peripheral vision

Oracle Q4 – Further Validation of Oracle’s Consolidation Strategy

2007-06-18T10:25:00.000-07:00

Well it’s that time of year again. No we’re not referring to the upcoming July 4th holiday, rather we’re talking about the all important upcoming May fourth quarter report from Oracle.

As longtime observers know, Oracle’s Q4 results are disproportionate to the rest of the fiscal year and typically serve to set the tone for the upcoming year. The May fiscal 2006 performance was a blockbuster which pushed the stock price beyond its longstanding trading range of $12-$14 into an entirely new range of $15-$19. With the quarter having ended two weeks or so ago, the early betting is pointing to another powerful performance which will lead the stock into a higher trading range.

Our checks to date generally confirm these expectations.

Field sources have been very optimistic and excited throughout the course of the quarter and there have been no signs that the company did not execute well.
The services ecosystem around Oracle has been going flat out.
Finally our discussions with various third party contacts including leading market research firms that provide sophisticated deal advisory services all point to a record level of activity and a preponderance of larger deals.

Since we no longer maintain detailed earnings and cash flow models for Oracle we are not going to discuss estimates apart from stating that we would be surprised if Oracle doesn’t beat the high end of their guidance ranges of license revenue growth of 5% to 15% year over year and non-GAAP EPS of $0.34. A big quarter against a tough year ago comparison should further validate the success of Oracle’s consolidation strategy. While our contacts are almost entirely North American based, we have no reason to expect that Oracle’s performance in key international markets wasn’t good. In addition, we believe that a comparatively weak dollar through the quarter didn’t hurt.

So after many years of skepticism towards Oracle, what’s driving the company’s success today? We believe that Oracle’s management of its acquisitions has been highly effective, particularly with respect to providing customers an increasing sense of confidence that Oracle will continue to support these products while extending their capabilities based on the company’s strong DBMS and middleware foundation. In addition we continue to believe that despite many cross-currents in the tech spending environment that Oracle is benefiting from its increased breadth and depth of applications, as well as the company’s larger scale and the realization on the part of many customer organizations that after the boom period they have underinvested for a number of years.

Oracle and Agile a Natural Combination; Where is SAP?

2007-05-16T08:09:00.000-07:00

Last night Oracle announced that it has reached agreement to acquire Agile Software for $8.10 per share or approximately $495 million in cash. The deal is expected to close in the second half of July.

The consolidation in the product lifecycle management space has been going on for a while now with Dassault’s acquisition of MatrixOne more than a year ago, and more recently Siemen’s acquisition of Unigraphics. Agile has been an obvious target for sometime given its continuing losses and its stop and go progress on the top line.

The fit with Oracle is pretty straightforward, given that Agile’s software has been built on Oracle’s infrastructure. Moreover, the attractiveness of Agile to Oracle is obvious as part of Oracle’s strategy to surround SAP. The deal will enhance Oracle’s position in the manufacturing sector and more specifically in the high technology and consumer packaged goods verticals. In addition, there is little question that where Agile has struggled to expand beyond its core markets, Oracle’s dramatically greater scale and industry presence should enable Agile to finally fulfill these long standing ambitions.

Agile’s product will become the core of Oracle’s PLM offering. As investors well know the PLM space has been long touted as one of the more strategic, compelling and high growth sectors within the enterprise software space, and yet all of the specialized vendors in this space have struggled to produce the expected growth.

The valuation of Agile with an enterprise value of approximately 2.2x trailing twelve month revenues and 5.2x trailing maintenance revenues is toward the lower end of the range, relative to the valuations for MatrixOne and UGS. However in each of those cases it could be argued that the deal was more strategic to the acquirer. Another point to consider is that despite the prospect of a couple of other companies as possible buyers, notably SAP, IBM and Parametric, we strongly suspect that none of these companies expressed serious interest. While we can understand Parametric being somewhat conservative in this case, moreover although IBM has been an active acquirer of software companies they continue to avoid buying applications vendors, one has to wonder what SAP is thinking. The recent Wall Street Journal article “German Company’s Plan to Globalize Hits Cultural Barriers” Friday, May 11, 2007 did an excellent job summarizing the company’s cultural challenges, which we believe represent a major distraction.

Separately and for what it’s worth, our checks on Oracle’s business momentum for the all important May quarter have been to date quite positive with broad based reports that the field is executing well.

Another important takeaway from last night's announcement is that the continuing consolidation of the enterprise software market is far from over.

A Brief Post-Mortem on Q1

2007-05-07T12:42:00.000-07:00

With Q1 earnings results largely out for the vast majority of enterprise software companies, we thought some high level observations were in order. While we are not going to comment in great detail since there are many financial analysts who have been doing just that at a breathless pace as the earnings reports come out, there are a number of themes that are important.

First and foremost, the overall state of spending on enterprise software continues to gradually improve. This is an easy assertion to make given that each of the largest software companies, Microsoft, IBM, Oracle and SAP, had decent to good to strong quarters. While we are still waiting for BMC and CA’s fiscal Q4 results, we would be surprised if they prove to be visibly disappointing. Likewise while inevitably there have been companies that have disappointed (BEA is one that comes to mind) these can be attributed more often than not to competitive or execution issues.

Software as a service – is still the hot market, even as there is greater recognition of the importance of on-premise for many strategic applications, particularly in larger companies. The continuing success of Salesforce.com, as well as its substantially outsized market valuation is an excellent indication that software as a service is both a strong trend from a fundamental perspective that has an even stronger attraction for investors based on the visibility of revenues. SAP’s big push to build a major on-demand offering to broaden and deepen their penetration into the SMB market is just one of the more recent indications that SaaS is really here.

Market consolidation is ongoing. The recent talks between Microsoft and Yahoo which became public last week are simply the most recent evidence. In addition to Oracle’s pending acquisition of Hyperion for more than $3 billion, there are certainly other deals in progress ranging from the pending acquisition of Mobius by ASG, the Tibco deal, Siemen’s acquisition of Unigraphics, to much smaller transactions such as Thomas Cressey’s acquisition of Embarcadero. It is interesting to note that there is growing evidence of private equity becoming more aggressive in the enterprise software industry. In addition to the stealthily built Infor, NetIQ and Embarcadero’s acquisitions are further indications that enterprise software is attractive to private equity investors. This should hardly be surprising given the increased maturity of the sector, coupled with the increased importance of scale, meaning that many companies with a substantial franchise are effectively thwarted from significant growth and yet have very large and predictable cash flows that can be readily leveraged.

The options scandal appears to be receding into the background. Unlike last year where many software companies were seeing their stocks banged hard by indications of backdated options, this year these types of scandals have been considerably less of a disruptive factor.

Software stocks continue to lag the broader market. The WSJ 5/5/07 article “Technology stocks give rally a boost" underscores the fact that tech stocks generally have been poor performers. While business conditions seem pretty good all things considered, stock performance remains broadly disappointing. With the Dow at an all time high and the S&P 500 closing in on its former all-time high reached in 2000, the NASDAQ is still well below its record high, it has been a good year so far. Year to date gains for the major indices are all up more than 6%. With the notable exception of Oracle (up 10% year to date) and CA (up 24%), other leading companies such as Microsoft (up 2%), BMC (down 2%) and SAP (down 10%) appear to be treading water. Salesforce.com is up 18% year to date. The biggest gainer so far this year is Hyperion (up 45%). Excluding deal activity, there really haven’t been any terribly dramatic gains evidenced in the group certainly among large and mid cap names. Interestingly there are a number of micro cap and small cap companies that have posted some impressive gains.

CA – When will it End?

2007-04-17T09:38:00.000-07:00

The recent “special litigation committee” report released by CA’s board late last week, among many other things, states that founder Charles Wang was the mastermind behind the accounting fraud at the company. Mr. Wang, according to various newspaper reports, not surprisingly places the entire responsibility on his one-time protégé and former CA CEO Sanjay Kumar. Mr. Kumar pleaded guilty last fall and has been sentenced to a twelve year prison term. In addition, Mr. Kumar has agreed to make restitution to the tune of $800 million to shareholders hurt by the fraud.

The committee was formed in February 2005 to address ongoing consolidated litigation issues against the company. The 390 page report evaluates CA’s stand on various litigation involving former officers, employees and directors. More specifically these people are divided into the following groups: criminal defendants, former officer defendants, KESOP (Key Employee Stock Ownership Plan) defendants, oversight directors, settlement directors and auditor defendants. The simplest boiling down of the report and how it affects these different groups is as follows. CA should pursue claims against the criminal defendants, former officer defendants and KESOP defendants, and that CA should not pursue claims against the other groups.

There is little doubt that Mr. Wang is at the very least a fortunate man since the opening of the criminal prosecution effort for this accounting fraud began after the statute of limitations had expired, sparing him the fate of his one-time friend and protege. It is also evident that Mr. Wang whether motivated by the desire to minimize bureaucracy or sensitive to the risks of an electronic or paper trail was a very, careful man as is noted by his aversion to email or voicemail. In any event, apart from a desire to realize a fair and just outcome following an extremely difficult and prolonged period, why after so many years is Mr. Wang finally being pursued? What took so long?

As a former Wall Street sell-side analyst who began coverage of CA shortly after the company came public in 1981 up until my retirement from the street in 2005, I find the continuing saga of CA absolutely remarkable on many, many fronts.

Rumors about financial impropriety at CA swirled for many years before the New York Times article appeared in 2001 which is widely seen as a pivotal turning point with respect to the company’s financial operations. The catalyst for the article had been management’s decision driven by former CEO Sanjay Kumar to transition the company away from recognizing license revenues upfront to a new subscription model which would spread license and maintenance revenues evenly over the term of the agreement.

It is still amazing to us given the highly acquisitive nature of CA back in the 80s and 90s, the $1 billion incentive stock award for key employees, the ever present undercurrent of financial improprietary, that the fraud persisted for so long.

