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THE WEEK IN REVIEW
Earnings reports galore; tone generally still cautious. Software had a choppy week of trading with the movement in stocks driven for the most in part by earnings releases. The Goldman Sachs Software Index (GSO) finished the week up 5 pts or 2.7% to 189. The broader markets finished the week up fractionally as well with the Nasdaq up 0.4% and the Dow closed up 0.7%. Due to the shortened workweek, there was a plethora of earnings announcements each night. In general the results were slightly ahead of published estimates. With a few exceptions (which we will get to) the tone of the conference calls was upbeat but still somewhat cautious on the near term outlook. The March quarter is still hazy as far as the demand environment, but we get the sense that most companies were able to build a small amount of backlog heading into the quarter. Guidance was generally left the same as most companies expect the normal seasonality to occur. Most of our models are calling for flat to down sequential growth for March still. There were a few companies that had exceptional December quarters and raised guidance for the March quarter and the year. The two notable companies is this regard were SEBL and MERQ, both on the GS Recommended List. Both companies were very bullish on their conference calls and believe that software spending is beginning to get back to more normalized levels. MERQ is an important datapoint for the rest of software since they are the leading tester of packaged applications. They stated that they saw demand come in to test applications for SAP, PSFT, SEBL and ORCL. SAP and PSFT also reported strong quarters this week but were more conservative on their respective economic outlooks. ORCL is hosting its Analyst Meeting in Redwood Shores on Wednesday January 30, so we should get an update on their application business at that time. KEY DISCUSSION POINTS 1) Thoughts on competition and supply chain in general There has been a lot of discussion and controversy surrounding market share and competitive wins regarding the supply chain market and the three major vendors (ITWO, MANU and SAP). The best gauge we have for looking at market share is license revenue comparisons for the last few quarters. Comparing ITWO and MANU's (we'll get to SAP later) license revenues for the last four quarters, it would seem as if ITWO had lost share in June but has taken a small amount of share from MANU (ITWO's share has gone from 70% to 77%) since. However, to give MANU credit they have not had the effect of December in their reported results and we are projecting license revenues to be up 15% in February while we believe that ITWO's license revenues will be down 5%. If our estimates become reality then ITWO would be back to 70% share with MANU at 30%. What this exercise basically showed us is that neither company is taking share from one another in the overall supply chain space in the last year. In fact we believe that there is less overlap between the companies in the marketplace than most investors believe. ITWO still is discrete manufacturing focused, but has won deals in MANU's backyard of CPG of late. On the flip side, MANU has better vertical diversification with a focus on transportation management and has won deals of late in high tech. What we do believe is that when demand for supply chain software returns both companies should rebound. However, given its vertical focus, we would argue that ITWO has more upside potential if high tech and industrial rebound more quickly than other vertical areas. SAP, unlike the two other vendors breaks out supply chain revenues by customer intent. Given that they can sell a bundled suite of ERP, SCM (what they call APO) and CRM solutions it is very difficult to tell what is actually being used for supply chain. Our checks with the SI community reveal that most of what SAP is selling as SCM is some basic demand and material planning solutions. Also, we have not been able to find many instances where SAP has beaten either ITWO or MANU head-to-head. Bottom line is, despite SAP's claims earlier in the week, they are not dominating the supply chain market. 2) Updated Fundamental Scorecard for the Supplier Relationship Mgt market Now that we have had a chance to digest the earnings of all the SRM companies under coverage, we have put together a scorecard to help investors differentiate the companies by four main areas: Financial Performance, Product Positioning, Organizational Strength and Industry Dynamics. Here are a few high level thoughts on the sector in general. *Cost structures are improving - all the vendors with the exception of CMRC did a good job of taking major steps at re-aligning their cost structures. While S&M as a percentage of license revenues remains very high compared to historical levels the companies were able to lower this ratio dramatically in the quarter. *Balance sheets also improved - in general DSOs were down from September due to better linearity (due to in part spillover) and a healthier demand environment. Deferred revenues for the most part stabilized if not ticked up and cash burn rates have slowed. *New products are important for 2002 growth - all the vendors are hoping that new products will be able to spark growth in the next 4 quarters both with new customers and with the current installed base. Innovation is important and the companies have been more reluctant to cut R&D than other areas of the firm. THE WEEK IN REVIEW