Some Software Companies Still Seeing Growth
Highlighted stocks include Red Hat (RHT - Snapshot Report), ArcSight (ARST - Snapshot Report) and Progress Software (PRGS - Snapshot Report).
Despite the pullback in overall business spending, 2009 earnings estimates for several software companies are being revised up. The overriding theme among the beneficiaries of the raised forecasts is cost-savings and/or enhanced productivity.
In other words, brokerage analysts believe those software companies that can help customers control costs and improve efficiency should be able to weather the current economic storm. These companies include Red Hat (RHT - Snapshot Report), ArcSight (ARST - Snapshot Report), Progress Software (PRGS - Snapshot Report), Pegasystems (PEGA - Snapshot Report), Open Text (OTEX - Snapshot Report), Rightnow Technology (RNOW - Analyst Report) and SourceForge (LNUX - Snapshot Report).
Confirming the optimism have been recent, bullish earnings reports from RHT, ARST and PRGS.
Double-Digit Growth for RHT
Red Hat recently reported a 22% increase in revenues for its fiscal third-quarter, which ended in November. Compared to the prior quarter, total revenues increased 1% and subscription revenues remained flat.
The sequential numbers are noteworthy because they imply that the company was able to maintain its revenue stream even as the economy worsened. CEO Jim Whitehurst credited his company's open source platform for the good numbers. RHAT specializes in Linux, which is said to have lower cost than competing operating systems.
On an earnings basis, RHT generated a profit of 24 cents per share, 11 cents better than brokerage analysts had forecast.
The positive surprise caused 11 of the 15 covering brokerage analysts to raise their full-year profit projections. The revisions led to a 7-cent increase in the consensus earnings estimate, which now stands at 63 cents per share.
ArcSight Beats
Last month, ARST said fiscal second-quarter revenues rose 33% to $32.8 million. Earnings reached 6 cents per share versus a loss of 3 cents a year prior. Brokerage analysts had forecast the company to break even.
The company said revenues should rise 16% to 23% in the third quarter, but did not update its full fiscal-year guidance, citing limited visibility. The cautious outlook did not deter 3 of the 5 covering brokerage analysts from adjusting their full-year estimates, however. The positive revisions led to a 4-cent increase in the fiscal 2009 consensus earnings estimate to 12 cents per share.
ArcSight provides compliance and security management solutions. The necessity of companies and federal agencies to continue investing in such software and services helped to shield the company from the brunt of the economic downturn.
Progress Software Guides For Continued Growth
Fiscal fourth-quarter revenues for Progress Software rose 2% to a record $139 million, led by a 4% increase in software license revenue. PRGS provides software platforms that aid in the development and management of business applications software.
Earnings, reported on a GAAP basis, declined to 16 cents. The numbers were adversely affected by a purchase accounting adjustment and other acquisition and amortization expenses.
PRGS believes it can achieve revenues of $532 million to $542 million in fiscal 2009, an approximate 4% increase over fiscal 2008. The sole covering brokerage analyst raised his fiscal 2009 earnings estimate to $1.60 per share in response. The previous forecast called for earnings of $1.22 per share.
OTEX, PEGA, PRGS, RNOW and LNUX are Zacks #1 Rank ("strong buy") stocks. ARST and RHAT are Zacks #2 Rank ("buy") stocks. They are all classified in Computer-Software.
Related ETFs
There are 3 software-specific exchange traded funds: iShares S&P North American Technology Software Index Fund (IGV), PowerShares Dynamic Software Portfolio (PSJ) and Software HOLDRs (SWH). Most of the companies mentioned above, however, are small-cap and thus have little to no representation in any of these ETFs.
Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.
| Sector Rank as of Jan 7 | ||||||
| Sector | This Week's Zacks Rank | Last Week's Zacks Rank | FY09 Revisions Ratio | FY09 Estimates Revised Up | FY09 Estimates Revised Down |
|
| Medical | 2.57 | 2.57 | 0.42 | 114 | 258 | |
| Aerospace | 2.88 | 2.90 | 0.11 | 8 | 45 | |
| Computer and Technology | 2.90 | 2.91 | 0.50 | 145 | 961 | |
| Consumer Discretionary | 2.91 | 3.00 | 0.09 | 40 | 181 | |
| Business Services | 2.93 | 2.85 | 0.24 | 17 | 104 | |
| Utilities | 2.96 | 2.94 | 0.27 | 25 | 128 | |
| Consumer Staples | 2.97 | 3.10 | 0.16 | 40 | 196 | |
| Retail-Wholesale | 3.09 | 3.17 | 0.23 | 78 | 289 | |
| Finance | 3.15 | 3.16 | 0.10 | 112 | 1003 | |
| Construction | 3.15 | 3.15 | 0.10 | 3 | 101 | |
| Industrial Products | 3.19 | 3.20 | 0.15 | 18 | 272 | |
| Transportation | 3.21 | 3.10 | 0.07 | 60 | 250 | |
| Auto-Tires-Trucks | 3.33 | 3.40 | 0.10 | 2 | 98 | |
| Oils-Energy | 3.35 | 3.24 | 0.06 | 82 | 572 | |
| Basic Materials | 3.39 | 3.32 | 0.01 | 23 | 309 | |
| Conglomerates | 3.59 | 3.70 | 0.01 | 2 | 84 | |
Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.