The irony of the past six or more years to long time observers of the company has been that regardless of Mr. Kumar’s guilt in the backdating of contracts, it was Mr. Kumar himself who was attempting to radically reform the company’s accounting in a bid for greater structure, conservatism and yes, ultimately, integrity.

Another irony is that for long time observers of CA it is inconceivable that a company so dominated by its founder, with such a reportedly close relationship with his protégé, that Mr. Wang could have been either unaware or innocent of the accounting fraud taking place at the company.

Finally, perhaps the biggest is that CA was by no means the only company engaging in questionable or inappropriate revenue accounting. In fact it is probably not unfair to suggest that virtually all software companies bent the rules to varying degrees in the bid to manage their revenues and meet Wall Street expectations.

While we by no means want to be seen as apologists for these companies that took liberties in how strictly they applied revenue recognition practices of the time, we do think it is important to point out that unlike many of the companies that engaged in sham accounting during the past decade suggest as Worldcom and Enron, the scale of the fraud is not comparable.

Furthermore we make these points not in the effort to defend either Mr. Kumar or Mr. Wang or for that matter any of the participants in the fraud, but in the case of CA and its shareholders’ to ask a number of questions.

At what point does the continued pursuit wrong doers, cost more than the benefit to shareholders?

To what extent do these continued efforts to resolve these problems represent a distraction to CA’s efforts to regain momentum with its customers?

Last, but not least when does CA believe that this long dark period in its history will finally be history?

Top Ten Reasons Why Oracle is on a Roll

2007-03-23T05:27:00.000-07:00

Oracle’s February Q3 results provided further dramatic evidence of the company’s success with impressive performance across all product lines and geographies. License growth of 27% year to year, coupled with GAAP and non-GAAP operating margins of 32% and 39% respectively are BIG numbers particulary when one considers that total quarterly revenues were almost $4.5 billion. As so much has already been written summarizing the specifics of the quarter, we thought it would be more interesting to highlight (in order of importance) the reasons behind Oracle’s strong growth.

#10 Oracle was early in its recognition of the growing maturity of the enterprise software market and the need for substantial consolidation.

#9 Oracle’s CEO Larry Ellison has refocused his energies on technology and vision rather than sales.

#8 Oracle’s sales force is highly motivated by a rich compensation structure and the benefit of a substantially enhanced strategic presence in accounts.

#7 Addition of new offerings in major verticals through acquisitions such as Retek, ProfitLogix, i-Flex, Portal Software and others, have opened up vast new markets

#6 “Lifetime” support for all acquired products, reducing customer anxiety and further reinforcing a customer-centric view.

#5 High performance middleware products are virtually free – allowing Oracle to leverage its leading position in relational DBMSs with the rapid increase of breadth and depth of its applications.

#4 Competitor SAP has been slow to react and continues to be focused more on the SMB market than the bigger picture.

#3 Acquisitions of PeopleSoft/JDEdwards and Siebel in particular, combined with Oracle’s very large presence in the DBMS and applications markets, means a huge number of customers have multiple offerings from Oracle and need to re-examine their licensing profile.

#2 Fusion is a compelling open, standards based, vision of applications services that will drive a new wave of profound improvements in business productivity.

#1 Oracle’s revamped management team has proven itself remarkably adept in navigating a complex and aggressive growth strategy, with no obvious missteps.

Oracle Buys Hyperion, Why We're Not Surprised -- plus A Couple of Thoughts on the Quarter

2007-03-07T14:52:00.000-08:00

Oracle’s announcement last week that it has reached agreement to acquire Hyperion for $3.3 billion or an enterprise value of $2.9 billion reflecting Hyperion’s net cash position of $450 million is not surprising and makes a great deal of sense. We’re not going to review the numbers here apart from noting that the valuation looks reasonable since the basic financial elements have been widely discussed in the financial community. While we have reservations owing to the challenges of any acquisition – integrating people, offices and systems in an effective manner so as to maintain the customer base and ideally leverage the technology, we think the deal is pretty compelling. Some investors may begin to worry more about these issues given that Oracle has been on a binge that reminds us of Computer Associates buying spree more than a decade ago. Nevertheless, we think Oracle’s internal systems are best in class and that management is up to the task.

So why do we think the Hyperion deal is not surprising and a smart move on Oracle’s part?

First, we know from our discussions with industry contacts that Oracle is doing extremely well with Siebel’s analytics now known as Oracle Business Intelligence Enterprise Edition (or OBIEE for short).
Second, we know that Hyperion’s core products are natural complements for these analytics. Hyperion’s more than 12,000 customers including 91% of the Fortune 100 represent a very attractive customer base for Oracle.
Third, that the Hyperion products performance management products and OLAP engine broadly rounds out Oracle’s offering across all the major categories in the business intelligence space.
And, finally as has been widely noted Hyperion’s products are broadly implemented in conjunction with SAP and Microsoft products (providing Oracle another key element in its technology stack). Oracle has been working hard to “surround SAP” as evidenced by the acquisitions of Siebel for CRM, PeopleSoft for HR, not to mention the vertical acquisitions in the retail and utilities sectors and the continuing expansion of the Fusion Middleware business.

Regarding the fiscal third quarter which ended last week, our checks have been encouraging but do not suggest a blow out quarter. Discussions with deal advisory contacts indicate a good amount of activity, but broadly represented by small and medium sized deals rather than “mega” deals. Likewise discussions with applications consultants indicate generally favorable attitudes towards Oracle, in sharp contrast to the sentiment a year or so ago and a healthy amount of activity. Finally field checks have been pretty positive. We have heard that Oracle has tightened on expenses a bit, in particular limiting travel by employees for internal meetings. We think this is a good move on several counts, first it helps contain spending, but more importantly it notably increases the time and focus on customers. Our assumption as of now is that when Oracle reports its February quarter results on March 20th that revenues and earnings will be toward the upper end of guidance.

Legal DisclaimerNothing 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 about our services. http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.

Oracle’s Continuing Bid for Leadership in Enterprise Applications

2007-02-05T11:06:00.000-08:00

We recently attended two different Oracle applications events, one aimed at the financial community to discuss the company’s vertical strategies and the other aimed at customers, partners and analysts unveiling Oracle’s “applications unlimited” launch of 5 major new releases of the company’s core ERP applications. Both events were very well attended and received. To the frustration of the financial community, Oracle’s president Charles Phillips did not comment on how the February fiscal Q3 period was shaping up, or to what extent Oracle has closed the deals missed in Q2.

While the focus of each of these events was different, there are a number of key themes common to both presentations. The most strategic advantage that Oracle has in its applications business is the strength of the Oracle technology stack. The benefits of Oracle’s leading positions in database and middleware are that this technology is available freely to Oracle’s applications businesses, freeing these development teams to focus solely on building domain expertise and expanding the breadth and depth of application functionality. The next most important benefit is simply Oracle’s scale as measured by the size of the organization as a whole as well as its financial strength.

Oracle’s applications businesses benefit from this scale in that they can provide extensive worldwide support 24 by 7 on a cost effective basis that few companies can match. In addition, particularly with respect to some of the much smaller companies Oracle acquired, Oracle’s scale eliminates customer anxieties not just about support but also about financial viability, which is often a big issue with smaller software vendors. Finally, and perhaps most importantly in light of Oracle’s very aggressive pace of significant acquisitions over the past few years, are Oracle’s promises not to discontinue support for any applications products and to continue to introduce new releases of existing products while continuing its development of its next generation Fusion release.

While none of these key themes are new and all of them have been discussed repeatedly over the past few years, what’s different now is that sufficient time has passed, that customers are able to see that Oracle is serious about delivering on these promises. As we have written on previous occasions this, in our opinion, has been the critical variable in Oracle’s success to date in the applications business. Our checks with various industry contacts have repeatedly underscored that where there was substantial anxiety a year or so over whether Oracle would continue to support its acquired products and whether Oracle would attempt to dictate the timing of upgrades, neither of these fears have been realized. As a consequence the sizeable installed base of applications customers has begun to recommit to Oracle and in many instances are expanding their licenses.

Oracle’s Focus on Verticals – “The Growth Area of the Applications Business”

Oracle’s interest in vertical applications is driven by the simple fact that the market opportunity is on the order of 2x the enterprise resource planning (ERP) market and that unlike the ERP market which has been defined by the packaged applications vendors, the vertical applications market is largely represented by custom built legacy applications. Further enhancing the appeal of the vertical applications market is that the emergence of services oriented architecture (SOA), along with the need to improve compliance and the ongoing dramatic improvements in the technology stack are catalysts to replacement of aging custom legacy systems.

In the bid to capture the vertical market opportunity as quickly as possible, Oracle has made a number of strategic acquisitions in key verticals. As of today Oracle has four vertical business units that have been built around these acquisitions. The largest is financial services which has Oracle’s 88% ownership interest in i-Flex at its core. The second is retail which is leveraging Oracle’s acquisition of Retek. Rounding out the four verticals is communications and utilities. Oracle’s strategy is to leverage its technology stack and to reapply the R&D savings realized toward accelerating the expansion of the functional footprint of these applications.

Oracle’s “Applications Unlimited” (Protect, Extend & Evolve)

Oracle’s Applications Unlimited event was designed to underscore the company’s progress since completing the acquisitions of PeopleSoft/JDEdwards and Siebel more than a year or so ago, with the announcement of new releases across all of these products as well as the Oracle e-Business Suite. More specifically Oracle announced the availability of the following: eBusiness Suite 12, PeopleSoft 9.0, Siebel 8.0, JDEdwards Enterprise 8.12 and JDEdwards World A9.1. The overarching theme of the event was to “protect, extend & evolve” customer’s applications investments so as to provide the utmost flexibility to meet customer needs.

