Zacks equity finds signs of demand stabilization and cost-cutting initiatives over the past several quarters indicating industry maturation and cautions that this is an uneven process with some companies finding a profitable niche to take them to the next level while others wallow in an environment that is still somewhat frugal when it comes to spending. The report adds, areas like ERP,SCM, & CRM software have been hit hard by weak IT spending, other niches have held up relatively well. It finds gaming, video editing and security software are among those with momentum. Government spending has also been supportive for some computer software companies. While Longer-term growth prospects remain slightly above average for the industry as a whole, top-line growth is likely to remain below historical averages. In addition, several of the group’s top companies possess stellar fundamentals, including high profit margins, pristine balance sheets and cash flow well in excess of capital requirements.
Two things stand out –
1. Cash flow in excess of capital requirements is in some way forcing rapid fire mergers, consolidation and
2. ERP, CRM, SCM areas have been hard hit by weak IT spending.
I was in an extended dinner meeting with a CEO of a medium sized software company who offered himself up for sale fearing takeover attempts( he wanted to sell out before being offered to be bought – a little ahead of the curve and he succeeded and is doing extremely well for himself and his division is doing phenomenally well post acquisition) – who pointed out that previous quarter Oracle’s profits zoomed and as I write Oracle is reporting modest numbers for this quarter - What is not coming out for discussion is the license sale of the products and the disproportionate share of maintenance business revenue stream- Vinnie has an excellent viewpoint on this theme, written based on previous quarter data. I think the world needs to know license sale details of acquired companies atleast 6-8 quarters post acquisition - this would be a key requirement for all stakeholders. From a customer perspective, the incentive to keep paying the hefty maintenance fee for support and the long wait for fusion and as Oracle keeps announcing new mergers – the anxiety levels are increasing and CIO’s may not be too enthused to have a big vendor becoming bigger and bigger by portfolio acquisitions and promising integration in the future. We may also additional interest in hosted solutions as well with some CIO’s. The sooner there is an alternative/ escape for customers to wriggle out of the maintenance albatross as we wrote earlier,it would be better for customers, product vendors (in new areas who are getting acquired by excess money coming out of existing applications) and to the entire ecosystem per se – we can do careful planning rather than worrying about who will get acquired by when and constantly reassessing new investments in newer areas. Lot more to write -shall try and do so in the coming days.