Earnings reports galore; tone generally still cautious. Software had a choppy week of trading with the movement in stocks driven for the most in part by earnings releases. The Goldman Sachs Software Index (GSO) finished the week up 5 pts or 2.7% to 189. The broader markets finished the week up fractionally as well with the Nasdaq up 0.4% and the Dow closed up 0.7%. Due to the shortened workweek, there was a plethora of earnings announcements each night. In general the results were slightly ahead of published estimates. With a few exceptions (which we will get to) the tone of the conference calls was upbeat but still somewhat cautious on the near term outlook. The March quarter is still hazy as far as the demand environment, but we get the sense that most companies were able to build a small amount of backlog heading into the quarter. Guidance was generally left the same as most companies expect the normal seasonality to occur. Most of our models are calling for flat to down sequential growth for March still. There were a few companies that had exceptional December quarters and raised guidance for the March quarter and the year. The two notable companies is this regard were SEBL and MERQ, both on the GS Recommended List. Both companies were very bullish on their conference calls and believe that software spending is beginning to get back to more normalized levels. MERQ is an important datapoint for the rest of software since they are the leading tester of packaged applications. They stated that they saw demand come in to test applications for SAP, PSFT, SEBL and ORCL. SAP and PSFT also reported strong quarters this week but were more conservative on their respective economic outlooks. ORCL is hosting its Analyst Meeting in Redwood Shores on Wednesday January 30, so we should get an update on their application business at that time. KEY DISCUSSION POINTS 1) Thoughts on competition and supply chain in general There has been a lot of discussion and controversy surrounding market share and competitive wins regarding the supply chain market and the three major vendors (ITWO, MANU and SAP). The best gauge we have for looking at market share is license revenue comparisons for the last few quarters. Comparing ITWO and MANU's (we'll get to SAP later) license revenues for the last four quarters, it would seem as if ITWO had lost share in June but has taken a small amount of share from MANU (ITWO's share has gone from 70% to 77%) since. However, to give MANU credit they have not had the effect of December in their reported results and we are projecting license revenues to be up 15% in February while we believe that ITWO's license revenues will be down 5%. If our estimates become reality then ITWO would be back to 70% share with MANU at 30%. What this exercise basically showed us is that neither company is taking share from one another in the overall supply chain space in the last year. In fact we believe that there is less overlap between the companies in the marketplace than most investors believe. ITWO still is discrete manufacturing focused, but has won deals in MANU's backyard of CPG of late. On the flip side, MANU has better vertical diversification with a focus on transportation management and has won deals of late in high tech. What we do believe is that when demand for supply chain software returns both companies should rebound. However, given its vertical focus, we would argue that ITWO has more upside potential if high tech and industrial rebound more quickly than other vertical areas. SAP, unlike the two other vendors breaks out supply chain revenues by customer intent. Given that they can sell a bundled suite of ERP, SCM (what they call APO) and CRM solutions it is very difficult to tell what is actually being used for supply chain. Our checks with the SI community reveal that most of what SAP is selling as SCM is some basic demand and material planning solutions. Also, we have not been able to find many instances where SAP has beaten either ITWO or MANU head-to-head. Bottom line is, despite SAP's claims earlier in the week, they are not dominating the supply chain market. 2) Updated Fundamental Scorecard for the Supplier Relationship Mgt market Now that we have had a chance to digest the earnings of all the SRM companies under coverage, we have put together a scorecard to help investors differentiate the companies by four main areas: Financial Performance, Product Positioning, Organizational Strength and Industry Dynamics. Here are a few high level thoughts on the sector in general. *Cost structures are improving - all the vendors with the exception of CMRC did a good job of taking major steps at re-aligning their cost structures. While S&M as a percentage of license revenues remains very high compared to historical levels the companies were able to lower this ratio dramatically in the quarter. *Balance sheets also improved - in general DSOs were down from September due to better linearity (due to in part spillover) and a healthier demand environment. Deferred revenues for the most part stabilized if not ticked up and cash burn rates have slowed. *New products are important for 2002 growth - all the vendors are hoping that new products will be able to spark growth in the next 4 quarters both with new customers and with the current installed base. Innovation is important and the companies have been more reluctant to cut R&D than other areas of the firm. <<weeklyJan2802.pdf<< - weeklyJan2802.pdf
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