While each of these releases includes significant enhancements in terms of traditional feature/function elements (we will spare readers all of the details), the real appeal is the addition of standard integrations across ERP suites, as well as a standard integration to Oracle’s industry suites and finally one-stop integration for independent software vendors and non-Oracle products. The integration across applications is particularly important since many Oracle customers have PeopleSoft for human capital management (HCM), Siebel for CRM, Oracle for e-Business financials and JDEdwards for plant management. Clearly the ability to integrate across these different applications represents tremendous potential benefits in terms of improving the productivity of operations as well as compliance. While there were many examples of these different integrations, one that resonates loudly is the integration between Siebel and the e-Business Suite in terms of tying Siebel’s “front office” order capture functionality with the “back office” order management capabilities in the e-Business Suite.In addition these latest releases are available via Oracle On-Demand for those customers who prefer a software as service business model. Finally, it is important to note that these new releases do not change Oracle’s continuing support of “stack” offerings from other vendors, such as IBM’s DB2 or BEA’s Websphere as well as other popular products.

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.

SAP’s Miss – Part II: New Attack on the SMB Market

2007-02-05T11:03:00.000-08:00

When SAP released their disappointing Q4 results a few weeks ago, we raised the critical question as to what do they mean. Was it a company specific issue, or a reflection of a broader weakening of demand for enterprise software companies?

Recently SAP hosted a meeting with financial analysts to discuss in greater detail its results for 2006 and provided a preliminary outlook for 2007.

The 2007 outlook calls for product revenue growth in constant currency terms on the order of 12% to 14%, which is similar to the growth seen in 2006 and for operating margins to take a hit of 1 to 2 percentage points to a range of 26% to 27% owing to the decision to develop an on-demand offering. While the revenue outlook should not be surprising, the lack of license revenue guidance along with the indication that profit margins would decline took the market by surprise and led to a further sell-off in the shares.

The presentations by SAP’s senior management illustrated the challenges to the leading enterprise applications vendor. In its traditional market serving relatively large companies the market share gains that SAP has enjoyed over a number of years owing in part to Oracle’s various fumbling of earlier releases of its eBusiness suite, and later anxiety over the company’s aggressive acquisitions have come to an end. In addition the long standing effort to build SAP’s presence in the strategically important small, medium business (SMB) market has not been as successful as hoped. Or put another way, SAP recognizes the need to address the sizeable portion of the SMB market that wants a different value proposition that emphasizes the low upfront costs and predictability offered by the software as service subscription model. Finally, compounding the fundamental challenges SAP also confronted the significant increase in the value of the Euro which visibly dampened the company’s reported top line growth. Despite the disappointment the actual results in absolute terms are not bad rather management was clearly overly optimistic in initial outlook for the year.

The biggest surprise was management’s intention to sharply increase its investment in building an easy to use, on-demand solution to more effectively address the all important SMB market. The announcement represents an admission that despite SAP’s claims during the past several years of its success in the SMB market, that the company is losing ground to a range of competitors that arguably include a number of traditional ERP software companies (Lawson, Oracle, et al.) not to mention on-demand offerings from Salesforce.com, NetSuite and others. While the move to on-demand makes sense, it raises a lot of questions regarding SAP’s current mid-market offering as well as to the underlying assumptions the company is using with regard to prospective market penetration, revenue contribution and longer term profitability. Our conversations with investors underscore these concerns as does the reaction of the stock.

Perhaps most importantly nothing in SAP’s presentations suggested a fundamental softening of demand for broader IT spending on enterprise software. In fact management continues to characterize the spending environment as “healthy,” which is consistent with the inputs we get from various industry contacts (systems integrators, market research analysts, independent consultants and field sales).

One bit of good news for SAP is that Henning Kagermann will continue at least one more year as CEO, forestalling a much anticipated horse race between leading executive board members Shai Agassi and Leo Apotheker and the risks that one of these key executives will leave.

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.

Q4 Postmortem: Bing, Boom, Bah – Outlook Still Healthy

2007-01-24T13:08:00.000-08:00

Disappointing results at Oracle, Symantec and SAP have raised questions as to whether the disappointments reflect a slowdown in spending, the maturation of the industry or the impact of “disruptive technology” as represented by “start ups” offering on-demand, software as a service.

We understand investors being nervous, but we think it is a big mistake to place too much importance on a single quarter and to read as much into the quarter as people seem to be doing.

Obviously after more than twenty five years, the enterprise software industry is a maturing industry. However, this is a not a new concern and the performance over the past couple of years with growth rates well above GDP underscore that the sector has recovered from binge years of the late ‘90s.

Our discussions with industry contacts do not lead us to believe that the growth in IT spending for 2007 will be less than it was in 2006. In fact we continue to believe that it will be modestly better like it has been in each of the past several years. The reason for our confidence is that enterprise tech spending has become a cyclical industry. The last big boom cycle was driven by the fear of a Y2K disaster and the Internet Bubble, which was followed by a period of massive consolidation of spending and resources. The net result is that companies have largely gotten their houses in order and that with a generally healthy economy are now faced with the need to incrementally invest in their IT infrastructure.

As for the impact of “disruptive technology,” there is no debate that for investors looking for growth rates of 20% or better these smaller companies are the place to be, whether they are “software as a service” or companies addressing newly emerging functional requirements.

While the longer term picture for 2007 and 2008 may very well be healthy, the near-term outlook is more clouded. Although there is evidence to suggest that the seasonality of the industry is diminishing, the first quarter of a new year has traditionally been problematic. On the heels of seasonally strong Q4 results, the early part of Q1 is usually pretty good. However, by the time Q1 draws to a close the angst has set in and investors fret about whether estimates for the full year are too optimistic. Expectations moderate and stock prices wilt, until there comes a point where investors once again are drawn to the sector and the whole cycle repeats itself. When 2007 is over we would be surprised if the overall enterprise software sector didn't do pretty well.

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.

SAP’s Miss – Market Slowdown or Market Shift?

2007-01-16T13:38:00.000-08:00

SAP’s disappointing Q4 results raise the critical question as to what do they mean. Is it a company specific issue, or is it a reflection of a broader weakening of demand for enterprise software. We’re not going to go through the specific numbers since there are plenty of sell-side analysts who do just that, but with indicated Q4 revenues up only 7% that’s a sharp slowdown vs. year to year comparisons throughout the rest of the year.

We’ve checked in with a number of our industry contacts (systems integrators, market research analysts, as well as independent consultants and field sales) to get the benefit of their perception of market conditions.

Is it an indication of a slowing demand for applications software? It is a bit early to say for sure, given that Oracle’s November quarter results were a bit disappointing on the applications side as well, but our checks to date do not suggest a deterioration in the market. Furthermore a recently published survey by a leading brokerage house of 500 corporate IT buyers suggests the prospects for IT spending continue to be pretty healthy.

Is it an execution problem at SAP? SAP has generally been very effective in managing its sales execution during the past several years. We have no reason to think SAP sales force is any less effective than they have been in the past apart from the increased challenge of no longer being able to benefit from angst over Oracle’s acquisitions. If anything SAP's strategy to largely steer clear of acquisitions would suggest a greater degree of stability.

Is it a product problem? While some observers are busy critiquing SAP’s SOA capabilities and lack of an on-demand solution as a reason for the slowdown in their business, we do not see this as a significant issue for SAP from a competitive perspective, since we can make comparable criticisms of virtually any competitor in the market.

Or is it a reflection of changing competitive dynamics with rival Oracle? We resisted making this declaration six months ago or so when Oracle had its first big blow out quarter and SAP came up a bit light. However, at this juncture despite the fact that Oracle’s apps business was not as strong as expected in the November quarter and our view that SAP remains the powerhouse in applications, we now believe that Oracle’s success to date in its major acquisitions is costing SAP a significant amount of business. Another way to put it is that SAP is no longer enjoying easy wins owing to uncertainty and concerns over Oracle’s acquisitions and how they would support those products. In addition we think this is particularly relevant in the all important small and medium business market, which by all accounts represents the biggest growth opportunity.

One bit of good news for SAP is that Henning Kagermann will continue at least one more year as CEO, forestalling a much anticipated horse race between leading executive board members Shai Agassi and Leo Apotheker and the risks that one of these key executives will leave.

With many software companies reporting December quarter results in the next few weeks there will be a wealth of additional data points and qualitative commentary to help investors handicap the outlook. However, our view is that demand remains healthy and that while there are a variety of factors that impacted SAP’s results ranging from the effects of a weaker dollar, to inevitable execution issues, as well as an overly optimistic forecast, we think the evidence of the past year points to a visible shift in the competitive landscape.

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.

2007 Outlook – Looks Pretty Good the Hangover from Y2K and the Internet Bubble are Finished

2007-01-02T11:45:00.000-08:00

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.

Oracle Q2 Post Mortem – Our Thoughts

2006-12-22T05:31:00.000-08:00

Oracle’s Q2 results were largely in line with expectations, with the notable point being that license revenue growth for the quarter of 14% year to year came in slightly below the 15% to 20% guidance. Likewise the geographic mix was a bit skewed with comparatively modest growth from the Americas and Asia Pacific regions. The ever so slight miss on license revenues was attributed to execution issues and not due to any change in the IT spending climate.

Management continues to be very, very positive with regard to the company’s prospects as evidenced by Q3 guidance (16% to 22% new license growth year to year) and the comments on pipeline growth (up 35% sequentially). In the effort to further underscore the confidence in guidance and that it is inherently conservative, management indicated that even if Oracle’s pipeline conversion rate is at the low end of the historical range of the past few years, that Oracle could still come in at the high end of the guidance range.

The conference call contained the typical discussions regarding Oracle’s growth initiatives based on acquisition and product innovation, with a litany of specific examples of success from each of these efforts.

Although the shares have sagged post the results, we remain extremely positive with respect to Oracle’s capacity for growth. In particular, management’s comments on the pipeline are consistent with the inputs we’ve gotten. Likewise Oracle’s ongoing stock buyback program of $1 billion per quarter is further confirmation of management’s confidence in the future and the value of the shares. Bottom line we are not disturbed by the nuances of the quarter’s performance since we see the results as a testament to the company’s broad strength in that despite some last minute deal slippages in the Americas, Oracle’s performance was not notably marred.

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.

Handicapping Oracle’s November Q2 – Will the Momentum Continue?

