Working for enigmatic Oracle (Nasdaq: ORCL) CEO Larry Ellison probably wasn't an easy task, but Oracle veteran and new Veritas Software (Nasdaq: VRTS) CEO Gary Bloom has quickly learned the hard way that there are even more demanding bosses to answer to than Mr. Ellison: finicky and unforgiving shareholders.
Mr. Bloom, who spent 14 years at Oracle, left the database software giant in December; he wanted to be a CEO, and it certainly didn't appear that Mr. Ellison was stepping down anytime soon. "I wanted his job and he wanted his job and I wasn't going to win that battle," he quips. When the move was announced late last year, many on Wall Street praised it as a major coup for Veritas. But it's been a rough few months for Mr. Bloom. Since joining Veritas, shares of the storage software leader have plunged nearly 62 percent. I guess the honeymoon is over.
The latest bit of bad news came on Wednesday. Even though Veritas met earnings and revenue expectations for the second quarter, the company predicted that revenue growth would slow in the second half of the year due to sluggish economic conditions. Veritas lowered its revenue projections for 2001 to 25 percent to 35 percent from a previous range of 35 percent to 50 percent. Wall Street didn't react kindly to the revision. The stock fell 26.5 percent on Wednesday and another 2 percent on Thursday. As a result, I think a good buying opportunity exists for investors that want to hold onto Veritas for the long term. What happened following the earnings report was a typical Wall Street overreaction.
MARKET LEADER WITH SOLID FUNDAMENTALS Let's put some things in perspective here. Veritas, the market leader in data recovery and backup software, is expected to post an incredibly healthy revenue increase this year, despite the warning of a slowdown. Revenue growth of 25 percent for a company with trailing 12-month sales of $1.5 billion is nothing to be ashamed of. What's more, analysts are still predicting earnings growth of 25 percent this year and 28 percent in 2002 -- and that's after estimates were lowered following the warning. By contrast, several other storage companies are likely to report earnings declines this year, including EMC (NYSE: EMC), Brocade Communications Systems (Nasdaq: BRCD), and Emulex (Nasdaq: EMLX).
Simply put, the poor economy has caught up to Veritas. It was unreasonable to expect the company to emerge from this economic slowdown completely unscathed. After all, some of its major customers are hardware original equipment manufacturers (OEMs) that have really been struggling -- companies like EMC, Hewlett-Packard (NYSE: HWP), and Sun Microsystems (Nasdaq: SUNW).
It's encouraging that Veritas appears, unlike other storage companies, not to be suffering due to strong competition. Veritas is the dominant force in storage software, and the company hasn't had to resort to price wars to maintain market share -- something storage hardware leader EMC has done in recent months. Mr. Bloom goes so far as to dismiss competition from companies like Legato Systems (Nasdaq: LGTO) and Computer Associates (NYSE: CA). "They can scratch and claw and inflict a little pain, but in the end they're still wounded animals," Mr. Bloom says. Analysts agree. "There isn't another vendor that has the breadth of product and stature in the market that Veritas has," says FAC/Equities analyst Mark Kelleher. "Veritas is in a unique position. There is very little pricing pressure."
AT YOUR SERVICES Another positive worth noting that was lost amidst the sea of negativity surrounding the earnings warning was the fact that Veritas's service business is growing rapidly. The company's consulting division, which was particularly strong in the second quarter, contributed to solid services growth. Since Veritas produces software for many different hardware platforms, customers often seek its assessment on the various types of storage architecture. Revenue from services increased 91 percent in the second quarter and now accounts for a quarter of Veritas's total sales. Mr. Bloom says that as the storage hardware business continues to evolve, the services segment should experience further strong levels of growth.
As a result of the stock's meltdown, it's now trading at 48 times 2001 earnings estimates. That's not a bargain by any means, but when you consider that the stock had been trading at more than 60 times earnings estimates before the earnings warning and that earnings are still expected to increase about 50 percent over the next three to five years, it's not an unreasonable price to pay for a market leader.
Don't get me wrong -- I'm not expecting the stock to move substantially higher anytime soon. As Mr. Kelleher points out, "The third quarter is going to be a mess for tech and storage in general. There are no catalysts to move things up." But Veritas is now trading just a fraction above its 52-week low and at a compelling valuation, considering its growth rate. If you buy at these levels, there's a solid chance that the stock will move substantially higher once the economy turns around.
FOCB INDEX WINNERS AND LOSERS Sadly, Veritas wasn't the only technology company to suffer from earnings-related mishaps. Many of the companies in the PMC-Sierra (Nasdaq: PMCS), with an 8.8 percent gain. PMC-Sierra reported a second-quarter loss that was in line with expectations, but there seems to be a growing feeling on Wall Street that the worst may be over for this sector. Broadcom (Nasdaq: BRCM), Xilinx (Nasdaq: XLNX), and RF Micro Devices (Nasdaq: RFMD) also gained ground in the last week.
The biggest loser in the index was e-business software company Siebel Systems (Nasdaq: SEBL), which plunged 26.2 percent. Siebel, like Veritas, reported a strong second quarter but warned that the second half of the year will be tough. Earnings will continue to take center stage this coming week as 15 FOCB companies are on tap to report their latest quarterly results, including Texas Instruments (NYSE: TXN), Corning (NYSE: GLW), JDS Uniphase (Nasdaq: JDSU), and Qualcomm (Nasdaq: QCOM).