Bill Burnham based on his experience provides a list of the Top 10 Early Warning Signs that a software stock is about to crater.
From a finance perspective – Capitalizing software development expenses( - software development capitalization is the heroin of software companies), DSOs greater than 95 days (typically viewed as a measure of how efficiently a company collects its accounts receivable. High DSOs can potentially indicate two types of trouble at a company – with Sales & Finance) and the reporting speed, EBITDA margins and positive cash flow statement(atleast increasing trend if in investment mode)
From an operational perspective – Missing ship dates, declining deferred revenues , movement of top sales guys, competitors underperforming . These need to be assessed all together - seen in isolation can be misrepresenting reality.
I think add the innovation factor(the ratio of revenue from new rollouts), quality of leadership, standing amongst peers, expansion in the range of activities –geographical, channel partners and new service offerings , articulation in clear terms of how the next eight quarters are going to be and possibilities of hold on to its position of leadership/standing amidst peers in such a period, rate of growth better than peers – all are set of associate indicators.One view I heard from a software CEO in a meet today is that only companies that can not innovate would become an easy prey for decay and acquisition and those companies able to sustain and improve on innovation would be able to improve its standing to be more powerful and if acquired - the realisation to shareholders would be substantialy higher.