6 Jul 8:15
By Marcelo Prince
(This story was originally published late Wednesday.)
NEW YORK (Dow Jones)--There's a simple, if incomplete, reason that some are
offering to explain the pain that business software vendors, such as Computer
Associates International Inc. (CA) and BMC Software Inc. (BMCS), are feeling
these days.
It's an upstate New York rival called International Business Machines Corp.
(IBM).
According to several industry watchers, IBM is mulling changing its pricing
model for both its mainframe hardware and software when it rolls out its new
line of boxes, the G7, later this year.
It's well-known speculation that technology research firm Gartner Group Inc.
(IT) has been discussing; and consequently it's telling corporations to hold off
on mainframe software purchases. Its reasoning: if IBM adopts new (possibly
cheaper) usage-based pricing for its mainframe software, then third-party
vendors will have to respond. So Gartner has been telling organizations to wait
and see if IBM comes out with the new pricing and aggressively negotiates for
price breaks from the third-party vendors, such as CA and BMC.
The concerns aren't new. They were discussed by Gartner analysts at a software
industry conference in New Orleans last week. And they surfaced Wednesday
morning on the conference calls CA and BMC held to explain their June quarter
shortfalls.
Some financial analysts wondered aloud Wednesday whether Gartner's comments at
the conference, which coincided with the final days of the June quarter, led big
corporate clients to hold off on expected software purchases. That would partly
explain the large number of hefty contracts that slipped out of CA and BMC's
quarters, said Bob Johnson, analyst at ABN AMRO. It's no secret that both
business-software makers rely heavily on the deals that typically close in the
final days of a quarter to meet expectations.
IBM concerns accounted for a "meaningful portion" of both companies
shortfalls, Johnson estimates. When a company is going to spend $10 million to
$50 million on software, it wants to know whether IBM will change its pricing,
he said.
Indeed, both CA and BMC cited weakness in mainframe software sales (about 40%
of business) and trouble closing large contracts for their shortfalls. And both
companies had said earlier in the quarter that they had enough business in their
sales pipelines to meet expectations. Why then did some big customers change
their minds? Some pointed to Gartner.
Gartner mainframe analyst Mike Chuba, who wasn't at the conference, said it is
possible that his firm's advice is behind some of CA and BMC's woes, but it's
also a convenient excuse. "To the extent (Gartner's advice) caused deals not to
be signed, maybe there's some element of truth," he said, "or maybe the deals
just aren't good enough as yet."
Deals On Back Burner
Chris Mortenson, analyst at Deutsche Banc Alex. Brown, wrote Wednesday that
because of a preoccupation with e-business and uncertainty about mainframe
software pricing, "we suspect some customers are putting these deals on the back
burner, which could negatively impact (CA and BMC's) business for at least the
next quarter or two."
In a conference call Wednesday, Computer Associates President Sanjay Kumar
said his "calculated speculation" was that customers are more aggressively
anticipating the IBM hardware cycle shift and nervous about a change in
mainframe software pricing. Kumar said the concerns, which were highlighted at
the conference last week, hurt CA's mainframe business.
BMC Chief Executive Max Watson also suggested in his conference call that
IBM's talk about a new "pricing paradigm" might account for the sluggish
mainframe market. But he said the rumored pricing changes are neither IBM's
first nor a threat of declining revenue at BMC, which has succeeded in
challenging IBM's previous price changes. "I think we'll be able to respond very
well to it," he added.
Of course, if IBM does change to usage-based mainframe software pricing in an
effort to boost sales of its hardware, the third-party software vendors would
have to address the issue with their clients - many of which are locked into
multiyear contracts.
Nor would it be the first time. In July 1998, Computer Associates shares lost
one-third of their value after it surprised Wall Street with lowered guidance
for its September quarter. At the time, it gave three reasons: the Asia
financial crisis, the year 2000 glitch and softness ahead of IBM's product
transition to its G5 mainframe line.
"I think it's an issue that's being overblown," said J.P. Morgan analyst
Sterling Auty. It's not surprising that the mainframe market would be weak a
quarter or so before IBM's new hardware boxes begin shipping or that these
software vendors missed a quarter.
Gartner's Chuba said IBM hasn't decided yet whether or not it will actually
change its mainframe software pricing. "The change is more conceptual in nature
than specific," he said, adding that it's not clear it would necessarily result
in lower software prices.
Plus, executives at both companies admitted Wednesday that much of the
shortfall was due to their own missteps and analysts noted that quarterly
shortfalls aren't all that surprising for companies with back-end loaded
quarters.
"Each of these companies seems to take a turn in the tank," said Merrill Lynch
& Co. analyst Chris Shilakes. "Given their lumpiness, these kinds of blowups are
not unusual." |
