2007 Outlook – Looks Pretty Good the Hangover from Y2K and the Internet Bubble are Finished
Will spending growth for enterprise software continue to improve in 2007?
Based on our informal, qualitative discussions with a pretty wide variety of industry contacts (software sales executives, implementation consultants, industry analysts, as well as users), our sense is that the ongoing gradual recovery in software spending growth will continue in 2007. The improving demand is being driven by a number of factors ranging from customers finally having digested the huge amount of technology investments made in the late ‘90s, a prolonged period of deferred IT investment, to the ongoing challenges of meeting Sarbanes-Oxley regulation, and the benefit of a healthy economic climate. We also believe that the growth rate in software spending will modestly outpace GDP growth in 2007. No one we know is complaining about the spending environment anymore and in our various conversations we see more and more evidence that business is quite healthy.
2006 was a record year for consolidation among enterprise software companies with a myriad of deals large and small, how will 2007 look in comparison? While we’re not sure 2006 was a record year in terms of total value of software M&A value, we’re pretty sure it was a record year in terms of total numbers of transactions. Some of the notable transactions in 2006 are as follows: EMC’s deal to buy RSA, HP’s deal to buy Mercury, and Perigrine Software, Oracle’s continuing spate of smaller acquisitions, infor’s acquisition of SSA Global (itself a conglomeration of many smaller software companies), along with further consolidation being done by private equity firms such as Silver Lake’s $1.2 billion acquisition of Serena Software or the aborted buyout of Embarcadero. While the past couple of years have been very busy for M&A in the enterprise software industry, we believe the forces driving consolidation remain very strong and we expect that 2007 will be another active year. We would not be surprised to see some potentially very large deals given IBM’s continuing desire to be seen as a software company, not to mention HP’s improving focus and Oracle’s success to date in digesting its large acquisitions.
Software stocks after a slow start had a strong finish. What’s the prognosis for 2007? How do valuations look? Since we are no longer in the business of making specific stock recommendations we are limiting our comments to broad brush strokes. We’re quite optimistic that 2007 will be overall another good year for the enterprise software sector in terms of industry fundamentals. We also believe that stock valuations are not unreasonable given the growth characteristics, but that as usual stock performance will be quite mixed.
What will be the hot areas, on-demand hosted applications, business intelligence, ERP applications, analytics, and business service management? During the past several years, on-demand hosted applications providers have done extremely well, benefiting from favorable up-front economics and rapid implementation. While we believe on-demand will continue to do very well going forward particularly with small and medium sized businesses, we think the market is beginning to mature. Large enterprises will embrace on-demand for non-strategic applications and in those instances where concerns over data security on less. ERP applications have enjoyed a recovery which we expect to be continued through 2007. Analytics has been very hot benefiting from companies looking to leverage their existing applications and from what intuitively is a high return on investment. We also see from our work that “e-Service” applications are gaining significant strength in the market as more and more companies recognize that as products are increasingly commoditized, that their service capabilities represent a critical basis for competitive success. Finally, we believe that business service management, long talked about by companies like BMC and others, is in fact gaining real traction in the market.
2006 was a year where the momentum among the major software vendors continues to shift. SAP’s license growth decelerated, while Oracle’s accelerated. Microsoft is finally rolling out Vista. The net of all this is that SAP’s stock has become stuck in a trading range, Oracle’s has broken out of a longstanding trading range, and Microsoft’s following a violent downdraft around the middle of the year appears to be recovering.
Options backdating took the gas out of many, many software stocks. We don’t expect this issue to be as corrosive in 2007.
What’s on tap for the big guys in 2007? We believe SAP will continue to be stuck in the current trading range as it license revenue growth continues to be comparatively sluggish vs. the high rates seen in 2004 and 2005, and the valuation is still rich. SAP registered approximately a 4% price gain in 2005 and a 3% gain in 2006, or 17% for the past two years. We expect SAP to have another year where the shares will be lackluster. While Oracle shares were down 6% in 2005, they’ve roared back in 2006. Although we don’t expect a repeat of the 43% price gain so far in 2006, we do believe that Oracle will continue to outperform the peer group in 2007. Over the past two years, Oracle shares are up 34%. Finally, with respect to Microsoft shares, which were down 2% in 2005 and up 12% (following a sharp downdraft in the middle of the year), we think the shares will have a pretty good year in 2007 and could be a positive surprise.
