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Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: Lizzie Tudor who wrote (10569)	2/19/2002 3:25:23 PM
From: stockman_scott	Respond to of 57684

Software Deja Vu: Looking Forward Is a Lot Like Looking Back By Ronna Abramson TheStreet.com - View from TSC Monday February 18, 2002 Rewind to 1996 and you'll get a glimpse of software's outlook this year. That was the take of Oracle (Nasdaq: ORCL - news) Senior VP George Roberts, head of North America sales, at the company's recent analyst day, and many software industry watchers agree it's a fair characterization. After all, 1996 was before Y2K and the dot-com boom drove tech spending -- and share prices -- into the stratosphere. These days, IT budgets have moved back to levels of leaner times. Merrill Lynch estimates a recovery in software will trail the economy and be more muted, with IT spending flat to up 3% in 2002 from 2001. But that's not to say software technology isn't moving forward, too. Software is still "almost absurdly profitable" with high gross margins and little capital investment required, concluded Merrill Lynch's global software research group in a weekly newsletter published earlier this month. Security and analytics are proving to be software bright spots. But investors beware: There's plenty of hype surrounding security, as well as the latest software sector du jour in software -- Web services. Integration is another popular buzzword, but there's debate about the long-term fate of middleware software suppliers in the wake of Web services. Meanwhile, the has-beens from the '90s business-to-business area will have to morph into supply-chain management specialists to survive. Here we take a closer look at those major areas of the software market and their prospects for the next year or so. Security The Bush administration's recent emphasis on homeland security, including cyberterrorism, in the next fiscal year federal budget has fed the flames that have made security stocks hot. Even if IT spending is flat in 2002, security will show healthy growth in 2002 because companies are shifting their dollars in that direction, said Sterling Auty, an analyst with JP Morgan H&Q. So why be cautious? Douglas Sabo, manager of government relations at Network Associates (NYSE: NET - news) , said the president has proposed $4.2 billion specifically for cybersecurity -- a 60% increase from a year ago. Network Associates, however, draws only a small portion of its revenue from the federal government, he noted. In addition, Congress hasn't passed any appropriations bills yet, so the numbers can change, said Israel Hernandez, a senior analyst with Lehman Brothers. And security-software makers are unlikely to sustain their substantial sequential growth in the fourth quarter -- pro forma earnings for Network Associates more than quadrupled -- because that was largely driven by virus attacks. Still, "those seem incessant in nature," said Hernandez. "There's enough growth there to sustain valuations." Hernandez rates Network Associates strong buy and Symantec (Nasdaq: SYMC - news) buy because he likes both stocks' valuations. He also has a buy on Internet Security Systems (Nasdaq: ISSX - news) , which he said is more expensive but still has strong fundamentals. Of those three, his firm has done banking business with only Network Associates. Analytics A less sexy software area poised to take off is analytics, which pulls together information from multiple sources to provide detail such as which customers are most profitable -- without forcing an executive to wade through several reports to figure that out. There's no strong leader, but big players such as Oracle, PeopleSoft (Nasdaq: PSFT - news) , Siebel (Nasdaq: SEBL - news) and SAP (NYSE: SAP - news) are battling against smaller pure-plays such as Informatica (Nasdaq: INFA - news) , Business Objects (Nasdaq: BOBJ - news) ADS) and Cognos (Nasdaq: COGN - news) . Since Jan. 1, Business Objects shares have increased 16.6% and Cognos has gone up 14%, while Informatica has fallen 21.3%. "Companies have spent millions and millions of dollars putting in ERP [Enterprise Resource Planning] and CRM [Customer Relationship Management] systems. They're great. They're the backbone of the enterprise," explained Jon Ekoniak, a senior research analyst with U.S. Bancorp Piper Jaffray. "But they generate a ton of information: It creates information overload." Joshua Greenbaum, a technology consultant and principal at Enterprise Applications Consulting in Daly City, Calif., thinks the recent Enron debacle also will fuel more interest in analytics. "The whole issue of oversight is becoming even more critical, and it's not just oversight on a quarterly basis from the CFO side. It's oversight of the entire business," he said. "I think these analytics are going to become much more popular as companies say, 'I don't want to be Enroned by my own company.' " The Big Guys Overall, the big enterprise-software makers have expressed optimism about the full year. That goes for CRM giant Siebel, expected to increase earnings 20.4% this year, and SAP, expected to boost earnings 33.3%, according to Thomson