Baltimore Technologies may have to implement a major rationalisation programme after shocking the market with its second profit warning in the space of three weeks.

Brokers estimate the software group will have to cut costs by £20 million sterling (€32.25 million) if it is to have any prospect of generating positive earnings next year.

In late March, after a disastrous presentation to analysts which has led to an investigation by the Financial Services Authority, Baltimore indicated that sales in the first quarter to the end of March would be no more than £25 million sterling, against analyst expectations of £30 million-plus.

Now Baltimore has revised its sales forecast down further, saying sales in the period will be just £23.7 million. This means sales in the first quarter will be 17 per cent lower than in the previous quarter.

Baltimore said customers got cold feet following its March statement, which warned of challenging trading conditions as a result of the US-led global economic slowdown. "When the statement was issued, a number of customers decided to delay on decisions until things became clearer and that unfortunately encompassed the first-quarter period," a spokesman said.

Baltimore said it expected these deferred contracts to be concluded in the current quarter, although analysts were extremely sceptical. The second warning has had a devastating effect on Baltimore shares, which had started a tentative recovery. In exceptionally heavy trading, the shares fell almost 20 per cent and closed down 18p on 74p sterling.

Analysts were scathing about this latest alert from Baltimore. Davys's Mr Barry Dixon said: "The reality appears to be that the company has no visibility in its own forecasts," and added that the warning would only increase concerns about sales forecasts for 2002 and 2003.

ABN Amro analyst Ms Jemma Houlihan was exceptionally negative about Baltimore after yesterday's statement, saying there was a serious danger that deferred contracts would end up being cancelled altogether.

Within the software sector, Ms Houlihan said 50 per cent of contracts were currently being postponed and half of these would be cancelled. Given the shortfall in sales, Ms Houlihan said it was imperative that Baltimore cut its costs substantially. She added that one target should be to eliminate the duplication that still existed following last year's acquisition of Content Technology in the UK.

"There's a lot of cost to take out. There are still two head offices in the UK and there is a lot of savings to be made in administration," she said. She said there was no possibility of Baltimore going earnings positive in 2001 unless there was a serious restructuring of the business. Without eliminating costs, she estimated Baltimore could end the year with cash reserves of just £4 million.

Baltimore chief executive Mr Fran Rooney has not specified how savings would be made. But the market expects a detailed statement on rationalisation with the first-quarter results on May 15th, particularly the extent of the savings that Baltimore aims to generate.