Veritas Has Double Vision

After doubling earnings over the previous year's third quarter, Veritas Software Corp. (Nasdaq: VRTS) raised expectations for its fourth quarter as it faces a looming battle with EMC Corp. (NYSE: EMC) to keep its leadership position in the backup software market.

Veritas beat its own and Wall Street's expectations by recording record earnings for the second consecutive quarter. Net income in the third quarter was $77.6 million, or 18 cents per share, more than double the $36.2 million, or 9 cents per share, it earned in the year-ago quarter. Revenue was $451 million, up 23 percent from $366 million in the previous year for the Mountain View, Calif., company.

Veritas pumped up its fourth-quarter forecast, predicting revenues of between $480 million and $490 million -- well above the $468 million analysts were projecting.

Veritas CEO Gary Bloom certainly doesn't appear concerned about EMC's recent acquisitions of Legato and Documentum. By acquiring Legato's backup-and-restore and Documentum's content-management software, EMC has the key pieces for its strategy to dominate the information lifecycle management (ILM) market (see EMC Closes Legato Acquisition and EMC Cops Documentum).

On a conference call with analysts yesterday, Bloom said Veritas has already been making gains against Legato, and that he doesn't consider Documentum a direct competitor."On the migration front, we've been in a really strong conversion rate going from Legato to Veritas for some time now," Bloom said. "That's been going on for really several years as Legato's market share has continued to decline pretty much year after year. So far in 2003, we're up to somewhere close to 100 customer migrations to Veritas from Legato."

He called EMC's bid for Documentum "an interesting acquisition. It puts EMC to some extent in competition with what should be their other partners, and I think it will open up some interesting strategic relationship opportunities for Veritas. I think there's an opportunity for the partnerships with some of Documentum's competitors to evolve in a pretty interesting way, and naturally we're not going to be too shy about that." [Ed. note: Hmmmm... interesting...]

EMC isn't shy about its software strategy, either. The company has pointed out that EMC, Legato, and Documentum combined brought in about $2.2 billion in software revenues over the past 12 months -- a sum that even Veritas would have trouble matching (see EMC Swings Into Software Big Leagues). Veritas reported $1.5 billion in revenues in 2002. It has $1.26 billion in sales in the first nine months of 2003 and will finish with around $1.74 billion, if it meets its guidance.

At least one observer doesn't share Veritas's optimism over the long run. Clay Sumner, an analyst with Legg Mason Inc., downgraded Veritas's stock today from Buy to Hold partly because he sees increasing competition from EMC and Network Appliance Inc. (Nasdaq: NTAP). Sumner said he thinks EMC's ILM strategy will reduce the need for Veritas's backup software.

"As early as January [2004], we could have EMC heavily marketing products with the message, 'Stop doing backups,' " Sumner says. "And Network Appliances is already saying that."Sumner also points out that much of Veritas's third-quarter gains came from the volatile emerging products category -- primarily replication -- and a rise in government contracts.

But others have more confidence that Veritas will continue to roll. Smith Barney upgraded the stock from Hold to Buy. And Steve Berg of Punk Ziegel & Co. says he expects Veritas to hold up well against the competition.

"I'm sure those competitors [EMC and NetApp] will have their hands full in dealing with Veritas," Berg says.

Veritas also has $2.3 billion in cash on hand, and Bloom indicated that the company might make some acquisitions of its own. "We have an appetite to do more acquisitions," Bloom said. "And we certainly have the balance sheet and cash position to satisfy that appetite."

However, company executives acknowledged that its purchase of application software management vendor Precise Software, which it completed in June, hasn't worked out as well as it would have liked (see Veritas Picks Up Precise)."We had a slow start with Precise, which was disappointing," said Veritas CFO Ed Gillis on the conference call yesterday. "Obviously, we could do better, but we expect to do better in the fourth quarter."

Dave Raffo, Senior Editor, Byte and Switch