Component software development specialist Rational Software Corp, of Santa Clara, has had its shares clobbered for the second day in a row following a management conference call Wednesday, in which the company warned revenues and earnings going forward would be less than Wall St forecasts. Shares of Rational plunged 19% Wednesday, from $2.875 to $11.938, on Nasdaq trading, which at 11.4 million shares made the stock the second most active in U.S. markets for the day. Thursday saw the same trend, with the company’s paper falling 16.75%, to close at $9.938. A host of Wall St firms have in turn changed their mostly still favorable ratings on the stock to hold or worse, such as Smith Barney (downgraded from outperform to neutral) and Deutsche Morgan Grenfell (accumulate to hold). DMG also cut its estimate of the company’s full year revenues to $310m from $366m, and also cut its projection for fiscal 99 results from $411m to $380m. The cause of the fuss was Rational Chief Executive Officer Paul Levy repeating his recent warning (CI No 3, 254), that the expected imminent entry of Oracle Corp into the data modeling market, with its upcoming Designer/200 product, where up until now Rational and its Rose product have held a leadership position, has drastically changed the competitive landscape. As a result the company’s previous projections for fiscal growth for the next two years out are now being held as too aggressive. Rational, while expecting revenue to match or come in slightly under market estimates for the rest of its current fiscal, now expects to end the year on sales of somewhere between $375m and $395m, with its third quarter results falling between $82m and $84m and fourth quarter in the $87m to $90m range, with earnings per share of between 11 and 13 cents and 12 and 14 cents respectively. This would represent 20% less than current Wall St estimates, if borne out. More immediately, the company is expected to report second quarter results on the 15th that will show a loss – but that mainly due to its stock-swap acquisition of Pure Atria Corp, which completed end of July, it contends. To meet the Oracle threat, Rational is having to increase investments in sales, marketing and product development, attempting to build its software engineering point tools into a combined (and presumably discounted) suite; but this suite will not be ready for deployment until fiscal 1999 at the earliest, presumably sometime next calendar year (its last fourth quarter results, showing $145.4m revenue, and losses mainly due to acquisitions of $42.9m, was reported late April). Building on a recent partnership with Microsoft Corp, Levy also confirmed the company is to concentrate on the NT market as a growth opportunity, complementing its already-established Unix portfolio. But the nod to Redmond only helped fuel speculation that Microsoft will sooner or later acquire the company outright, especially given the currently depressed share price. Some commentators see Microsoft’s VisualModeler (which is bundled with its Visual Basic 4GL and Visual Studio product) as essentially an inferior version of Rose, and the company’s SQA test product range is already highly Windows-friendly in any case. Rational stock has enjoyed a dizzying seesaw this year following its October 1996 IPO, when it hit a 52-week high of $44.25, with it only recently climbing rapidly from $13 in mid-August to $22 at one point last month. The company reported its first quarter of fiscal 1998 in July, with sales up 34% to $42.9m from $32.0m, with net income of $7.8m, up from $5.1m the previous period in 1996.
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