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Mercury falls on fears it could miss profit target

Tue Sep 28, 2004 04:27 PM ET

NEW YORK, Sept 28 (Reuters) - Shares of Mercury Interactive Corp. (MERQ.O: Quote, Profile, Research) fell 4 percent on Tuesday on fears the software maker could miss its quarterly earnings target, traders and analysts said. FTN Midwest Research analyst Trip Chowdhry reduced his revenue and earnings estimates on several software makers including Mercury, citing tight budgets.

"Probably Mercury will miss its numbers because major software projects are not going to be initiated in the next several quarters," Chowdhry said.

Jefferies analyst Katherine Egbert said the September quarter seems better so far than June, but Mercury has yet to close several big deals.

"Our checks indicate that the company has yet to close several million-dollar-plus deals that would put it at or over the range of guidance for the quarter," Egbert said in a research note, adding that reliance on big enterprise deals poses risk to its financial model.

The speculation spilled into the options market. Near Tuesday's close, more than 38,000 contracts had changed hands combined across U.S. options exchanges, more than 13 times typical volume, according to market research firm Track Data.

Paul Foster, options strategist at, said Mercury shares fell "on fears it will not meet the Street's financial estimates because of competition and accounting recognition issues."

Mercury uses a subscription model in which it recognizes some revenue over the life of the contract rather than upfront, which some analysts say is more conservative.

The stock fell $1.48 to close at $32.36.

The company, whose software helps companies test technology performance, faces competition from open-source vendors whose software is free and International Business Machines (IBM.N: Quote, Profile, Research) which is essentially giving away those products, FTN associate analyst Brian Weisberg said.

Another rival, system management software maker BMC Software (BMC.N: Quote, Profile, Research) , is also selling software that optimizes technology performance more effectively, he added.

A Mercury spokeswoman declined to comment, citing a mandated quiet period leading to its earnings announcement.

She said the September quarter is tracking ahead of where it was at this point last quarter, as Mercury closed two big deals that slipped out of June and closed in early July.

The company, based in Silicon Valley, in July posted lower quarterly earnings and said profit for the current quarter ending Sept. 30 could miss Wall Street estimates. Analysts on average expect Mercury to earn 25 cents a share, according to Reuters Estimates.

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