67 WALL STREET, New York--May 5, 2009 The Wall Street Transcript has just published its Corporate Software issue, a report offering a timely review of the sector to serious investors and industry executives. This 41-page feature contains industry commentary through in-depth interviews with 6 analysts. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics include: Adoption of data services, Emerging markets, Reallocation of resources, Location services, Advertising, Social networking, R&D spending, More pricing pressure, Penetration rates, The business model, International exposure, M&A activities, IT budgets, Stock picks, Stocks to avoid.
Contents: Outlook for Telecom Software: Scott P. Sutherland, Wedbush Morgan Securities; Business & Professional Services: Kevin D. McVeigh, Credit Suisse First Boston Corp.; Outlook for Infrastructure Software: Richard Sherman, MKM Partners LLC; Infrastructure Software: Walter Pritchard, Cowen & Co., LLC; IT Outsourcing & Consulting Companies: Karl Keirstead, Kaufman Bros., LP; Small & Mid-Cap Software Stocks: Mark W. Schappel, The Benchmark Company, LLC. Companies mentioned include: Smith Micro (SMSI); Syniverse (SVR); TeleCommunication Systems (TSYS); NeuStar (NSR); VeriSign (VRSN); Vodafone (VOD); AT&T (T); Nokia (NOK); Google (GOOG); Microsoft (MSFT); Iron Mountain (IRM); Convergys (CVG); TeleTech Holdings (TTEC); Sykes (SYKE); F5 Networks (FFIV); Blue Coat Systems (BCSI); CA (CA); Data Domain (DDUP); Adobe Systems (ADBE); VMware (VMW); Citrix (CTXS); McAfee (MFE); Check Point (CHKP); Accenture (ACN); AsiaInfo (ASIA); salesforce.com (CRM); Oracle (ORCL); Infosys (INFY); Amdocs (DOX); ANSYS (ANSS); Wind River (WIND); GSE Systems (GVP); Aspen Technology (AZPN); Open Text (OTEX); Guidance Software (GUID).
In the following brief excerpt from the 41-page report, Mark W. Schappel, The Benchmark Company, LLC discusses the outlook for the sector and for investors.
TWST: Mark, where are you focusing your attention in the software area?
Mr. Schappel: I typically focus on small and mid-cap software stocks. There are a few themes that I'm looking at during the current downturn that impact the entire software sector, especially the small/mid-cap names I follow. First, I look for software vendors that sell small to mid-sized deals. These deals are typically characterized by a measurable ROI story over a fixed time period. Mid-sized deals often carry lower risk than larger deals. I look for vendors that are well diversified by industries and geographies covered.
I also look for companies that are less reliant on corporate IT spending and corporate IT budgets. It's no secret that customers are reluctant to spend and IT budgets have been pulled back. So I look for software vendors that are not tied to IT budgets or customer unit shipments. For example, some software companies are funded through customer R&D budgets, like Ansys (ANSS). Another is Wind River (WIND), a company followed by my partner Brent Williams. Also, to a lesser extent, there's MSC.Software (MSCS). All of these vendors' products are largely funded from customer R&D budgets, not IT budgets. R&D budgets are holding up a little bit better during the downturn than IT budgets, and this bodes well for those software vendors.
Another theme that I think is appropriate during the economic downturn is software vendors exposed to strong secular stories not tied to IT. For example, GSE Systems (GVP), a micro-cap or small cap company, is exposed to the coming buildout in the nuclear power industry, so IT budgets can fall for many years and that won't impact GSE Systems. They're exposed to the number of nuclear power plants built worldwide during the next 20 years. Another company in that category is Aspen Technology (AZPN). Aspen is tied more or less to capital spending in the process industries, such as oil and gas, refining, chemicals, petrochemicals and pharmaceuticals.
Another secular theme is regulatory compliance. Regulatory compliance spending is less exposed to the macro downturn, although it's not completely immune. Software companies exposed to this area include e-mail archiving vendor Open Text (OTEX) or e-discovery vendors such as Guidance Software (GUID) and to a lesser extent, EPIQ Systems (EPIQ). E-discovery software is used in corporate litigation when a lawsuit is filed against your company. During the discovery process, electronic information is subject to the discovery process as well as documents sitting in your filing cabinets. Companies like Guidance Software have technologies that help gather the relevant electronic information and put it into a case file.
TWST: I guess that's becoming more prevalent in this kind of environment.
Mr. Schappel: It is becoming very prevalent, which bodes well for Guidance and EPIQ Systems. Another company in that space is UK-based Autonomy (AUTNF). They trade on the London Stock Exchange. E-discovery and e-mail archiving fall under the broader umbrella of regulatory and compliance software.
As much as I look for positive software developments, there are also areas that I'm staying away from. One of those areas is application software that vendors such as SAP (SAP) and Oracle (ORCL) provide. This includes everything from the backoffice ERP applications, like finance, accounting and inventory systems, to supply chain management and human resource applications.
TWST: And you're suggesting to stay away from them at this point.
Mr. Schappel: I'm cautious on the application space because applications typically require a large upfront purchase. Million dollar plus deals are common, if not the norm, especially with larger companies. These large capital purchases are being heavily scrutinized during the downturn. Secondly, you need an army of consultants to help install the software and you also have to take people out of your business, which can be disruptive to an organization. In addition to these costs that are easy targets for executives to cut in a downturn, the payback is not always evident in the short term. It is sometimes six to 12 months after an Enterprise Research Planning (or ERP) deployment to say, "Okay, this is what our savings were and this is what the payback on our investment was." For many companies, the payback is several years out. So I'm avoiding companies tied to big application projects.
I think IT budgets are locked down for these big heavy projects, at least for the remainder of the year. I think customers are unlikely to embark on any new application initiatives until 2010 at the earliest when the next budgeting cycle begins. I think customer IT organizations are more willing to initiate bite-size projects in this environment, such as Internet infrastructure projects or e-commerce systems. These systems are less expensive, less disruptive, and you can often measure their benefits much easier. That's much different from large application projects that are known for their high total installed costs. Additionally, I think the application vendors are also exposed to some emerging and disruptive technologies, particularly on-demand or Software as a Service applications. I think SaaS applications are chipping away at the margin of the conventional application vendors like SAP, Oracle and Lawson (LWSN).
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 41-page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
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