What does IBM’s recent pronouncement that it is now a software company first and foremost really mean? IBM despite its position as one of the largest software vendors in the world, a spate of significant acquisitions in 2006 (Micromuse and FileNet), as well as the sale of its pc business, is still thought of as primarily a hardware and services company. The declaration that IBM is a software company reflects a frustration with the stock’s valuation and perhaps indicative that the company’s appetite for software acquisitions is not yet satiated.
Will CA recover? While investors have obviously been very disappointed this past year in the pace of CA’s recovery (one step forward, two steps backward), there is little doubt in our mind that CA will recover. The problems to date, in our view, illustrate the tremendous complexity of the business in terms of evolving from older license models to the new subscription based model, as well as struggling with the challenging of defining a rationale pricing model. However there is no question, in our mind, that CA given their breadth of products and deep penetration in the marketplace that the company will recover its balance and resume growth in the 5% to 10% range.
Can BMC continue its turnaround? BMC has enjoyed a terrific year in terms of their stock price. The gains have been driven by 6 quarters where the company has beaten its guidance. Perhaps more importantly bookings growth has turned positive for the past couple of quarters. In our work during the past year we’ve attended a number of BMC events, most notably its user conference earlier in the year. There is little doubt that business service management is gaining traction in the marketplace and that BMC is the clear leader, benefiting in large part through the strength of their CMDB (change management database) offering. Our sense is that BMC’s healthy progress will continue.
Legal Disclaimer Nothing herein constitutes an offer or solicitation to buy any security. Readers are advised to review their own financial situation, risk tolerance, and investment objectives as to any investment. Information provided here is based, in part, from sources believed to be accurate and reliable, although no representations or guarantees can be provided as to its accuracy or completeness.Blue Atlas Management, LLC is our official business entity for consulting related work. In addition, we also have a website for those of you who are interested in learning more a little more about our services http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.
Based on our informal, qualitative discussions with a pretty wide variety of industry contacts (software sales executives, implementation consultants, industry analysts, as well as users), our sense is that the ongoing gradual recovery in software spending growth will continue in 2007. The improving demand is being driven by a number of factors ranging from customers finally having digested the huge amount of technology investments made in the late ‘90s, a prolonged period of deferred IT investment, to the ongoing challenges of meeting Sarbanes-Oxley regulation, and the benefit of a healthy economic climate. We also believe that the growth rate in software spending will modestly outpace GDP growth in 2007. No one we know is complaining about the spending environment anymore and in our various conversations we see more and more evidence that business is quite healthy.
2006 was a record year for consolidation among enterprise software companies with a myriad of deals large and small, how will 2007 look in comparison? While we’re not sure 2006 was a record year in terms of total value of software M&A value, we’re pretty sure it was a record year in terms of total numbers of transactions. Some of the notable transactions in 2006 are as follows: EMC’s deal to buy RSA, HP’s deal to buy Mercury, and Perigrine Software, Oracle’s continuing spate of smaller acquisitions, infor’s acquisition of SSA Global (itself a conglomeration of many smaller software companies), along with further consolidation being done by private equity firms such as Silver Lake’s $1.2 billion acquisition of Serena Software or the aborted buyout of Embarcadero. While the past couple of years have been very busy for M&A in the enterprise software industry, we believe the forces driving consolidation remain very strong and we expect that 2007 will be another active year. We would not be surprised to see some potentially very large deals given IBM’s continuing desire to be seen as a software company, not to mention HP’s improving focus and Oracle’s success to date in digesting its large acquisitions.
Software stocks after a slow start had a strong finish. What’s the prognosis for 2007? How do valuations look? Since we are no longer in the business of making specific stock recommendations we are limiting our comments to broad brush strokes. We’re quite optimistic that 2007 will be overall another good year for the enterprise software sector in terms of industry fundamentals. We also believe that stock valuations are not unreasonable given the growth characteristics, but that as usual stock performance will be quite mixed.