Financial/First Call. PeopleSoft CEO Craig Conway also is among the enterprise-software executives who have used the "O" word. And for good reason: Wall Street expects PeopleSoft to increase earnings 23.7% this year. Oracle is the only big player whose earnings are forecast to be flat for the year, because its application business has stumbled and its database business has suffered competition from IBM (NYSE: IBM - news) and Microsoft (Nasdaq: MSFT - news) . While those are formidable foes, Oracle may be taking the conservative route. "Oracle is still considered the gold standard in the [database] market," said technology consultant Greenbaum. "Its users are everywhere. The people who have trained on Oracle are all over the market." He also praised the company's latest integration technology. "If they can go out and execute sales and marketing, they've got the technology to do it," he said. Web Services Of course, all of the major players are betting big-time on Web services, but no one more so than Microsoft. Today, the Redmond, Wash., giant launched a $200 million advertising campaign for its .Net initiative, promising businesses a way to integrate all of their business systems through Web services. But there's still disagreement about what, exactly, Web services are. To some, they're no more than the XML standard that allows different applications to talk to each other. Daryl Plummer, Gartner Dataquest's group vice president for software infrastructure, considers Web services one step along the way to delivering software as a service with steady revenue streams rather than as a shrink-wrapped, off-the-shelf product. But most agree that there are still plenty of hurdles, including security issues and the longevity of legacy systems, which some predict will survive for still 20 more years. That means Web services is unlikely to take off in any major way this year. And then there are skeptics like Greenbaum, who considers Web services just another software integration play. "I think Web services is a shadow game trying to become the next big thing. I think it's the next small thing," he said. "The next big thing is there is no next big thing." Software Integrators Software integrators such as SeeBeyond (Nasdaq: SBYN - news) and WebMethods (Nasdaq: WEBM - news) also have jumped on the Web services bandwagon but make a point of saying Web services is no panacea. These firms, which also include Tibco (Nasdaq: TIBX - news) , Vitria (Nasdaq: VITR - news) and Iona (Nasdaq: IONA - news) , could benefit from Web services because they've been integrating software for years, or they could be replaced by them. Greenbaum thinks the latter ultimately will occur as integration becomes a feature of larger products from the likes of Oracle and SAP. Integrators already are getting swallowed up, he says, pointing to IBM's acquisition of CrossWorlds Software last year. Gartner's Plummer, however, calls integration "the only strong area" in software because it leverages existing IT resources, which are popular in tough economic times. But which middleware company to invest in? Erick Brethenoux, an analyst with Lazard Freres, favors Irish software maker Iona, which he believes has one of the strongest platforms. Iona saw revenue grew 18% in 2001 but lost $3.27 a share. Shares of the company, which has filed for a follow-on offering of 5 million shares, have fallen 15% since the beginning of the year. Brethenoux's firm hasn't done any banking business with Iona. Supply-Chain Management Companies also are looking inward to manage their supply chains better, but this may present a bigger opportunity for small, private start-ups than public companies. That's because companies are looking for specific products -- rather than spending more money on broader products provided by such companies as i2 Technologies (Nasdaq: ITWO - news) and Manugistics (Nasdaq: MANU - news) , said Greenbaum. "They can't grow. They're shrinking because they can't have a lot of small deals," he said. B2B a Bust? To survive, B2B will have to be more closely linked to supply-chain management, industry analysts say. Ekoniak expects the ERP and supply-chain companies to develop the functionality that B2B companies have been banking their business on -- particularly marketplaces. Conversely, B2B companies such as Ariba (Nasdaq: ARBA - news) and Commerce One (Nasdaq: CMRC - news) are going to have to incorporate more supply-chain tools into their offerings. "There's a huge opportunity still in supply-chain management," said Philip Lay, senior managing director of the Chasm Group, which provides strategy consulting to high-tech companies. "It only has the surface scratched." He characterized the current B2B market as quiet but expects that to change soon. "Over the next six months, we'll find out if Ariba comes into the market and gets any new traction and gets large customers," he said. Lay expects the next year to determine whether the B2B companies are anything more than one-product wonders. "They don't have the survivability of a public company, so they're trying to build it in real-time," Lay said. "They should all really be private companies." But then, that would be so 1996.

