Analysts sees in-line 2Q for software infrastructure cos.

SAN FRANCISCO, Jul 22, 2008 (Thomson Financial via COMTEX) -- VMW | Quote | Chart | News | PowerRating -- The infrastructure software companies are likely to meet Wall Street expectations for the June quarter but there is concern that the second half of the year may present challenges for the group. The sector's reporting season is set to pick up this week and a number of analysts have issued notes previewing the numbers.

VMware Inc., Citrix Systems Inc. and BMC Software Inc. could feel the impact of the current cautious macroeconomic environment, Raymond James analyst Michael Turits told clients last week, saying the mood could lead to delays in deals and new projects or a slower sales cycle. Turtis added that clients could also turn to existing products rather than buying new software licenses.

Stifel Nicolaus also sees an in-line June quarter for the sector but was less pessimistic about the next quarter.

"While software could experience some pressures, we think there is likely to be less pressure than the last weak period. We also think many software companies' business models are in better shape and that companies are better prepared to manage through this. Lastly, valuations remain tilted more to the cheap than expensive," analyst Todd Weller wrote in a note to clients Monday.

Sharp dropoffs in IT spending in the last downturn cut much of the fat at many companies, and there's less to trim this time around, he said. Moreover, many companies now have more recurring revenue and better international exposure than during the last downturn, he said.

Turits, too, wasn't downbeat on all stocks in the sector. If his channel checks are correct, the prognosis could be somewhat better for some firms - he maintained outperform ratings for the full year on McAfee Inc. and CommVault Systems Inc. and market perform ratings on Check Point Software Technologies Ltd., Symantec Corp. and Limelight Networks Inc.

Turits was particularly bullish in Akamai Technologies, reiterating a strong buy rating on the stock because of burgeoning growth in online video viewing and the profitability of online video advertising and e-commerce. Cambridge, Mass.-based Akamai makes content delivery networks (CDNs) that help speed up the delivery of Internet traffic.

A growing consumer interest in higher bit-rate video delivery and HD video delivery also bodes well for the company, he said, as does the emergence of new technologies that bring Internet video to consumers' flat screen TVs as well as to personal computers.

"[W]e believe the CDN business is less recession-sensitive than enterprise software," he noted.

Maxim Group analyst Hark Harding echoed that sentiment, noting Monday that Akamai customer Sony plans to release its Playstation 3 video rental and download service soon, which he thinks will help broaden the online video user base. Harding also said Google's remarks last week, that online traffic remains strong, are a positive for Akamai.

Turits sees an adjusted profit of 41 cents a share at Akamai on revenue of $197 million in the June quarter, in-line with the mean estimates of analysts polled by Thomson Reuters.

He was slightly more cautious on the prospects for Citrix and trimmed his second-quarter adjusted earnings view for the stock by a penny to 36 cents a share on revenue of $384 million. The consensus analyst view was a profit of 36 cents a share on revenue of $387 million.

The analyst said resellers have told him that sales of XenApp, the company's Windows virtualization product, were strong but that sales of some of its server virtualization and application delivery products have slipped.

Citrix incorporated XenServer into its product line after its $500 million acquisition of server and desktop virtualization firm XenSource Inc. in October last year.

"We believe the buzz around desktop virtualization (XenDesktop) is driving customers to consider opportunities for broader deployment of XenApp as well," he said.

However, Goldman Sachs analyst Sarah Friar wrote in a note to clients Friday that her channel checks suggest the core business at Citrix appears to remain strong, even if the bar on the relatively small XenServer line, which she called "the overriding bear case" for the company, has been lowered.

Some customers have turned to desktop virtualization so they can telecommute and save money on the gas they would otherwise use to drive work, she said.

Friar rated the stock at buy and called it a favorite among the software companies she follows. "We continue to see Citrix as the best positioned vendor to seize the large desktop virtualization opportunity," she said. The company also remains an attractive acquisition target for Cisco Systems, HP and Microsoft Corp., she added.

Friar sees an adjusted third-quarter profit at Citrix of 40 cents a share on revenue of $395 million.

At BMO Capital Markets analyst Steven Freitas was also more upbeat on the stock than Raymond James. In a research note Monday he reiterated an outperform rating and $48 price target for Citrix and said strength in XenApp sales should drive a second quarter at or above guidance. He sees a second-quarter profit of 39 cents a share on revenue of $395 million.

Like Turits, other analysts were cautious on some names in the infrastructure software sector. Canaccord Adams on Monday lowered its price target for VMware to $42 from $66.70 and reiterated a hold rating. While virtualization remains at the top of IT spending priority lists, existing and pending competition will compress pricing, the broker said.

VMware's virtualization software allows users to continue to run older software applications that are not longer supported by outdated hardware. Shares of the Palo Alto, Calif.-based company tumbled earlier this month after the company ousted founder and Chief Executive Diane Greene and warned investors it sees lower-than-expected revenue growth.

Morgan Stanley also lowered estimates for the stock, slashed its price target to $38 from $68 and said VMware will "remain volatile" in the near term.

Turits pared his full-year earnings outlook for the stock to $1 from $1.08 and cut his second-quarter adjusted earnings view a penny to 23 cents a share on lower revenue of $461 million, versus an earlier $470 million. The mean Street view was a second-quarter profit of 23 cents a share on revenue of $459 million and a full-year profit of $1.02 a share.

Friar at Goldman Sachs sees VMware's earnings as an indicator of broader interest in virtualization products, including those from competitors Citrix and Microsoft.

"Despite the company recently lowering its full year revenue outlook, our checks continue to indicate virtualization as the top software spending growth area in the current environment," she said.

Turits was cautious about emerging sales trends for the companys offerings - even though server virtualization can save companies money, new server sales appear to be weakening, he said.

Some customers might be pushing out buying cycles in anticipation of Microsoft's Hyper-V, a virtualization competitor, and VMware also appears to be selling more aggressively against its resellers. "While this can create near-term sales leverage, it can also force steeper reseller discounts from VMware," he noted.

He also warned that the firm is still adjusting to the top-level shake-up. New CEO Paul Maritz comes from majority VMware stockholder and parent EMC and may be less interested than Greene in a complete spinoff of VMware. Engineers could also leave the firm to follow Greene, he said.

VMware reports results Tuesday afternoon; Citrix, Wednesday afternoon and Akamai the following Wednesday afternoon.

Shares of Akamai were trading down 43 cents at $33.08, Citrix shares slipped 10 cents to $27.75 and VMware stock was down 78 cents at $37.73. Brigid Gaffikin bg/mb

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