Veritas Sees No Problem

Despite lukewarm license revenues and guidance, Veritas Software Corp. (Nasdaq: VRTS) execs say they're on track. And they maintain the company has suffered no ill effects from the EMC Corp. (NYSE: EMC) purchase of Legato last year.

In its earnings report last night, Veritas reported a profit of $105.3 million for the fourth quarter, compared to a loss of $49.4 million in the same quarter last year (see Veritas Posts Q4 Returns). Its revenue rose to $512.8 million, up 26 percent from $405.7 million last year and 14 percent from $451 last quarter.

Analysts have been dwelling on a negative tucked inside these positives. To wit: Revenue from newly issued software licenses was $308.9 million, representing an increase of 17 percent year-over-year and 6 percent sequentially. In contrast, revenue from the maintenance of existing software was $204 million, up 44 percent year-over-year and 27 percent sequentially. Bottom line? Veritas had more success with customer renewals than selling new software.

On top of this, Veritas gave next-quarter revenue guidance between $455 million and $470 million -- even though many on Wall Street were expecting around $469 million. The company's projected earnings per share ranged from $0.18 to $0.21, with most analysts expecting $0.21. Veritas's fourth-quarter EPS was $0.25.

We certainly don’t think we have a problem,” Veritas CFO Ed Gillis told analysts in a conference call. “I think we’ve had a good strong second half of the year, and we’ve got a lot of momentum as we go into '04.”Gillis and CEO Gary Bloom say the guidance reflects a seasonal dropoff from the fourth to first quarters, and they see nothing wrong with the software licensing revenue they generated last quarter. As for claims by EMC that Legato is eating Veritas's lunch, they consider it no more bothersome than a gnat on a humid day.

“We didn't see any real effect of the EMC Legato acquisition,” Bloom said, pointing out that Veritas’s data protection software revenues grew $22 million from the third quarter. ”Clearly, if there's a place that people were expecting them to have an effect, it would have been with that [data protection] acquisition.”

The EMC/Legato PR machine tries to paint a different picture. It sent out a press statement this week saying Legato, which posted revenues of $77 million last quarter has replaced Veritas at more than 100 customer sites (see EMC: Everything's 'Better'). Legato also points to analyst reports claiming Veritas is priced significantly higher and customers are tired of it.

Bloom countered that Veritas replaced Legato in more than 200 customer sites during 2003, and Legato has no competitive advantage other than price. “We continue to see that acquisition [EMC-Legato] as positive for Veritas,” he said. “We haven’t seen any negative effect of them entering the marketplace. The fact that we don’t have a hardware agenda is an enormous asset. It’s no way a liability. They [Legato] have continued some of the practices we saw as an independent company of trying to win on price alone.”

Veritas and EMC battle on other fronts besides data protection. Veritas followed EMC’s December purchase of VMware for $625 million by acquiring Ejasent in January for $59 million (see EMC Completes VMware Acquisition and Veritas Nabs Ejasent). Bloom denies the two moves are directly competitive, although both acquired companies do software virtualization. The difference is: VMware works at the operating system level, while Ejasent works at the application level.“VMware is kind of an interesting acquisition… pretty far out of their traditional storage domain,” Bloom says. “There are other efforts underway besides VMware. There's also technology being developed by Microsoft through an acquisition they did, and [that] is an environment that we would probably end up supporting if our customers use it.”

With $2.5 billion in cash, Veritas might do some more shopping in 2004 but so far hasn’t had much success with the 2003 acquisition of Precise Software Solutions (see Veritas Picks Up Precise). Veritas reported its second straight disappointing quarter of revenue from Precise's application performance management software, but said it did make some recent sales that will show up as first-quarter revenue. In future quarters, Veritas will report Precise’s revenue as part of a utility computing infrastructure category.

Despite failing to meet analysts’ expected guidance, Bloom echoes the claims of other storage company CIOs by predicting a strong year of customer spending in 2004, saying Veritas is sticking to its goal of $2 billion in revenue for the year.

“We view 2004 as a growth year, with growth more heavily weighted to the second half of the year,” he says. “While our level of growth depends on a continued IT spending recovery, our business is strong and we expect to drive the company from $1.77 billion in annual revenues in 2003 to a target of $2 billion in 2004.”

Early this afternoon, Veritas’s stock was trading at $31.46, down $5.01 (13.74%).— Dave Raffo, Senior Editor, Byte and Switch