker EMC Corp. (EMC), said Kaushik Roy, an analyst with Susquehanna Financial Group. EMC also fell, 6.3 percent.

Veritas said software license sales slowed during the last month of the quarter, when most software deals are signed. But demand for products and services in most of Europe and Asia Pacific met its expectations.

"Part of what you are seeing is when a company is exposed to large deals, and when those deals slip, you've got problems," Sanford Bernstein analyst Charlie Di Bona said.

Veritas now projects revenue of $475 million to $485 million, including license revenue of $263 million to $273 million and services revenue of $212 million.

Analysts on average had expected revenue of $502 million. There is no official estimate for software license sales, but several analysts said they have pinned their numbers at $308 million.

Shares of Veritas were down $9.50, or 35.7 percent, at $17.04 on Nasdaq.

The miss at Veritas was blamed for other software stocks sliding lower. BEA Systems Inc. (BEAS) fell 5 percent to its lowest level in more than a year and Siebel Systems Inc. was down about 9 percent.