I am involved in a lot of first-half 2009 investment research into the leading enterprise software suppliers this month, following their late July/early August reports to the financial analysts concerning how they are doing. So you'll see a recurring theme of numbers and what they mean in my last few blog posts. But this post veers from the numbers although the source is the same, Wall Street.
It is always interesting to keep track of what Wall Street thinks about your IT suppliers, especially if your management does too. There is an interesting report now available from the Wall Street Transcript, titled "Enterprise Software has Sustainable Economic Advantage: Gives Industry an Investment Edge." An abstract is up on the investment-research site as of August 25. It's good reading because it provides a pretty basic explanation of the software industry, if you feel your CEO or CFO needs a primer. And it's good reading because it points out to investors the advantages of enterprise software users signing up for maintenance subscription. Of course, what investors think of as an advantage of enterprise software, you might think of as a disadvantage.
In the article, the newspaper interviews John DiFucci, a Managing Director at J.P. Morgan covering the software industry. Here's some of what he says (remember he is speaking to non-IT folks):
" then there is something else (other than a license fee) in the traditional revenue model for a software company: You buy the product and then after that, you buy what's called maintenance. The maintenance is typically 20% or thereabouts of the license fee and it's paid on an annual basis. For that maintenance fee, you get any bug fixes, any product updates, any new versions when they come out. You can call the company and ask for help Now, because enterprises are using this software to run their business, they pay that maintenance even in recessionary times, unless they're going out of business. So maintenance typically grows during a recession, and maintenance provides the overwhelming majority of the profit of a software company. So in a recession, licensing revenues may get crushed just like anything else out there. But you'll see total revenue for software companies hang in there. The bottom lines of software companies have held up a lot better than hardware companies over the last year."
DiFucci somewhat redeems himself with the last sentence but, as you know, it's harder and harder to distinguish "hardware companies" from "software companies." What will Oracle be after the Sun acquisition is approved by the European Union? A software company or a hardware company? Or an IT company such as IBM, HP, EMC and Microsoft -- yes Microsoft -- already are.
And, as I explained in this August 19 post, while so-called software companies might be doing better than so-called hardware companies, everything is relative. The last year has been a bear for everyone.
DiFucci rightly points out that "when a company buys software, it's like any technology and if it's working, you're not going to switch -- switching costs are usually pretty high. If it ain't broke..." and wraps up with some good advice for users and investors:
"Most enterprises today are focused on buying things that help them run their IT assets more efficiently; in other words, they're focused on saving money. It's all about TCO and ROI - total cost of ownership and return on investments - that's what enterprises are looking at."
The only thing I would disagree with in that statement is that it is not about running your IT assets more efficiently, it's about running your company or organization more efficiently using IT. Look at the ROI and you'll have a lot in common with the IT investment people who are interested in enterprise software.