Software companies are getting softer and softer for investors. In the past week, we've seen a rash of warnings. Visual Networks
What's to blame for the fallout? A big culprit is the never-ending villain, Sarbanes-Oxley (SOX). Congress and President Bush said they wanted to prevent future Enron and WorldCom episodes when the bill became law in 2002. It's possible that SOX has done just that. But one thing is certain: The new law has significantly increased the cost of being a public company.
Software companies have especially complex revenue-recognition issues and internal controls. Sale of licensure generally equates to some intent to deliver, meaning that the delivery of software itself hasn't yet happened. That complicates SOX compliance and drives compliance costs up.
Look at Altiris. The company develops advanced software that helps monitor an enterprise's IT systems. Revenue was termed as "good" for the quarter, but there were higher-than-expected "legal and compliance" costs.
Software companies are also getting pushback from customers who are enduring their own high costs of SOX compliance. That was the excuse, anyway, from SeeBeyond, a company that specializes in integrating various IT systems within an organization. According to SeeBeyond, "There were several significant license deals that did not close in the first quarter largely due to prospective customers managing new procurement processes in accordance with Sarbanes-Oxley." Visual Networks, a company that boosts the performance of applications in the enterprise environment, also blamed SOX.
Bear in mind, though, that software demand has been fairly weak for the past several years. Given the degree of investment on comparatively cheap terms in the late '90s and early into this decade, compliance is probably not the main culprit. Companies like Cognos
Investors shouldn't be asking whether SOX has resulted in delayed revenue recognition or increased legal and compliance costs. Instead, they should ask whether recent earnings-report bad news is being caused by changes in the strategic viability of their businesses. After all, software companies are packed pretty tightly into their respective niches; they compete fiercely for large corporate accounts and pricing.
Like him or not, Oracle
Fool contributor Tom Taulli does not own shares mentioned in this article.