Odinight projects another difficult 4-6 quarters for technology vendors

Odinight projects a continuing weak economic climate that will translate into another tough 4-6 quarters for technology vendors before a software technology market turnaround. Of interest to technology vendors, Enterprises and investors.

OTTAWA, ON, September 18, 2002 -- Odinight projects a continuing weak economic climate that will translate into another tough 4-6 quarters for technology vendors before a software technology market turnaround.

The forecast for a turnaround follows the money trail. Enterprise technology vendors rely on Enterprises for revenue and growth. These Enterprises rely on other Enterprises and consumers for product sales. Currently, consumers and Enterprises are reluctant to spend.

There are segments of the technology landscape that are still relatively prosperous. Cognos just reported 16% license growth in the BI space and Microsoft grew revenue 10% in the latest quarter. However, these pockets of spending (with quick ROI returns like portals, BI and upgrades) are not large or sustainable enough to drive the entire software market. Further, consumers (who account or 2/3 of GDP in the U.S.), already beaten down by the continued poor job market have reached a limit in terms of artificial stimulation (lower rates or home spending and auto sales offers) and have taken a break from new spending.

Thus, GDP projections are being continually revised downward, forecasting less output and spend on goods and services. As well, the continued strength of the US dollar will hurt production in the short term in the US, though the account deficit should weaken the dollar in the long term, which should improve growth prospects.

The main revenue categories have shown flat and declining revenues. SAP, the best performer in the Core Application vendor category posted license declines of 27% in their latest quarter, while CRM market leader Siebel posted a decline of 41% in licenses, in times when CRM systems were supposed to sell well. IBM, HP and Sun also declined in the quarter just passed. This will even affect the bright areas in technology as these larger vendors position to enter these spaces to gain revenue. While this revenue is a decimal point in Microsofts top-line it will seriously impact these niche vendors, lowering multiples in even these momentarily successful areas.

The catalyst for turnaround will be when Enterprises start to provide meaningful earnings gains in 2-3 quarters when compared to this year (though only comparatively). Early Enterprise adopters will begin to seek out solutions to new sets of pain problems induced during these constrained times. Consumers will also restart buying patterns as the stimulated haze from auto and home providers recedes from memory. This will begin to lift IT spending in the 2nd half of 2003, though meaningful (mass market) purchasing may not begin until Q403 or Q204 (if Q4 is missed it will take two more quarters). All of this assumes, of course a stable political environment. An unstable environment affects confidence, commodity prices (like oil) and economic output -- so all bets are off.

Purchases during this period will work to address the unresolved issues prior to the downturn, plus new issues evolved during the downturn. Larger incremental purchases to complete projects will be undertaken, though with less vigor than in past (adding a CRM component versus a whole suite). Enterprises will also have to solve problems propagated during LoB buying during the downturn for quick ROI. Problems like multiple Portals, competing BI solutions, disparate point products will again have to be brought under one umbrella for management to derive the greatest business value. While these would have been mega-deals in past, look for eager vendors and focused solutions to keep costs down (though Systems Integrators should also see a boom).

The state of the economy, market makers and market players is analyzed in detail by Odinight in the recently released Software Business and Market Outlook for Q4 and Beyond". To access the report go to http://www.odinight.com.

About Odinight

Odinight is a High-Tech research company that addresses the corporate need to analyze market and competitive forces to develop sound business directions and strategies. Odinight bridges the gap between high-level research firms and in-house core competencies to bring strategic direction and input to corporate decision makers. See us on the Web at www.odinight.com

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Odinight does not offer investment advice, nor are we personal investment advisors. We provide strategic analysis and advice to Enterprise vendors and this analysis is intended to guide Enterprise investment decisions. The purpose of this service is to showcase our research. We do not make recommendations for buying or selling any securities or options.