What will be the hot areas, on-demand hosted applications, business intelligence, ERP applications, analytics, and business service management? During the past several years, on-demand hosted applications providers have done extremely well, benefiting from favorable up-front economics and rapid implementation. While we believe on-demand will continue to do very well going forward particularly with small and medium sized businesses, we think the market is beginning to mature. Large enterprises will embrace on-demand for non-strategic applications and in those instances where concerns over data security on less. ERP applications have enjoyed a recovery which we expect to be continued through 2007. Analytics has been very hot benefiting from companies looking to leverage their existing applications and from what intuitively is a high return on investment. We also see from our work that “e-Service” applications are gaining significant strength in the market as more and more companies recognize that as products are increasingly commoditized, that their service capabilities represent a critical basis for competitive success. Finally, we believe that business service management, long talked about by companies like BMC and others, is in fact gaining real traction in the market.
2006 was a year where the momentum among the major software vendors continues to shift. SAP’s license growth decelerated, while Oracle’s accelerated. Microsoft is finally rolling out Vista. The net of all this is that SAP’s stock has become stuck in a trading range, Oracle’s has broken out of a longstanding trading range, and Microsoft’s following a violent downdraft around the middle of the year appears to be recovering.
Options backdating took the gas out of many, many software stocks. We don’t expect this issue to be as corrosive in 2007.
What’s on tap for the big guys in 2007? We believe SAP will continue to be stuck in the current trading range as it license revenue growth continues to be comparatively sluggish vs. the high rates seen in 2004 and 2005, and the valuation is still rich. SAP registered approximately a 4% price gain in 2005 and a 3% gain in 2006, or 17% for the past two years. We expect SAP to have another year where the shares will be lackluster. While Oracle shares were down 6% in 2005, they’ve roared back in 2006. Although we don’t expect a repeat of the 43% price gain so far in 2006, we do believe that Oracle will continue to outperform the peer group in 2007. Over the past two years, Oracle shares are up 34%. Finally, with respect to Microsoft shares, which were down 2% in 2005 and up 12% (following a sharp downdraft in the middle of the year), we think the shares will have a pretty good year in 2007 and could be a positive surprise.
What does IBM’s recent pronouncement that it is now a software company first and foremost really mean? IBM despite its position as one of the largest software vendors in the world, a spate of significant acquisitions in 2006 (Micromuse and FileNet), as well as the sale of its pc business, is still thought of as primarily a hardware and services company. The declaration that IBM is a software company reflects a frustration with the stock’s valuation and perhaps indicative that the company’s appetite for software acquisitions is not yet satiated.
Will CA recover? While investors have obviously been very disappointed this past year in the pace of CA’s recovery (one step forward, two steps backward), there is little doubt in our mind that CA will recover. The problems to date, in our view, illustrate the tremendous complexity of the business in terms of evolving from older license models to the new subscription based model, as well as struggling with the challenging of defining a rationale pricing model. However there is no question, in our mind, that CA given their breadth of products and deep penetration in the marketplace that the company will recover its balance and resume growth in the 5% to 10% range.
Can BMC continue its turnaround? BMC has enjoyed a terrific year in terms of their stock price. The gains have been driven by 6 quarters where the company has beaten its guidance. Perhaps more importantly bookings growth has turned positive for the past couple of quarters. In our work during the past year we’ve attended a number of BMC events, most notably its user conference earlier in the year. There is little doubt that business service management is gaining traction in the marketplace and that BMC is the clear leader, benefiting in large part through the strength of their CMDB (change management database) offering. Our sense is that BMC’s healthy progress will continue.
Legal Disclaimer Nothing herein constitutes an offer or solicitation to buy any security. Readers are advised to review their own financial situation, risk tolerance, and investment objectives as to any investment. Information provided here is based, in part, from sources believed to be accurate and reliable, although no representations or guarantees can be provided as to its accuracy or completeness.Blue Atlas Management, LLC is our official business entity for consulting related work. In addition, we also have a website for those of you who are interested in learning more a little more about our services http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.
posted by jcm at 11:45 AM
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