Veritas Takes a Dive

More evidence that this might be a rocky quarter for storage companies surfaced today when Veritas Software Corp. (Nasdaq: VRTS) preannounced quarterly earnings below its previous guidance (see Veritas Announces 2Q Results).

Veritas CEO Gary Bloom said the company expects revenues between $475 million and $485 million for the quarter that ended in June, compared to its previous forecast of $490 million to $505 million. Bloom said he expects earnings per share from $0.18 to $0.20, down from previous guidance of $0.22 to $0.26. Veritas will report its quarterly earnings on July 27.

Veritas is the third storage networking company to downgrade its earnings forecast since the end of June. Last week, HBA vendor Emulex Corp. (NYSE: ELX) and tape library company Overland Storage Inc. (Nasdaq: OVRL) said they would report earnings and revenues below previous estimates (see Emulex Hits the Deck and Overland Guides Under). Those companies blamed soft OEM sales, and analysts say a poor quarter by Hewlett-Packard Co. (NYSE: HPQ)hurt both.

Bloom blamed seasonally weak U.S. sales in late June for Veritass woes. "As we have indicated previously, software license orders are generally concentrated in the later part of the third month of the quarter,” he said in a statement. “At the end of the June quarter, our anticipated order flow weakened, contributing to lower-than-expected license revenues."

Bloom said the company’s services business was strong, and revenue in Europe and Asia/Pacific met expectations. He said license revenue will likely fall between $263 million and $273 million, with services revenue, coming from consulting and help with product installation and maintenance, of approximately $212 million.Despite surpassing expectations in the first quarter of the year by generating $487 million, Veritas will have a tough time meeting Bloom’s former prediction of a $2 billion revenue year (see Veritas Holds Steady). If Veritas hits the high end of the revised forecast for the June quarter, it will still need revenues of $1.028 billion in the second half of the year to hit that projection.

The disappointing earnings announcement comes as Veritas tries to put an embarrassing accounting error behind it and gears up for renewed competition from Legato backup and data protection software from EMC Corp. (NYSE: EMC).

On June 14, Veritas filed its 10-K for 2003 and 10-Q for the quarter that ended last March, along with restated financials for 2001 and 2002 and three quarters in 2003 (see Veritas Files 2003 Forms and Veritas Searches for Truth). The restatements were due to accounting irregularities that the company announced in March. The company said the irregularities include incorrect deferral of services revenue, unsubstantiated accrual of expenses, and the overstatement of accounts receivable and deferred revenue.

On top of this, competition from EMC might not turn out to be minor. On June 10, EMC announced a reorganization of its software businesses into one division and said it was gunning for Veritas (see New EMC Group Jabs Veritas). EMC set a target of $1.5 billion in revenues from the new software division, which includes products acquired from Legato and Documentum as well as open EMC software.

“I’m already sticking pins in the Gary Bloom doll,” EMC software EVP Dave DeWalt said at the time.Today, it’s looking as if there’s something to DeWalt’s voodoo. Veritas’s shares lost more than 34 percent of their value in morning trading, dropping to $17.50 per share.

— Dave Raffo, Senior Editor, Byte and Switch