2006-11-30T17:01:00.000-08:00

Old habits die hard, and while we have generally resisted commenting on upcoming software earnings reports, given our long history following Oracle and that the company has done so well this year, we can’t help ourselves.

We did a number of checks with the usual types, industry analysts, deal advisory services, systems integrators, applications consultants, and various other field sources.

Since we no longer maintain a detailed earnings model for Oracle our comments will be considerably less specific when it comes to opining on specific estimates. As has been pointed out by a number of financial analysts the November quarter is a relatively easy compare given the timing of the Siebel deal. Rather our intent it to provide some qualitative inputs regarding direction and more specifically our sense as to whether Oracle will meet, beat or miss their earlier guidance for the quarter.

As has been the case throughout the year deal inquiry activity to pricing and contract specialists continues to be very, very busy. There are a variety of reasons behind the strength of activity. First, and perhaps most importantly, is that customers of a number of the companies Oracle acquired over the past 18 months or so (most notably PeopleSoft & JDEdwards, but also Siebel, Retek and others), have become more comfortable that Oracle will keep their promises regarding support and a long term migration plans. Consequently, Oracle is benefiting from pent up demand from the period when these customers had adopted a wait and see approach. Second, is that Oracle has been promoting new license plans such as “applications unlimited,” that has served to stimulate a review of the applications portfolios at a lot of companies. And last, but certainly not least, we continue to believe that the general IT spending climate has continued to improve.

Field contacts indicate that pipelines continue to be quite strong and steadily building, benefiting in part from a large number of customers that haven’t bought anything in several years coming back to the table. While the applications business arguably has a relatively easy compare owing to the timing of the Siebel deal, we do think it is important to mention that the year ago quarter did benefit from a couple of very large transactions. Our checks indicate that this quarter’s strength is being built on a broad base of good sized deals, more than a couple of isolated mega deals. Separately, we continue to hear very good things both not just about the applications business, but also the technology business. In particular we are hearing that Oracle is doing very well leveraging a number of the small acquisitions it did on the technology side, ranging from Times Ten, to Oblix and SleepyCat Software. Applications for database technology continue to expand with a great deal of interest in content databases and email management. Interest in Linux continues to build, and the field is very excited by the plan to offer support for RedHat Linux at half the cost than if it were provided by RedHat. While quotas continue to build, sales morale remains very good owing to the bevy of new products available. Furthermore, our contacts indicate that Oracle has been hiring a visible number of salespeople from various competitors, including archrival SAP.

Consultants and systems integrators checks are consistent with our other inputs, in that business appears to be quite healthy and that Oracle in particular has made significant strides in its applications business over the past year. These inputs are largely reflecting the trends in financial services, government, and retail verticals.

Conclusion – while it is difficult to say exactly what the stock is discounting, and though comparisons become increasingly difficult, our checks (U.S. only) strongly suggest that Oracle’s momentum is very much on track. We would not bet against this stock for the next six to nine months, despite the notable run up in valuation.

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.

More Thoughts on Consolidation of the Enterprise Software Industry

2006-10-10T05:51:00.000-07:00

As everyone knows the enterprise software industry has been experiencing a wave of consolidation at a pace not seen for many years.

While we have written repeatedly on this topic given its impact on the industry for both software vendors and customers (not to mention investors), we thought it would be worthwhile to revisit it.

What sparked the increased M&A activity? We believe that there were a convergence of factors in the wake of the post 2000 meltdown in technology stocks generally that sparked the fire, albeit rather belatedly.

The difficult IT spending climate post the internet/Y2K induced spending boom shifted the balance of power from vendors to customers, and resulted in very challenging conditions for enterprise software companies large and small.

The ensuing pressures on revenues and profitability at software vendors generally called into increasingly sharper focus the need to rethink their businesses with respect to pricing, distribution and their product portfolios.

Last, but not least, the lack of an active IPO market for enterprise software companies has meant that many younger companies that would have looked to the public markets for capital and liquidity as the most attractive path, now see a buyout or merger as a more competitive alternative. (The much publicized decision by Sevin Rosen to return the money raised for their most recent fund underscores these issues.)

Why now, and not years ago? While some readers may wonder as to why all of this activity seems to be ignited four to five years after tech bubble bursting, we would highlight that it clearly has taken the industry at large quite a bit of time to the realization that the industry is no longer a young growth industry, but rather a maturing (some would say mature) growth industry. Another factor that contributed to what is clearly a delayed reaction is the fact that software companies are often quite profitable (even if they’re not growing) and that many, many companies have balance sheets with big chunks of cash. Consequently, it is fair to say that there was no sense of urgency in terms of major financial pressures to force action. Likewise it is also important to note the difficulty of companies to come to terms with the dramatic reduction in valuations.

Is it good or bad for the industry? The consolidation of the industry has had a number of ramifications vendors, customers and investors, whether they are on balance good or bad remains to be seen. However, our view at this time is that consolidation has generally been good for customers.

Larger software companies have come under increasing pressure for a number of years now to reduce the cost of their software. Not surprisingly these cost pressures have been an outgrowth of the efforts of customers to better manage their corporate IT spending which, as is widely recognized, largely devoted (estimates on the order of 80%) simply to maintaining the existing IT infrastructure, with the small remainder being available to advance the capabilities of the customer. Furthermore the emergence of open-source software and software as a service (SaaS) provided new alternatives for customers looking to better manage their IT spend. Consequently, larger software companies looking to improve their value proposition have needed to build out their product portfolios more aggressively.

Smaller software companies in this same environment found it increasingly difficult to maintain their status within existing customers as well as to develop new customers. In addition, the cost of selling and supporting their customers is comparatively high due to lack of economies of scale, making it that much more difficult to address the increasing pricing pressures the industry has faced.

Will it continue or will it slow down? While it is unlikely that the feverish pace of consolidation seen during the past 24 months or so will continue, we don’t see the basis for a dramatic slow down in activity either. Valuations while somewhat higher than they’ve been are still low by long term historical standards. IT spending will continue to gradually improve but is still not likely to accelerate sharply in the next year or so. The IPO market for enterprise software companies remains lackluster. And while we suspect Oracle is not likely to continue their acquisition binge at the pace of the past year or so, we see evidence to suggest other players could become more active, whether they be large technology companies such as IBM, HP, or EMC, or increased activity from private equity players (we note with interest the growing list of deals – Serena, NetIQ, and Embarcadero).

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.

Oracle's Victory Lap

2006-09-20T12:00:00.000-07:00

Oracle’s powerful Q1 performance represents the long awaited confirmation that the company’s aggressive acquisition strategy is working. While the past couple of quarters have shown dramatic growth in application license revenues, as long time observers well know, Q1 is typically a problem quarter. The impressive gains in a typically challenging seasonal period with the double whammy of summer and a new fiscal year, are the most compelling evidence to date that Oracle is in fact executing well and gaining share. As the detailed results have been widely circulated, we will not review the specifics in detail, but rather call out isolated highlights of the quarter.

As longstanding bulls on Oracle we are extremely pleased to see our views validated by Oracle’s gains. License revenues up 28% year to year is an extremely big number coming off the blow out Q4 ’05 gain of 32%. Oracle’s ability to not only post good results (as seen in 2005) but more recently accelerating gains, has finally begun to win over long standing skeptics. The big gains in Oracle’s stock price represent the inherent leverage when one looks at the valuation throughout much of last year, coupled with significant growth and the expansion in the valuation. Even with the recent gains, given where earnings estimates have gone and the prospect of 20% growth, the shares still look quite attractive.

Oracle’s success underscores successful execution with respect to a number of critical elements of Oracle’s strategy.

First, that Oracle will continue to actively support all of its acquired applications whether from PeopleSoft/JDEdwards, Siebel, Retek or otherwise. On this point we give a lot of credit to Charles Phillips and his tireless commitment to communicating Oracle’s plans to customers and in presenting a more customer-centric face to users. As a result of growing confidence among users, Oracle’s applications license revenue growth was 66% for all of 2005, and accelerated to 80% in Q1.

Second, Oracle’s significant investment in its middleware offerings and open-source has proven very effective in maintaining Oracle’s competitive edge. The strong Q1 gains in database/middleware license revenues, up 15% year to year, with a 10% gain for database and a 55% gain in middleware, indicate that despite Microsoft’s recent release of SQLServer as well as the continuing gains of open-source, Oracle’s performance advantages and presence in open-source have significantly blunted the impact of these lower cost alternatives.

And third, that the development of Fusion is a daunting, ambitious task, but one that is inevitable and something that cannot be forced on users. Again, we think Oracle has succeeded in finally getting the message out that this initiative is intended to be customer friendly. Likewise we also believe that users are increasingly recognizing that SAP faces a similar challenge architecturally and that they are arguably behind Oracle in building this next generation architecture.

While we tip our hat to Oracle, we also reiterate that while the big gains in applications licenses for the May Q4 and August Q1 periods indicate significant market share gains, and stand in sharp contrast to the comparatively anemic gains for SAP in the June Q2 period as well as the substantial slowdown in SAP’s growth, investors should keep perspective.

Ultimately we do not see the sharp slowdown in SAP’s growth as indicative of a major problem, but rather as due to a combination of factors. SAP clearly benefited from the confusion/concerns that disrupted Oracle’s momentum, and to some degree the natural ebb and flow of pulling revenues from a broad installed base. That is no longer the case, in addition, we believe the substantial differential in pricing for largely comparable application suites from a functional point of view is also contributing the divergence in performance. SAP has long been known to premium price its applications, while Oracle has been extremely aggressive in discounting theirs. As users have become more confident in the stability of Oracle’s offerings, and SAP has been resistant to discounting, the pendulum has shifted in Oracle’s favor.

Although we do not see SAP’s challenges in the current environment as indications that this powerful franchise is fading, we do believe that the combination of high valuation and the turn in Oracle’s momentum will cause the divergence in stock price performance between SAP and Oracle to continue for the foreseeable future (defined as the next 12 to 18 months).

We can’t help but be pleased to see many of our longstanding positions on Oracle and SAP being recognized more broadly in the market.

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.

