FileNet’s Woes: Blame It on Sarbanes-Oxley?
By ANDREW SIMONS
FileNet Corp.’s troubles might be more than just a blip, according to some Wall Street analysts who follow the Costa Mesa-based business software maker.
Two weeks after FileNet warned earnings for the current quarter would be half of expectations, analysts are wondering whether there are more bumps ahead.
“I did not think this is a one-quarter thing that will snap back,” said Mark Schappel of Keybanc Capital Markets, part of Cleveland-based KeyCorp.
Among the biggest questions facing FileNet: Will its customers,banks, insurance companies, utilities, government agencies and companies alike,shell out big bucks for its mainstay file management software?
The question arose after several large customers ended up delaying purchases, a phenomenon that has befallen other software makers. One company insider said companies were dragging their feet on software buying because of fallout from the 2002 Sarbanes-Oxley accounting reform act.
The FileNet news shocked investors and left management fumbling to explain.
“Company executives got to the end of the quarter and decided that money they originally had allotted for big investments should be delayed,” said Steven Ashley, an analyst with Milwaukee-based Robert W. Baird & Co. “I’m not saying that these customers won’t sign deals. I just don’t think it’s going to be a September quarter event. It might be a December quarter event.”
FileNet’s software is no small investment. The company focuses on deals of $1 million or greater, according to analysts.
Big companies and others use FileNet software to organize disparate computer files that aren’t easily handled by a database.
Those include audio and video files, electronic forms, scanned documents and e-mails.
“Other companies manage a portion of a company’s documents,” Schappel said. “FileNet wants to manage a customer’s entire document management system.”
That means a greater number of big deals. But it also means a tougher sell for companies worried about the strength of the recovery and whether technology spending will crimp profits.
FileNet’s smaller rivals, including Florida’s Citrix Systems Inc. and Toronto’s Hummingbird Ltd., go after smaller deals, according to Schappel.
“They go after small and midsize transactions,” he said. “FileNet’s sales force isn’t geared toward these.”
Another issue for FileNet: Sarbanes-Oxley.
FileNet had banked on the securities reform law driving some sales as companies looked for ways to comply with new rules.
Sarbanes-Oxley may be causing companies to put software purchases on hold. According to the theory, some executives may be wary of installing new software that could result in inadvertent errors in the auditing process.
Chief information officers are said to be ready to buy FileNet software. But chief executives are leery of doing so midyear out of fear it could impact financial results they’ll have to sign off on at year’s end. They’re more inclined to do big software deals in the fourth or first quarters.
FileNet Chief Executive Lee Roberts (photo) said he still sees Sarbanes-Oxley as a driver of sales.
“The people who are making money on compliance right now are auditors and lawyers, and that’s a simple fact,” he told analysts during the company’s most recent quarterly conference call. “They’re going to start to look for software as a way to reduce their costs.”
Analyst Ashley said he doesn’t expect much from Sarbanes-Oxley spending.
“It’s a little driver,” he said. FileNet’s “business comes from companies looking to automate business. Any Sarbanes-Oxley business will be something that crescendos and dies.”
After two warnings last month, FileNet said it sees third-quarter sales of about $93 million, down from an earlier projection of $97 million.
Profits are seen coming in at around $1.9 million, half of an earlier estimate.
The revisions sent FileNet’s shares down about 40% since July 1. The company counted a market value of about $700 million last week.
