Times remain tough for enterprise-software companies, and analysts aren't sure when the good times will return for an industry that has been confronted with a host of uncertainties.
August 24, 1998
Analysts Aren't Putting a Date
On Enterprise-Software Rebound
By MARK BOSLET
Dow Jones Newswires
PALO ALTO, Calif. -- Many enterprise-software companies have taken it on the chin lately, and analysts aren't sure when the good times will return.
Investors fear slowing growth and the end of a sales burst that came from replacing older systems unable to handle dates after the year 2000.
Questions also persist over how the industry will look several years from now as today's big-selling products begin to saturate their markets and companies need to look elsewhere for faster growth. Some say consolidation is expected and talk of vulnerability in even the industry's big five: PeopleSoft Inc., Oracle Corp., Baan Co. NV, SAP AG and J. D. Edwards & Co.
The stock pullback has been broad-based and has affected even some of Wall Street's favorite enterprise-resource planning, or ERP, software vendors. PeopleSoft, for example, is down more than 30% from its mid-July peak and 39% from its year-high on April 20 of $57.4375. Baan also has backed off 39% from its April 20 year high of $55.50, and Siebel Systems Inc. is down about 25% from its year high of $37 in mid-July.
Vantive Corp. has fallen further than most, off 72% from its April year high of $39.75. And Manugistics Group Inc., which sold at $66.375 on April 14, is now in the $22 range, after the company reported a first-quarter loss. Fellow supply-chain management competitor I2 Technologies Inc. also has slumped, sliding to $18.25 from a year high of $42.25 reached July 16.
Without a doubt, there has been plenty of bad news to go around for these companies, whose products automate many of the day-to-day corporate functions. Baan, for instance, has disappointed investors over a string of quarters, and last month the company's chairman and co-founder, Jan Baan, resigned.
Despite posting solid revenue numbers, PeopleSoft's first and second quarters drew concern as product sales -- or licensing revenue -- were lower than expected. The second quarter also saw a slowing in the deferred software-license revenue the company puts away for future quarters.
Oracle's performance has been under pressure as well, as the company's applications sales have grown sluggishly if at all. Reasons are varied, including troubles in Asia, a sales-force reorganization and delays for its new Release 11 software as it incorporated Java technology.
In early July, Vantive told investors it would see a second-quarter shortfall in North America license revenue. Even industry leader SAP has sounded a cautious note of late.
Behind the investor nervousness is uncertainty over how fast the industry will grow in coming years.
"That's the key question I keep getting," said Morgan Stanley Dean Witter analyst Chuck Phillips. "What's the real growth rate?"
Predictions vary. Mr. Phillips projects 30% to 35% annual growth over the next two years. In contrast, AMR Research Inc., a market-research firm, several weeks ago issued a report predicting 37% annual growth over the next five years, with the market reaching $52 billion by 2002. That's a strong rate of growth, but still down from 53% growth in 1997.
One explanation for the slowing demand for software is the waning surge of Year 2000 buying, which some industry observers say began putting the brakes on growth this year and could be a modest drag through 1999. The industry also is suffering from the economic slowdown in Asia and from some degree of market saturation.
Mr. Phillips puts the market penetration of traditional ERP products -- human-relations, manufacturing and financial software -- at 40% or more among companies with $1 billion or more of annual revenue.
Other industry experts say the industry's slowing growth is due to its success. "Whenever an industry gets to this size, you're always going to see a moderation in growth," said Romesh Wadhwani, chief executive of Aspect Development Inc. "I see this as a much more natural process."
The problem is that no one knows for sure when these influences will lift or how quickly the industry will change once they do. That has vendors looking for growth in new places, especially among mid-sized companies and in new industries, such as retailing.
Companies also are looking for new technologies and for a chance to expand into adjacent market segments, such as supply-chain management, sales-automation and customers-service software. PeopleSoft, for instance, agreed to buy Intrepid Systems Inc., a maker of retail-management software, in June, and, last week, Oracle said it would purchase Versatility Inc. and its customer-service call-center software.
Vendors also are seeking to increase their penetration of existing accounts. The past rule of thumb is that 15% to 20% of a company's workers would be candidates to use ERP programs; now, that target is climbing to more than 80%, industry experts say.
Ronald Wohl, senior vice president of application development at Oracle, said he also sees several customer trends propelling future growth, such as the shift to greater worker self-service, whether it's filing expense reports, handling purchase requisitions, or processing invoices. This will be especially true as the age of electronic commerce takes hold.
Another push for the company will be customers' desire to get more information, or business intelligence, out of their systems. Customers also are increasingly interested in replacing older systems with ones that rely on Internet standards, he said.
The big question is whether new opportunities will be equal in size to the ones they replace. PeopleSoft's Mark Nittler, vice president of applications, said he is optimistic growth rates will accelerate again. "We are pretty excited about what comes next," he said.
The traditional ERP market has been focused on transaction processing: providing administrative systems that keep records and provide controls, Mr. Nittler said. Technology is deployed to reduce costs and to make better use of resources. "I think [the market] right now has quite a lot of activity," he added.
However, the next several years will see a new market emerge, perhaps shortly after companies finish repairing or replacing systems hampered by the Year 2000 bug. This market will be focused on increasing revenue, or helping companies "do better business rather than doing business better," Mr. Nittler said.
That means focusing applications on generating and analyzing data, or optimizing a company's supply chain for faster revenue growth, he said.
Some industry observers say adapting to new opportunities will bring about significant changes in the way companies look, as well as an expansion of their product portfolios.
"I see much bigger, broader companies," said SoundView Financial Group Inc. analyst Steven Kohn. "They will not look like they do today."
Still, that may not necessarily mean a great re-organization of the industry. "The large trusted vendors will continue to be the large trusted vendors," said Bob Austrian, an analyst at NationsBanc Montgomery Securities Inc.
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