HP’s Pending Acquisition of Mercury – The Arms Race Continues

2006-07-28T09:04:00.000-07:00

The rapid consolidation of the enterprise software industry continues with HP’s announcement that it has reached an agreement to acquire Mercury Interactive for $52 per share or $4.5 billion, a 33% premium to the closing price prior to the announcement. The valuation at 4.8x estimated ’06 revenues and 33x ’06 EPS estimates clearly reflects Mercury’s leadership position in its core testing business.

Implications

Underscores big is better and represents a very important addition to HP’s OpenView business, arguably moving them from being behind the curve technologically to being ahead. The move also underscores that CEO Mark Hurd is sufficiently confident in the overall improvement of HP’s core businesses as to finally address the long latent opportunity of the software business.

Ongoing significant consolidation in both systems and applications sectors underscores the grab for real estate by the bigger companies. HP’s move, coupled with recent public comments by Oracle suggesting increased interest in the systems management space is likely to further fuel speculation as to a variety of possible deal combinations. Oracle’s growing interest in systems management software as a means to both fend off Microsoft and to strengthen its competitive position versus SAP. Oracle’s recent success in dramatically expanding the breadth of its applications portfolio as well as increasing its presence in key vertical markets against SAP may further embolden Oracle in its acquisition spree.

Who’s Next?

No change in the usual group of suspects. Among the larger companies that are arguable candidates for acquisition by even bigger players, BMC Software, CA, Symantec and Quest are among those that come to mind. Other companies that could prove interesting candidates would be Compuware and Serena (which recently went private).

Who’s the Next Acquirer?

EMC’s pending deal to buy RSA, coupled with HP’s announcement, would suggest that IBM, Microsoft, Oracle and SAP prospectively could be in the market. Given the long standing practices of Microsoft and SAP to focus predominantly on internal development, we would guess that the next likely deal will be driven by either IBM or Oracle.

Is it a Good Deal for HP?

For what it's worth we think the answer is yes. While the price tag seems high, Mercury has been one of the few companies of size to show significant growth. In addition it clearly dominates the testing space and has a good vision for proactively integrating business and IT requirements.

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.

Postmortem Thoughts on SAP’s Disappointing Quarter – A Tipping Point?

2006-07-25T05:01:00.000-07:00

During the past week we had the opportunity to listen to SAP’s earnings calls, attend Oracle’s analyst update, and speak with a number of independent applications consultants who work with larger companies to deploy and update applications.

We will spare readers a detailed summary of either Oracle’s Analyst Update or the SAP quarter given what has already been written in the general business press and by financial analysts. There are a myriad of very specific factors that have contributed to the recent earnings results of both Oracle and SAP that are independent of the underlying competitive attributes of both companies.

Our initial reaction to SAP’s comparatively weak license revenue figures was to not read too much into a single quarter’s performance. While we believe that view is correct, we have been somewhat surprised by the significant change in stance among the consultants we know toward Oracle. More specifically several months ago there was a good deal of concern and skepticism being expressed toward Oracle Fusion and the company’s commitment to continue to support indefinitely the wide variety of recently acquired applications. However, in our most recent conversations there has been a pretty dramatic reversal in this view. Today, while expectations as to when Fusion will arrive continue to, if anything, extend further into the future, there appears to be a good deal of confidence that Oracle will indeed continue to provide long term product support for the existing lines and that there will be no effort to force customers to adopt Fusion. As a result, the consultants are much more comfortable with their endorsements of Oracle and customers (as evidenced by Oracle’s very strong February and May quarter performances) appear to be moving forward again. It is unclear how much of the substantially improved license performance of Oracle’s applications business is a reflection of pent up demand and how long this pent up demand will favorably impact results. It is clear that the period of FUD (fear, uncertainty and doubt) that weighed on Oracle's performance as it executed an ambitious series of relatively large acquisitions (PeopleSoft/JDEdwards, Siebel, Retek, et. al.) is over.

Our point at the margin is that SAP’s disappointing Q2 performance and Oracle’s strong Q4 may in fact be early indication that the competitive balance is shifting to Oracle’s favor. It is clearly too soon to say for sure. We must admit that as long term bulls on Oracle the recent turn of events is exciting.

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.

Oracle Beats and SAP Misses, What Does it Mean? More Noise than Anything Else

2006-07-13T13:02:00.000-07:00

SAP’s preliminary Q2 results indicate that the company fell short of their target growth range for product revenues of 15% to 17% year over year for the first half. Despite the miss in license revenues, management has reaffirmed their 2006 operating objectives based on strong order entry. As a reminder, SAP does not provide detailed quarterly guidance and the company’s business has a long history of substantial seasonality.

SAP’s disappointing Q2 license revenue performance raises a number of questions. Is the weaker growth a reflection of overall demand softening? Is it a reflection of a significant change in the competitive balance vs. rival Oracle? Or is it a short term reflection of a transitory seasonal shift in the competitive balance? Or is it a reflection of the differences in SAP’s areas of vertical industry strength vs. Oracle?

Since our retirement from the sell-side we have stopped maintaining detailed earnings models and likewise we no longer provide investment recommendations. Nonetheless we continue to spend time speaking with a wide range of industry contacts and tracking industry trends.

Our view is that we don’t believe investors should get too hot and bothered by the miss. While there are a myriad of specific factors that bear on the results, our discussions with various contacts (systems integrators, consultants, field managers, industry analysts, and users) lead us to believe the following.

First, that overall demand is steadily to gradually improving (despite the bigger issues being debated regarding the broader macro-economic outlook).

Second, while we have long been known as bullish on Oracle (and we took great pleasure in their strong May quarter performance) and believe that Oracle’s market share on an organic basis should grow we do not believe that this is at SAP’s expense. The ERP market is consolidating and SAP and Oracle are the beneficiaries with the losers generally being numerous smaller companies.

And third, although we don’t believe that SAP is being hurt in a major way by Oracle, we do believe that the seasonal aspect of Oracle’s fiscal May fourth quarter did have a short term impact.

We will do further checks on demand, but as of now we remain pretty confident that business prospects are good.

So what should investors do? Our bias is to view the sell off in SAP (and for that matter Oracle as well), combined with the continuing sharp decline in the broader market averages, as an opportunity. Next week Oracle is hosting a luncheon for analysts in New York City and we would be surprised if the company doesn’t argue that SAP’s miss is a function of Oracle’s gaining visible momentum. Likewise SAP with their detailed earnings announcement out next week will further affirm their target ranges for 2006. The battle continues.

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.

Enterprise Software – Who Would Have Thought it would be Boring?

2006-06-27T06:25:00.000-07:00

Enterprise software stocks continue to be generally listless despite significant growth in cash flow and modest gains in revenues, not to mention the sharp increase in the pace of industry consolidation. During the past 20 plus years that we have followed the industry much of that time has been characterized by significant volatility with many individual stocks moving 50% or more in a single year and with the group broadly moving up or down together. Today the majority of software stocks seem to be stuck in trading ranges of 15% to 25% in terms of 52 week high/lows. Put another way it has been a challenging “stock picker’s” market in software for the past couple of years, with the vast majority of stocks being comparatively uninteresting…..or boring.

Our demand checks for enterprise software spending have for the most part been quite positive. Discussions with systems integrators, consultants, field sales managers, and market research sources generally indicate that demand continues to gradually improve.

• Industry analysts who handle deal inquiries relating to licensing terms and conditions have been very, very busy (while some of this may reflect changing pricing models, much of it is indicative of increasing spending).

• Systems integrators are aggressively adding capacity and we continue to hear reports that government and financial services sectors remain very active.

• Field managers appear to be hitting numbers.

The only problem area continues to be the mature mainframe sector. (Here we see ongoing efforts to restructure the businesses as seen by the buyout of Serena Software and BMC’s plans to organize into two business units, one for its mainframe business, one for everything else.)

We would point to results from a wide range of major companies such as SAP and Oracle (recently reported May Q4 results were very impressive), to a significant number of smaller companies as evidence of the underlying health of the industry. Microsoft’s tools business is also doing very well.

Independently of industry fundamentals there have been a number of instances of substantial setbacks owing to execution issues (Microsoft’s ongoing delay of Vista, CA’s recent sales management issues) as well the growing number of companies wrestling with questions as to the timing of option grants (Quest Software among others), that have resulted in sharp stock price corrections. These steep sell-offs are indicative of negative surprises, but who is really that surprised by the ongoing delay of Vista? Or the continuing challenges CA faces? Accounting issues continue to be wild card factors that are extremely difficult to predict and represent an ongoing risk despite Sarbanes-Oxley.

While the majority of our field checks are quite positive with respect to demand prospects, we have also heard reports of increased anxiety as the Fed’s efforts to contain emerging inflation and slow the economy are expected to take hold later in the year. (Most of these concerns regarding the risk of a slowing economy are emanating from hardware manufacturers rather than software companies.)

The anemic performance and steadiness of enterprise software stocks is in sharp contrast to many other sectors in the market and signs that market’s volatility is on the rise.

What gives?

As the divergence between fundamental performance and valuations continues to increase, we believe the principal reason behind investors’ lack of interest is simply that the sector is no longer exciting and investors are uncertain what to make of this new wave of consolidation.

The high growth period of the ‘80s and ‘90s is clearly past. The current recovery is largely a function of the share consolidation of IT spending by users seeking to rationalize their IT infrastructure and vendors as they seek to capture market share and broaden their product offerings. The substantial ongoing consolidation among companies as evidenced in part by Oracle’s string of large deals over the past 18 months or so has added to the sense of uncertainty, despite Oracle’s strong revenue and earnings gains. Arguably the scale of improvement is gradual and not dramatic. Another way to look at it, is that the software market has become so broad and diverse that it no longer makes sense to discuss it generally but rather more specifically in terms of “pockets” such as software on-demand which continues to do relatively well, or the mainframe space which hasn’t.