To: Lizzie Tudor who wrote (10569)	2/20/2002 8:17:03 PM
From: stockman_scott	Respond to of 57684

INVESTING -- "A Mending Year for Tech" Wednesday February 20, 12:21 pm Eastern Time BusinessWeek Online Technology stocks are in the process of moving away from a market bottom and will start to shine again in 2003. In the meantime, 2002 is ``a mending year for tech,'' says Thomas W. Smith, the Standard & Poor's investment officer who heads the group of S&P technology analysts. That said, S&P has an overweight recommendation on information technology stocks, especially those of software and semiconductor companies. Telecommunications equipment -- and the chip companies that serve them -- are still invalids, Smith says. Among the names on S&P's buy list, Smith cites Sun Microsystems, contract manufacturer Flextronics, and small-cap stocks of FEI Company and Kulicke & Soffa. On the next rung down -- accumulate -- the recommendations include Oracle and Analog Devices. These were among the comments made by Smith in a chat presented Feb. 12 by BusinessWeek Online and Standard & Poor's on America Online. Following are edited excerpts from this chat. A complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk. Q: Tom, Nortel (NYSE:NT - news) revived the market's jitters today -- if they had ever really subsided. How do you see the outlook amid all this post-Enron nervousness? A: Warnings from industry leaders such as Nortel always give investors pause. However, investors should bear in mind that the telecommunications-equipment group is one of the weaker areas among information technology industries. We still see warnings from equipment makers like Nortel and chip companies that serve them. This group should lag in the recovery. However, prices are already pushed down. Q: How much of a tech-stock revival do you see now, Tom? A: We are maintaining an ``overweight'' position in information technology, based on the strength we expect in semiconductor and software shares this year. As I say, other areas like communications equipment are laggards, and there are some special cases we like, including IBM (NYSE:IBM - news), Flextronics (NasdaqNM:FLEX), and DoubleClick (NasdaqNM:DCLK). Overall, 2002 is a mending year for tech, and we expect a more decisive recovery in 2003. Q: Sun Microsystems (NasdaqNM:SUNW) at $9 and change sounds like a great buy. What's your opinion? A: We, in fact, do have a 5-STAR [buy] ranking [in S&P's Stock Appreciation Ranking System] on Sun Microsystems...they are targeting a double-digit operating margin and plan to do stock buybacks...margins should improve materially in the near term, based on Web-based efficiencies and better product mix and component costs. Q: What does Lucent Technologies (LU) look like now? A: Lucent Technologies has a profile similar to Nortel, which is to say it's in a fundamentally weak industry in 2002. Our analyst following the stock, Ari Bensinger, has a 3-STAR [hold] ranking on the shares...things should get brighter for Lucent, but it looks like a laggard in the recovery. Q: What's S&P's view on Analog Devices (ADI)? A: Analog Devices is one of the premier high-end analog-chip companies. They also make DSP chips. Both these categories of chips are high-growth areas. Revenues have fallen in the downturn but remain in good shape for the upturn. We have a 4-STAR [accumulate] ranking on the stock. Q: Your opinion on Oracle (ORCL)? A: Oracle is a 4-STAR [accumulate] as ranked by our analyst Jon Rudy...Jon recently went with an ``overweight'' recommendation for the systems software industry. Oracle is a major player in the group and should do fairly well. Q: Any thoughts on VeriSign (VRSN)? A: VeriSign is currently a 3-STAR [hold]. It's active in the Internet-based ``trust'' services, including authentication, validation, and payment that are needed by Web sites and electronic-commerce service providers. This is a promising area of commerce, but for now, we just have a hold on the shares. Q: You mentioned Flextronics briefly toward the top -- a bit more on it? A: Flextronics is a 5-STAR [buy] as covered by analyst Richard Stice. He actually has a positive outlook for the whole electronics contract manufacturing sector. The group had been battered and beaten up in the downturn but should come