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Wall Street girds for bad news from B2B companies

Wall Street girds for bad news from B2B companies

With the big three business-to-business (B2B) software companies poised to announce earnings this week, analysts are preparing themselves for another run of bad news.

The once high-flying Wall Street darlings, i2 Technologies Inc., Commerce One Inc. and Ariba Inc., have all recently warned they will miss analyst earning expectations for the coming quarter.

Now analysts are waiting for the companies to report this week, to find out what guidance those companies will give for the rest of the year. Analysts have said they expect the news to get worse before it gets better.

"I don't expect to see any big differences between the warnings and what the companies will report this week," said Goldman Sachs analyst Tom Berquist. "But everyone's holding their breath for guidance."i2 kick-started the bad news last week. The company, which makes software that lets businesses share their inventory and product data with suppliers over the Web, said it would post a profit of 2 cents per share, rather than the 5 cents analysts were expecting. It also cut its workforce by 10 percent and said it would announce a series of other cost-cutting measures on its conference call on April 18.

Ariba came next, shocking the analyst community by announcing a much-wider-than expected miss - a loss of 20 cents a share vs. the 5 cents per share profit Wall Street expected - a reduction of its workforce by 700 employees and the scrapping of its merger deal with Agile Software Inc.

It also said revenues would only be have what the company had previously stated.

Then followed Commerce One, which makes software that powers B2B exchanges that bring together buyers and suppliers online. The company warned it would loose 11 cents per share, not too far off the 6 cents per share loss analysts were expecting. And revenues would be 15 percent less than the $198.89 analysts were expecting, the company said.

THE END OF QUARTER EFFECT

In delivering their bad news, all three B2B software companies cited the end-of-quarter phenomenon, coupled with a slow down in information technology spending, as the major reason for their downfall.

The problem is one that most software companies, including giants such as Oracle Corp., get a large portion of their deals as the quarter winds down. That means if crucial sales fail to materialize, the companies can find themselves badly missing Wall Street expectations.

"At the end of the quarter, we experienced a large unexpected drop-off in our sales closure," said Keith Krach, Ariba's chairman and chief executive. "...spending decisions at the executive level were postponed as customers evaluated their budgets in light of the prevailing economic uncertainty."

And the chief executives of Commerce One and i2 said the same thing. Importantly, none of the companies said they could give any guidance as to the second, third and fourth quarters due a lack of visibility.

Berquist said it would take at least until the end of the summer for the Federal Reserve's interest rate cuts to take hold and for an upturn in the economy to have any effect on the software sector, presuming there is an upturn.

"My sense is we're going to have conservative guidance for June, with growth flat to down sequentially," Berquist said. "September will be the same with December being the first quarter where I anticipate any positive guidance."i2 will kick off first for the B2B software companies, posting its fiscal first quarter on Wednesday April 18. Commerce One follows on April 19 and Ariba reports on April 20.


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