However, this is not going to be the case forever. Technology is not static and to that end there are numerous powerful forces that are gathering that will serve to unleash big changes in the not too distant future. Open source, on-demand, and services oriented architectures are a potent brew that we believe will contribute to the emergence of new services and new demand. Furthermore we continue to believe that the forces driving industry consolidation are still a very big factor that will take the weaker players out of the market.

Hence our advice to investors is to continue to be patient, the sector will not be boring for much longer. In the not too distant future (probably 2007) we will see increasing stresses brought on by the growth of open-source, on demand and services oriented architectures, which will lead to greater volatility and more excitement. However, while the volatility will increase, from an investing point of view it will continue to be a stock picker’s market, but the stakes will be significantly larger than they have been of late.

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.

The Recovery in ERP Software

2006-06-05T05:46:00.000-07:00

The ongoing consolidation of enterprise software companies continues at a pretty active pace, with the recent announcements of RedHat’s pending purchase of JBOSS as well as Oracle’s deal to acquire Portal Software and most recently JDA’s pending acquisition of Manugistics.

March quarter earnings were generally okay and did not contradict our longstanding view that the spending environment continues to gradually improve. Independently of the ongoing macro-economic concerns regarding the risks of inflation and the challenge for the Fed to slow but not tank the economy, the underlying trends driving the recovery in IT spending are very much intact. The picture, as always, is complicated by the challenge of handicapping of investor expectations vs. reality. Likewise deciphering the critical elements of individual company reports with respect to execution, strategic position, competitive dynamics and demand, will also be debated by market pundits.

The Recovery in ERP Software

While one wouldn’t know it based on the stock performance of ERP companies, the ERP market, long thought to be mature is showing very healthy growth of late.

SAP has been demonstrating impressive growth for the past several years and has significantly increased its market share. However, Oracle for all the controversy surrounding its acquisition strategy, is in fact a considerably larger applications vendor, than it was several years ago, and we believe its organic growth rate is healthier than recognized. (We expect Oracle's May Q4 results to provide further confirmation of healthy applications growth.) Growth hasn’t been limited to the largest vendors a number of other vendors are seeing good growth as well. Among smaller, but nonetheless sizeable companies, such as Epicor, Lawson (which has recently acquired Intentia) and SSA Global (itself a particularly active acquirer) have shown healthy growth in their most recent quarters. In addition there are a number of private companies of notable size that are also doing quite well, one that comes to mind that is not particularly well known is Deltek. While most companies are posting healthy growth, there are always some exceptions the most visible among these would be QAD and Manhattan Associates.

What’s behind the recovery in ERP software? How long will it last? Who are the prime beneficiaries?

Our discussions with various industry contacts ranging from systems integrators, field sources within the larger applications vendors, industry analysts and consultants indicate that there has been a significant up tick in ERP activity.

The boom in our opinion is being driven by the confluence of a number of trends.

• First, the accelerating consolidation of the enterprise software industry and in particular, Oracle’s applications acquisition binge is leading companies to actively re-evaluate their strategies toward applications vendors in general. (While Oracle has been by far the most aggressive, there has been a visible increase in consolidation among the other vendors as well and if our sources are correct, there are many, many more to come.)
• Second, the emergence of On-Demand services as a compelling alternative to traditional options such as building the software, buying a packaged application or outsourcing. Users increasingly recognize the benefits of retaining control of the software but without the headaches of managing the software itself.
• Third, the influence of Sarbanes-Oxley, which is forcing companies to re-examine their business processes with an eye to ensuring better controls through increased automation and integration of transaction processing coupled with ongoing investments in data warehousing and business intelligence.
• Fourth, the emergence of service oriented architecture which will enable new applications functionality and new found flexibility and is also contributing to the ERP boom, as ERP vendors work to introduce SOA versions of their existing products along with new functionality that wasn’t possible before.
• Finally, ongoing improvement in IT budgets driven by a combination of accumulated benefits of more efficient spending and the continuing strength of the economy.

These trends are driving demand across all segments of the market from very large to very small companies. The vendors meeting the demand vary according to the needs of the respective segments within the market. Put another way, we see SAP, Oracle as well as a handful of other vendors like SSA Global, Lawson, Epicor and QAD working with larger and mid-sized companies. On the other end of the spectrum we see on-demand, ASP companies such as salesforce.com, Rightnow, along with others enjoying good momentum among smaller to mid-sized companies. Microsoft which has made a number of acquisitions with the intent of becoming a major force in the business applications market has had mixed success.

Under the radar are a number of privately held companies that are also enjoying healthy growth such as Deltek and Authoria.

The improving demand is also evident across the many functional segments of enterprise applications such as GL, HR, performance management, training, analytics, budgeting/planning, and so on. Finally, our checks with respect to spending trends by vertical industry segments also suggest ongoing recovery. In particular we believe that the financial services, government, energy, retail, manufacturing and healthcare sectors are all doing pretty well.

So if the business is broadly doing better, why aren’t financial results even stronger and why haven’t the stocks performed?

• Growth rates for revenues and earnings while improving are still well below the boom period of the late ‘90s.
• Ongoing consolidation has created greater complexity and uncertainty in assessing results with respect to underlying “organic” growth as well as concerns over integration of acquired companies.
• Impact of FAS 123R is a factor in that as companies adopt the new standard for recording options expense reported earnings inevitably take a hit. In addition, while the impact on cash flow is comparatively modest, FAS 123 R does make near-term comparability of results more complex and difficult.
• SOA while clearly an opportunity is also clearly a risk, much as was the case with the emergence of the client/server model. Investors are challenged to determine which applications companies will get it right vs. not, as well as how much of the broad vendor claim for SOA capabilities are real or not.

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 now have a website www.blueatlasmanagement.com for those of you who are interested in learning more a little more about our services. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.

The Name Game, What's in a Name? -- A Guide to Software Technology Names

2006-04-28T13:09:00.000-07:00

The automobile industry has long been teased for bizarre car names like our old Chrysler “Volare,” or our ill-fated Renault “Alliance,” or the Acura “Legend”, the “Aspire,” the Ford Focus, the “Optima” etc., etc (you get the idea). The current convention reflects a fascination with numbers, the LS430, the S500, the 3 series, the 5 series, or the XJ8 and so on. The technology sector is clearly in close competition for weird names.

We apologize to any readers who may regard this comment as trite, but recently we were struck by the absurdity of company names as we scanned down our “favorites” list for websites. Clearly as the technology industry has grown and matured, the number of companies despite rapid consolidation continues to expand, and consequently the challenge of naming companies has grown. Weird names are likely intended as a means to capture one’s attention and perhaps to spark additional curiosity regarding the company in question, both good reasons to be creative…..though in a piece like this, running spell-check is a bit more arduous and time consuming.

In looking through this partial listing of software related technology names we identified a number of “categories:” the pseudo Latin type name, a true Latin name, the “we’re all business” name, the “we’re on a mission” name, the “homage to our founder” name, the somewhat surprising “nature” name, the “command” name, the totally random name, and if all else fails “the place” name. At this pace it is only a matter of time until naming with numbers hits the scene.

To illustrate the point the following is a slightly edited version of our “favorites” list.

After a quick perusal of this list of names a number of things become quickly apparent.

First, is that there is a clear fascination with pseudo Latin type names (17) as is quickly evident from names like Acronis, Altiris, Applix, Attunity, Authoria, Citrix, Cognos, Epicor, Kognitio, Idera, Indus, Industri-Matematik, Informatica, Intentia, Manugistics, Symantec, and Quaris, to name just a few.

Then there is one true Latin named company such as Veritas (which also presumably was a reference to the company’s mission as well.)

Then there is the “we’re all business” (18) reflected in these comparatively short (but not necessarily sweet, or for that matter particularly imaginative) names as CA (formerly known as Computer Associates), Business Objects, Commvault, Compuware, db4Objects, Deltek, IBM (which of course stands for International Business Machines), Internet Security Systems, Microsoft, Microstrategy, mySQL, paper.com, SAP (Systeme Anuendungenund Produkte in der Datenverarbeitung or in English, Systems, Applications Products in Data Processing), SSA Global (formerly known as Systems Software Associates), Salesforce.com, SupportSoft, QAD (we’re not exactly sure what QAD stands for, but believe it has something to do with “quality assurance” ) and Verisign.

The next most popular category would be “we’re on a mission name” (9) as exemplified by the likes of Agile, EMC (surely a reference to Einstien’s E=MC squared, though we must admit we’re not sure of the purpose other than to suggest “we’re really smart,” Mobius, NetIQ, Oracle, Precise, Progress, Quest and Veritas.

Then there are those companies named, not immodestly, for the founders (6) – BEA, BMC, Gartner, Lawson, Hewlett-Packard and of course, Siebel.

Somewhat surprisingly there is “that nature category” (6) (surprising since these names have nothing to do with the business, the mission, the science, or even the location company, but appear to be purely a mercurial reflection presumably the founder). While these names have little to do with anything, we can’t help have affection for these as we ourselves are guilty of drawing on nature for inspiration. Some examples of these “nature” names are seen with Acorn Systems, Blue Atlas Management (a common reference to a type of evergreen tree), Hummingbird, Mimosa, Primavera (also could be a reference to a love of a type of pasta), and SilverBack Technologies (presumably a reference to the SilverBack gorilla).

The totally random (2) – RedHat, Novell

The authoritative (2) – Concur and RightNow come to mind.

The “just plain weird” or “what were they thinking?” (3) – JBoss (meaning boss of Java?), or Sleepycat Software (who knows what this is getting at?), or for that matter Yahoo.

If all else fails, there is always the “place name” (3), clearly these companies know where they’re located, or at least where they came from, as seen in CapeClear, Embarcadero Technologies and Manhattan Associates (originally founded not in Manhattan, New York, but in Manhattan Beach, California, but now of course based in Atlanta, Georgia). As we thought about place based names, we realized that our blog address uses a place. (For those interested the blog address, http://remsenburg.blogspot.com, is a reference to a very small hamlet in Long Island, New York.)

