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Software Industry Matures

July 12th, 2004 · No Comments

Barron’s writes:

First, Veritas Software…then Siebel Systems, PeopleSoft, BMC Software and Computer Associates. They all missed the sales and earnings expected for the June quarter, with most blaming shortfalls on last-minute deals that should have closed but didn’t.

Will the software industry wind up in the lost-and-found, or should you consider retrieving any of these shares? Bear Stearns analyst John DiFucci believes that investors — and software executives — are encountering a permanent slowdown in the industry’s growth. At the same time, he sees reasonable opportunities for the likes of Oracle and Computer Associates.

“I don’t think that the sky is falling in software,” says DiFucci. “This is just the reality of the future.” In the 1990s, he says, the software business grew at a compound annual rate of about 13%. With no novel applications on the horizon, DiFucci thinks software vendors will now grow sales just a bit faster than GDP growth — say 7%-8% per year.

As software firms approach the limits of their original market, they’ve started to intrude on each others’ turf. Oracle has tried to sell applications, in addition to its database. Microsoft’s tried to sell databases and applications, on top of its operating system. Pricing pressure has increased. Mergers might relieve that pressure, says DiFucci, but antitrust objections are blocking the consolidation attempts of firms like Oracle.

News.com has more on the enterprise software market:

“The thing to realize is that the ERP market is a very small market,” said Jim Shepherd, an analyst at AMR Research in Boston. “The reality is that the Fortune 1000 only has 1,000 companies.”

Although much of the technology industry faces similar challenges, this change has been particularly harsh for enterprise software manufacturers. For three decades, the prime mover behind business software sales has been the promise of a “killer app” that can give customers new insight into their businesses, wring profits in the most efficient way and help them gain a competitive edge. That’s what drove multimillion-dollar sales throughout the 1990s.

In recent years, however, many corporate customers have begun to rethink that notion, especially after the twin blows of the technology bust and the national recession forced them to live with less. Now, rather than buying more products to do more things, companies want the software they already own to more closely model how they do business.

NYTimes writes that the slowdown could be impacting the entire tech industry:

Inquiring investors want to know: Is this a blip, or is the second-quarter slowdown the beginning of a longer-term malaise in tech?

Fred Hickey, editor of The High-Tech Strategist in Nashua, N.H., and a technology stock analyst who knows the industry down to its nittiest and grittiest, says the setbacks in the sector are just beginning.

Investors may have been lulled into thinking that the second-quarter results at tech companies would be sunny because reports of shortfalls had been relatively rare.

Companies typically alert investors to problems late in a quarter, but by June 30, that front was quiet. “Normally the third month in a quarter belongs to the confessors,” Mr. Hickey said. But at the end of June, he added “there were more positive preannouncements than negative.”

Nevertheless, two signs point to problems ahead for technology stocks, he said. First, semiconductor shares, which often lead the action in tech stocks, have gone into a nose dive. The semiconductor stock index, known as the SOX, is down 11.2 percent this year, and spot prices of computer chips are forecasting further declines.

But the biggest trouble spots on Mr. Hickey’s horizon are the ballooning inventories on tech companies’ balance sheets. Already rising in the first quarter, these inventories will probably show a surge for the second quarter, he said, because few tech companies appear to have cut production in recent months.

Tags: Enterprise Software

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