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Broderbund Software Stock Falls by 24%

Wall Street: Company says its earnings won't meet estimates because it cut prices to stimulate sales.

March 06, 1997|From Bloomberg News

NOVATO, Calif. — Broderbund Software Inc. stock plunged 24% after the software maker said fiscal second-quarter earnings won't meet Wall Street estimates because it cut prices to stimulate sales.

Shares of Broderbund fell 7 3/8 to 23 1/8, making it the seventh-biggest percentage decliner on U.S. markets.

The maker of such software titles as "Where in the World is Carmen Sandiego" and "Myst" is suffering because it was forced to cut prices to try to keep up with aggressive competitors like Microsoft Corp. and The Walt Disney Co., analysts said.

"Growth in the consumer software market is slowing," said analyst Larry Marcus of Alex. Brown & Sons Inc. "It's important for Broderbund to see more stability in pricing and get new titles out."

The company said earnings in the quarter ended Feb. 28 will be 15 cents to 20 cents a share before acquisition-related charges, well below the Wall Street estimate of 32 cents, the average estimate of 18 analysts polled by IBES International Inc.

Broderbund and other personal-computer software companies miscalculated by cutting prices to stimulate demand during the holiday season, a move that came back to haunt them during a post-holiday slowdown, said Stephen Dube, an analyst with Wasserstein Perella Securities.

"In retrospect, for a lot of these companies it was premature to cut prices during the holiday season," he said. "What they gained in volume they didn't make up for in margins."

Broderbund said it expects to report second-quarter revenue of $41 million to $44 million, below the $48 million it reported in the year-earlier period, when it earned $18.8 million, or 87 cents a share. The company said unit sales increased 30% during the quarter.

Dube said the Learning Company Inc., which also makes educational and consumer software, took the opposite approach of keeping prices firm to protect revenue and gross margin. Its revenue increased 49% in the fiscal first quarter while gross margin fell slightly to 25.7%. Gross margin is the percentage of revenue remaining after subtracting product costs.

Broderbund's gross margin had climbed to 74.2% in the fiscal fourth quarter, but fell to 63.9% in the fiscal first quarter.

Analysts said they expect the new version of the popular "Myst" game, which is due out in August, should help Broderbund. Still, that title has been delayed and should have been out for the Christmas season, analysts said.

The older version of "Myst" now sells for between $20 and $30, said analyst John Girton of Van Kasper & Co., compared with as much as $50 last year.

Broderbund said earlier it will take a charge in the second quarter to cover costs associated with its acquisition of Living Books.

Lehman Brothers, Morgan Stanley Inc. and Alex. Brown all trimmed their recommendation on Broderbund to "neutral" from "buy" on the news.

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