Perhaps the most noticeable thing about the recent profit warnings parade is that it is a bit too orderly a procession to signal a prolonged meltdown of the enterprise software sector where revenue targets remain sky high and premiums hefty.
CIO Magazine’s recent tech poll projects that IT budgets will grow over 8% this year, but it is also true that customers continue to put the brakes on their IT spending. There is also another reason that has been largely overlooked. Competition, in the form of larger software firms, continues to put the squeeze on mid-size software rivals.
Most of the 15 or so software vendors that can be categorized in the latter bracket: Veritas, Siebel, FileNet, JDA, Kana, Ascential, to name a few, have publicly come forward and announced they expect a second-quarter shortfall due largely to deals not closing or being cancelled. The official line that appeared in several vendor releases was unexpected delays in purchasing decisions.
Leading vendors remain unruffled
Curiously, this financial malaise has not spread to top-tier vendors like SAP and Microsoft, which have neither issued warnings nor reduced their forecasts. If anything, the softness demonstrates the fragility of mid-tier software makers and suggests that the industry slowdown isn’t as pronounced as some tech analysts and investors would have the market believe. Aggregating software industry spending of those vendors losing market share and those gaining it reinforces this view.
Reading further between the lines, IT user organizations are increasingly looking to rationalize their software purchasing decisions around a single trusted supplier. Customers are driven to this by their need to lower costs and to lift away some of the integration burden being placed on beleaguered IT departments. As a result, the tide is turning against the smaller vendors. It is understandable that risk-averse companies would not want to buy software they intend to use for several years from any supplier they perceive might not be around in a year’s time.
The prospect of CRM software leader Siebel going out of business on the back of a profit warning is hardly likely, but some number crunchers predict that SAP will topple Siebel from its CRM perch by the year’s end. One of the reasons cited by AMR Research is the ease of integration, a phrase that has not often been mentioned in the same sentence as SAP.
Battling over price-points
A more plausible reason behind AMR’s thinking might be that SAP is a more diversified software firm than its smaller rivals, and is using this to take more market share away from second-tier rivals. Indeed, SAP has its finger in many pies, offering one of the broadest business software platforms that manage functions as diverse as financials, manufacturing, supplier management, and payroll.
This means it is less sensitive to recent price pressures in the business applications software market than its mid-sized counter-parts. Of course when software vendors battle over price-points, this puts customers in the ascendancy; after all they are in no hurry to open their wallets these days.
Consolidation in the enterprise software market is also contributing, albeit indirectly, to declining market shares of smaller, niche software providers. Oracle’s hit list of intended targets included the likes of Siebel and BEA Systems as well as its current target of choice, PeopleSoft. Naturally, PeopleSoft blamed Oracle for its current revenue and profit shortfalls.
So the spate of profit warnings issued recently is a sideshow and is not necessarily a pointer to a more sinister downward trend in the enterprise software sector. Rather, it indicates a more careful and considered approach by customers to doing business with software companies. These companies will survive in the long term.