And finally, perhaps the most bizarre name and yet the most powerful, is a made up verb (1) Google. Google may be inspired by googol, which means 10 raised to the 100th power, and perhaps it was chosen to illustrate the power of the company’s search engine. This name is truly surprising and perhaps explains the company’s success.

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 now have a website www.blueatlasmanagement.com for those of you who are interested in learning more a little more about our services. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.

Oracle -- Observations on Siebel and Sleepycat

2006-02-16T06:49:00.000-08:00

Oracle hosted a conference call last week to discuss its acquisition of Siebel. Given that much has already been written summarizing the details as well as analyzing the implications for both Oracle and the industry, we will keep our comments very brief.

The content and tone of the call was entirely consistent with Oracle's well articulated strategy for building its enterprise applications business. The announced headcount reductions on the order of 2,000 people, as well as the fact that the cuts will come from both the Oracle and Siebel organizations was not surprising. The scale is in keeping with what would seem reasonable to achieve Oracle's goals with respect to both profitability and yet preserving the integrity of the Siebel franchise. Through the acquisitions of PeopleSoft/JDEdwards, Retek, iFlex and now Siebel, Oracle hopes to achieve the following objectives (the specific benefits and order of importance vary among the acquisitions).

1) Dramatically increase the breadth and depth of applications domain expertise both in terms of specific functional capabilities (ie. Human resources and CRM), and in terms of major vertical markets (retail, financial services and others).
2) Provide "lifetime support" in the effort to provide acquired customers confidence that their existing investments will be protected and that they will not be strong armed into a premature migration to new technology, whether it is Oracle's or a competitor's offering.
3) Achieve significant cost savings through economies of scale with respect to "back office" expenses, while largely preserving customer facing resources and keeping the best of the best in technical and support capabilities.
4) Through Fusion built on Oracle's e-business architecture and "open standards," Oracle will offer users the opportunity to access a broad range of applications based on a technically rich and flexible foundation.
5) Finally, Oracle's intent is to create a much stronger brand and further expand and deepen its large customer base.

We ask readers to excuse our liberal use of quotation marks, which we use as means to acknowledge the cynics who question the validity of these claims on Oracle's part.

Perhaps the most notable surprises from the call, in our view, had to do with the size of the Siebel analytics business, as well as the overall scale of the combined "On Demand" application service business.

Guidance commentary, we expect Oracle learned a lesson from the PeopleSoft acquisition. Last but not least a brief comment on Oracle's guidance outlook. As best we can tell, the increased expectation for license revenue growth for Oracle's February Q3 period in particular appears, to be driven almost entirely by organically derived growth. Our demand checks with various resellers, partners and field contacts have been very positive.

Acquisition of Sleepycat Software
Earlier this week Oracle announced its plans to buy Sleepycat Software, a privately held, open source database. Our view regarding the motivation behind this very small deal is that it provides Oracle with a bigger window into the burgeoning market for open source software. Given the size of Sleepycat relative to the size of Oracle we strongly doubt that Oracle has any interest in terms of driving revenue through increasing prices on Sleepycat products. Rather we believe that Oracle will work to improve the Sleepycat product capabilities to make it more competitive with alternative open source databases, but not to improve it so much that it hastens the pace of market share gains of open source databases vs. Oracle's core offerings. Put another way, to the extent open source alternatives gain, Oracle would like to be the primary beneficiary. The deal underscores the momentum of the open source market.

The acquisition of Sleepycat also represents a further effort on Oracle's part to broaden and deepen its capabilities in its core technology business, compleacquisitionslier acquistions such as TimesTen and Oblix.

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 now have a website www.blueatlasmanagement.com for those of you who are interested in learning more a little more about our services. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.

Some Thoughts on the Boom in Software Consolidation

2006-01-24T05:35:00.000-08:00

What is driving the merger and acquisition boom in the enterprise software industry? (Pricing pressures, industry maturation) Is it good? (Only if acquiring companies learn from earlier problems) Will it work? (Some will, some won’t, with the critical variable being the quality and capabilities of management)

During the past few years the overall pace of mergers and acquisitions in the enterprise software industry has accelerated notably. Clearly Oracle has been a major factor, but many other companies have become more active, including long standing acquirers such as IBM and Computer Associates. In addition to these players there have been a number of others from EMC to Symantec to name some more. What is behind all of these acquisitions? Are they good? Will they work?

As we have written on previous occasions one of the bigger drivers in acquisition activity has been the efforts of customers to reduce the number of vendors they support. Major IT organizations through standardization and rationalization of their IT operations can realize substantial savings in the biggest cost component, IT labor. This has made it much more difficult for smaller software companies to develop or maintain their presence in larger customer organizations and have made them more amenable to being acquired. (Likewise some improvement in valuations but without a corresponding improvement in the IPO market has contributed to making the sale to a larger software company an attractive exit strategy.)

However another major factor behind the recent M&A boom has been ongoing pressures of software pricing. Software pricing is under assault on a variety of fronts such as the internet which has enabled new business models, open-source, and lower development costs through use off-shore development resources. The impact of generally lower prices is the need for increasing economies of scale with respect to leveraging development resources, support and sales.

The internet has lead to the emergence of new business models by the likes of Google and Yahoo. These companies offer many software components on the internet for free, supported by advertising, or where users pay via modest a la carte subscriptions, threatening traditional pc software models. Traditional pc software and applications with substantial up front costs and periodic upgrade costs look comparatively expensive and inflexible. In addition there is greater vulnerability to system crashes.

On demand is another example of software as service that challenges traditional enterprise software vendors. Companies such as Salesforce.com or RightNow, which provide applications on a services based model, represent an alternative to the more traditional license/maintenance support models used historically by applications vendors.

Open source alternatives represent yet another threat to traditional software pricing models. Regardless of the fact that open source vendor pricing for support may often negate the pricing differential vs. traditional software vendors, customers perceive open source as a means of becoming less dependent on their vendors. Less dependence means less pricing flexibility for vendors.

Finally very low cost off-shore development opportunities represent both an opportunity and a risk for software vendors. Those vendors that aggressively take advantage of the dramatically lower wage costs, can pass those savings to their customers, and be better positioned to weather the deflationary trend in software pricing. However, those vendors that ignore the opportunity will be incrementally threatened as other vendors and customers do go off-shore. Arguably, it is easier for larger vs. smaller software companies to take advantage of off-shore resources.

The following trends further complicate the analysis of enterprise software vendors in terms of understanding various growth drivers: products vs. features, processor based capacity definitions, numbers of users, or other metrics used to measure volumes and usage.

The above factors increase the uncertainty of sustainable growth and profitability and thereby serve to generally undermine stock valuations for traditional enterprise software vendors.

There is little question that each of these trends is quite powerful with substantial momentum. Nor is there much doubt that each of these trends is inherently negative with respect to the traditional enterprise software business model -- there is little question it is an extremely difficult one to address.

We believe there is a parallel in the challenges facing the traditional enterprise software vendors to that which IBM has faced for the past 15 years or so in its mainframe hardware business.

While IBM’s mainframe business has seen declining revenues, it has nonetheless remained a highly profitable and strategic business. Large profits have funded IBM’s development of its services business, as well as the build out of its software business. Likewise IBM has been able to leverage its unique relationship with it’s customers who have been dependent on the mainframe as the foundation for many of their mission critical systems. Put another way, IBM has managed to successfully transform itself into a diversified business, while being able to leverage its historical position as provider of mission critical systems to very large companies. A substantial part of that diversification came through acquisitions of companies such as Lotus, Tivoli and PWC.

We believe that traditional enterprise software vendors whether fundamentally systems management or applications vendors are pursuing similar strategic objectives; managing the maturation of their original core business, while attempting to build/acquire complementary products that can be sold into their installed customer bases. Clearly some vendors have had more success than others, as measured by their financial performance (if not their stock performance).

BMC consolidated a number of complementary mainframe systems management vendors such as Boole & Babbage, Fourth Dimension, BGS and others. With the benefit of hindsight their most successful acquisitions were Patrol and Remedy, both of which were geared toward entering altogether new, but complimentary markets.

Herein lays the test for managements of the traditional software firms. To help counter the ever growing pressures on revenue growth, these companies must build out their product reach and leverage their existing installed customer base. Market share consolidation may alleviate traditional pricing pressures, but as the acquiring vendor preserves its pricing power in the short-term, it undermines its longer term position as customers seeking greater value look for alternative, substitute solutions which inevitably emerge. (BMC and Compuware are excellent examples of vendors which are contending with a new generation of competitors based on price, and while both of these companies benefited in the short term, few today would look at the deals aimed at market share consolidation in a particularly positive light.)

Arguably a more successful acquisition strategy focuses on adding highly complementary products that can be clearly defined as separate products (and not confused as extensions or added features to existing products) and that further broaden the relevance of the acquiring company’s solution. For the record, the potential problem with product extensions or feature is the difficulty the vendor may have in getting additional value or revenue for them from their customers. However, in fairness, it is often difficult to determine whether additional functionality can truly qualify as a distinct product. The real point is the capability (whether feature or product) has to significantly contribute to the acquiring company’s competitive edge from a product perspective to justify added value.

Of course there is another factor that plays into acquisition strategies and that is the potential for highly financially accretive deals owing to very low valuations for the target companies. When these types of deals are not complementary and are merely financially driven, they are inherently tactical in nature, with the biggest risk being the distraction of management and company resources from the more important task of leveraging the company’s strategic opportunities. Investors should be weary of companies who are making these types of investments.

Do the recent acquisitions by companies such as IBM, Computer Associates and Oracle meet this test? History will ultimately be the judge, but in our view each of these companies are a combination of tactical and strategic deals. Clearly Oracle is the most aggressive in terms of number and size of deals, followed by CA and then by IBM.

We are not going to provide in this forum a detailed evaluation of the pros and con these companies’ recent deals. However, a high level (and admittedly subjective) view of the overall character of these companies’s acquisitions strategy is summarized below.

