Wall Street Beat: Software’s turn under the gun

Greater-than-expected costs of doing business on the Web and a predicted decline in PC sales have put pressure on Internet and hardware companies lately. This week, it was software’s turn in the spotlight for IT investors.

Questions about core product lines led to disappointment surrounding Adobe Systems Inc. and Oracle Corp., while Microsoft Corp.’s announcement that Windows Vista would be delayed dragged down the share prices of a variety of tech stocks as investors mulled over the news.

While Adobe Wednesday announced what it called record results, there was some confusion about how much growth was due to its core business. The company did not differentiate between results of its traditional business — including Acrobat and Photoshop — and that of Macromedia, which it acquired last year.

Adobe said it achieved revenue of US$655.5 million for its first fiscal quarter. Profit, however, took a hit from the acquisition, and the company said second-quarter revenue would be $640 million to $670 million. Analysts surveyed by Thomson First Call had been forecasting second-quarter revenue of $675.7 million.

Though some company watchers have been pleased with new Macromedia products such as Flash Lite 2 and Flash Player SDK 7, both released this quarter, the confusion around the company’s core products and its cautious quarterly forecast has some investors worried. Shares of Adobe Systems (ticker symbol: ADBE) dropped $0.39 Thursday to close at $36.33.

Doubts about Oracle’s core market also surfaced after the company’s quarterly report Tuesday. The company reported net income of $765 million for its third quarter, up 40 percent from one year earlier and beating analyst expectations. But shares of Oracle (ORCL) slipped by $0.10 to $13.62 Tuesday.

One reason for the slump is that growth appeared subdued in the company’s core database line, taking into account growth due solely to acquisitions. The problem of how to link the various products it has acquired also weighs on the company. Longtime software analyst Rick Sherlund in a research note called the database line’s growth “unexciting.”

Meanwhile, reacting to Tuesday’s announcement that Vista would be delayed until after this year’s holiday season, PC vendors and corporate users did not seem bothered. This is because versions of the software for large corporate users will still ship according to schedule. Also, according to industry sources, hardware makers had already made the calculation that they would not get Vista onto their machines in time to make the end-of-year retail rush.

Investors were uneasy however, as shares of Microsoft (MSFT) dropped by $0.59 to close at $27.15 Wednesday. Thursday, the software giant announced that it is reorganizing its Platforms & Services Division, which comprises Windows. Company shares slipped again, by $0.30, to close Thursday at $26.85.

While acknowledging that the delay will have a hit on year-end earnings, most tech analysts did not change their ratings on the stock. Company observers have taken into account the fact that Vista will be launched into a mature, slowing market, and seem confident in predictions about eventual Vista uptake — even if it is delayed. The real questions now revolve around Microsoft’s efforts in areas such as consumer electronics, telecom and online services.