Our judgments reflect the following parameters:

• Financial risk grades were assigned based on price and scale of acquisitions relative to the overall size of the company;

• Strategic opportunity is our qualitative view regarding the inherent logic and fit with the company’s existing business;

• Market share consolidation is determined by the extent to which the acquisitions overlap with existing product offerings vs. extending product range;

• The overall grade is essentially an average of the ratings for the first two factors. (We decided not to include the market share consolidation or complementary nature of deals done as part of the grade, since we have seen successful deals of both types.)

CA we gave an overall grade of B+. Financial risk is medium given the size and nature of the deals announced to date. Strategic opportunity is high, since the deals are very complementary to CA's existing products. Market share consolidation factor is comparatively low.

IBM we've given an A. Financial risk of their deals is small. Strategic opportunity is typically high. Market share consolidation is medium.

Oracle we've also given a B+, a rating which is probably the most controversial given the pace and scale of the company's acquisitions. Financial risk is medium, despite the magnitude, owing to modest valuations for the acquired companies. Strategic opportunity is high, since despite a lot of market share consolidation, the acquired products typically add a combination of significant additional presence in major verticals as well as significant extensions of functionality. Market share consolidation is high.

In the case of each of these vendors, success will ultimately be determined by the abilities of the respective management's to meet the unique challenges of their specific deals.

Last, but not least, we are a bit behind in posting to our blog, since we have spent the last couple of weeks working to improve our own technology infrastructure.

We recently formed Blue Atlas Management, LLC as our official business entity for consulting related work. For those interested in learning more about our services please visit our website at: www.blueatlasmanagement.com for more information. Please note that we have a new email address, jmendelson@blueatlasmanagement.com. As always we welcome any comments you may have.

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.

Enterprise Software 2006 Outlook -- More of the Same

2006-01-06T04:54:00.000-08:00

The enterprise software industry has seen modest growth during the past several years. The benefits of a gradual recovery in IT spending to software vendors, being diluted by ongoing pricing pressures from the increasing use of open source alternatives, consolidation of products, the emergence of third party maintenance providers, as well as growing competition from hosted application providers. We expect 2006 will in many ways be similar to 2004 and 2005, meaning further significant consolidation of vendors, and valuations constrained by uncertainty as to profitability and growth prospects.

The enterprise software industry has shown negligible growth during the past five years or so. Following a sharp decline in the years immediately following 2000, 2004 and 2005 did see a resumption of modest growth.

In contrast to the latter portion of the ‘90s when small software companies dominated the landscape, the power has again shifted back to the largest software franchises, such as Microsoft, Oracle, SAP, Computer Associates and others. However, investors remain concerned about a number of risks to these franchises that has limited the performance of these stocks.

The bubble period of the late ‘90s was a unique and crazy time. Demand for software was feverish, driven by the fear of widespread system failure with Y2K and the greed associated with the opportunities represented by the internet to turn the old “bricks and mortar” world upside down.

In the aftermath of the bubble, the reality that IT spending was out of control struck home. Companies suddenly realized that they had overbought capacity and that their bid to address the opportunities and challenges of the internet was haphazard and not well thought out. A period of severe retrenchment ensued.

The period of retrenchment generally benefited the largest software vendors as large corporations looked to rationalize and standardize their technology infrastructure. The primary goals of these initiatives were to significantly reduce the amount of IT headcount needed, and to be able to utilize less-expensive offshore IT labor.

While IT spending has finally begun to recovery over the past couple of years or so, the reins remain very tight.

Though the prospects for broader IT spending continue to gradually improve, a lengthy list of challenges for software vendors remain. Put in the broadest possible terms, the longstanding business model for enterprise software companies is under assault.

Pricing pressures continue to build.

• Open source alternatives, such as Linux, or other elements of the “technology stack,” is an ongoing threat to major franchises such as Microsoft Windows, or major database products such as Oracle or IBM’s DB2, and application servers as well.

• Third party maintenance providers are another challenge to leading software franchises that threatens to undermine their highly profitable maintenance revenue streams.

• Hosted applications companies like Salesforce.com or RightNow, as well as many others, is another threat to the traditional business model of upfront license revenues complemented by ongoing maintenance and support revenue streams.

As investors readily appreciate, it is extremely difficult to handicap or predict with any accuracy how these various threats to the enterprise software business model plays out in terms of impact on revenue, earnings growth or overall profitability.

If the risks to the business model weren’t enough, the enterprise software industry is at the cusp of a major change in technology architecture. The industry is moving toward web services. We’re not going to try to put forth a substantive definition of what, how and why, but simply note that the move to web services or services oriented architecture will ultimately open the door for smaller software companies to compete again.

Each of these trends has been widely discussed and is arguably well discounted in equity valuations. Nonetheless the associated uncertainty as to the degree of impact, limit the prospective recovery in valuations.

Perhaps the biggest question facing investors as 2006 gets underway is whether the momentum behind any of the aforementioned trends picks up enough speed to create a tipping point in the near-term so as to present a highly disruptive influence to the current industry equilibrium. Our best guess is that this is unlikely to happen within the next twelve months.

Overall, we expect that 2006 will look much like 2005. Meaning, that while IT spending continues to gradually improve, there will be no evidence of a major positive breakout in growth for the larger software companies as any improvement is offset by ongoing pricing challenges.

We do believe that the prospects for smaller software companies will on the margin improve, since much of the consolidation efforts on the part of corporate IT spending have been completed.

Likewise we expect that merger and acquisition activity in the software sector will continue at a rapid pace.

For investors these trends suggest that valuations relative to the broader market averages are not likely to change radically. We also believe that software stocks which generally underperformed the major averages are not likely to be very exciting in 2006. It will continue to be a challenging market environment, where winning stocks may not necessarily be represented by the best companies.

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.

Does Oracle know what it wants to say?

2005-12-01T15:37:00.000-08:00

With Oracle having just closed its November 2Q, investors are busily attempting to handicap the performance. As we stated in our first post to this blog, we are going to refrain from opining on very short term performance.

As a long time observer and fan of Oracle, we have been frustrated by the inability of the company to garner significant investor support as reflected by its comparatively modest valuation.

Certainly there are lots of issues that concern investors.

One is the maturity of the relational DBMS market. Another is represented by the competitive challenges of traditional players such as Microsoft and IBM, but also emerging open source alternatives such as MySQL, Ingres and many others.

Apart from questions regarding the growth prospects for Oracle’s core business, there are plenty of concerns revolving around the company’s acquisition strategy, breadth and depth of the management team.

Obviously we are not in a position to answer all of these questions, nevertheless our research suggests that Oracle is generally doing better than most investors appreciate and that there message is resonating better in the customer market than within the investment community.

Oracle has been undergoing some dramatic changes. While there may be a clear sense within the company of where it is going longer term, management is certainly guilty of conveying mixed signals to investors regarding the near-term. We believe the primary reason behind the poor communication with investors is due to management trying to get their arms around short term execution in the midst of so many moving parts -- and this is certainly a factor undermining the stock's valuation.

The question of short term performance is particularly acute in the applications business, where Oracle has claimed that its market share is growing. Clearly it is, if one looks at total revenues (licenses and support) on a year over year basis. However, if one attempts to look at Oracle’s performance on an “apples to apples” basis (adjusting for acquisitions), and uses licenses revenues as the primary barometer of health, then clearly market share has shrunk. Longtime industry observers will appreciate that there are a lots of extenuating factors to consider in the analysis. A couple of examples would be to what degree PeopleSoft drained its pipeline as it tried to ward off Oracle, or to what extent Oracle in its bid to challenge SAP engages in much more aggressive discounting on license fees so as to capture more customers and more support revenues.

Oracle’s communications with investors has been muddled. Our suggestions for improvements are as follows:

1) Define a consistent message regarding Oracle’s strategy and positioning. Too often we get what seem to be contradictory statements regarding Oracle’s intentions. Whether this is part of a Machiavellian strategy to keep competitors off balance, or a reflection of CEO Larry Ellison’s unique personality is hard to tell. Regardless, mixed signals while perhaps a valid competitive tactic, create issues for customers, prospects and investors. In our opinion a more consistent message would be a significant positive.

2) Go the next step. In presentations to investors, Oracle makes a good argument regarding looking beyond license revenue performance in determining market share success. However, apart from making the assertion, including a detailed illustration that supports the analysis would be useful. (You cannot “spoon feed” too much!)

3) Loose the attitude. Oracle is an incredible success story, everyone knows it. Likewise, it is also a truism that management views its shares as undervalued and sees this as evidence that investors don’t get it. While this may be a way to rationalize why the stock price has been stuck in the mud, despite improving financial performance, it is not a productive way to solve the problem. If the street doesn’t get it, then it is Oracle’s responsibility on behalf of its shareholders to present its view in a constructive manner so as to sell Wall Street on the validity of its argument. The only reason Oracle shouldn’t accept this responsibility is if in doing so it adversely impacts its ability to execute its strategy in that competitors are made that much more knowledgeable as a result. If this is the reason, then at the very least Oracle should not alienate the street with a critical, arrogant and often negative tone.

4) No more major acquisitions until it is well established that Oracle has fulfilled its objectives with the current deals. To know for sure whether Oracle is ultimate successful will take several years at least to better detail product strategy and to deliver in a timely fashion on that vision.

Put succinctly Oracle’s modest valuation is more a reflection of lost credibility with investors as a result of poor positioning and communication than its absolute performance as one of the leading software vendors.

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Retirement from the sell-side

2005-11-28T16:16:00.000-08:00

After more than 20 years following the enterprise software industry, first at Morgan Stanley, then at SoundView Technology Group, and most recently at Lazard Capital Markets, I have decided it is time to retire from the much maligned practice of "sell-side" investment research.

I have created this "blog" as a means to share my thoughts regarding the software industry which has undergone dramatic changes in the wake of the internet/Y2K induced boom of the late '90s, from a veritable feast in terms of growth and numbers of companies, to famine, with negative growth and consolidation.

Unlike my prior life where we issued earnings models, ratings and price targets on software stocks we covered, with the focus inevitably being short term oriented, in this blog we aspire to discussing companies and the industry from a more strategic perspective.

Stay tuned.