back with the new up-cycle. Flextronics is the low-cost producer in the group and is our only 5-STAR. However, we have two accumulate-ranked stocks in the group: Celestica (CLS) and Sanmina-SCI (SANM). Q: In that same group, what about (SLR)? A: Solectron is another large player in that group. It's currently ranked hold. Also, Jabil Circuit (JBL) is ranked hold. Q: Where do you see Advanced Micro Devices (AMD) going this year? A: Advanced Micro Devices is currently ranked hold. They are embarking on a major change in chip architecture and launching the Hammer family of chips later this year. If they succeed in successful production ramps and the chip industry expansion takes off as we expect, they should see earnings recover from a small loss in 2001 to about 75 cents [per share] in 2003. They have done fairly well in their competition for PC processor market share against Intel (INTC), but Intel remains a production powerhouse with the ability to counter advances that AMD might make...Intel has a history of more stable operations and is also currently a 3-STAR [hold]. Both these companies should do well as the next chip expansion plays out. I should note that Intel has a Standard & Poor's earnings/dividend ranking of A, which indicates a fairly steady history of financial performance, and AMD has a ranking of B-, which is less than that of Intel, but not bad for a chipmaker. These rankings tend to look at a 10-year history, so cyclical companies such as chipmakers often do not have high rankings in this category. Q: What about RF Micro Devices (RFMD)? A: RFMD is currently ranked 2-STAR [avoid]. They make radio frequency integrated circuits for wireless phones and remote meter reading. Presently, they face a challenging revenue environment -- which means their markets are slow. They should do better as the economy comes back in 2003 and 2004. But for the near term, we would avoid the shares. Q: How about chip-equipment makers Applied Materials (AMAT) and Lam Research (LRCX)? A: Applied Materials is reporting even as I speak. They are the leader in the semi equipment area, accounting for about one-quarter of all spending on wafer-fab equipment. They, like other chip-gear makers, have seen revenues cut way back through the bust year of 2001, and 2002 is likely to also be a down year. However, at some point, the cycle will pick up again, and these brand-name equipment makers will have their heyday. The timing is always unclear, but we are beginning to think more positive thoughts about the group. LRCX is also a hold. These two have some stream of income from leading-edge equipment needed for 300-millimeter wafer technology, which is the next step up from 200-millimeter technology -- which is still the standard size. Capital spending for 200-millimeter plants is very slow, but spending for 300- millimeter equipment is a little better. Two companies we like in the group are FEI Company (FEIC) and Kulicke & Soffa (KLIC). These two are both smaller-cap companies and 5-STAR buys. FEIC makes ion-beam microscopes. The idea here is inspection becomes increasingly important at smaller line widths, so FEIC's equipment is becoming more critical for leading-edge technology. KLIC makes wire bonders and other products for packaging of chips after they have been completed on the wafer. KLIC is often an early mover when an expansion starts. The risk here is that we may be too early with the buy call. Q: People have been asking about EMC (EMC), the data-storage giant. A: EMC is covered by Richard Stice with a 3-STAR [hold] ranking. He is neutral on the outlook for the data storage area. One positive for the group is that the World Trade Center attacks have renewed focus on the importance of storage. Disaster recovery capabilities are in the forefront of people's planning. A negative for the group is that there's some excess capacity, given that many companies purchased storage products during the Y2K buildup. High valuations are something of a concern for the group. The second half of 2002 should offer a better revenue environment as the economy comes back. In the long term, the buildout of the Internet and movement of information by e-mail will require significant storage facilities, so a long-term horizon may work out pretty well for EMC and the storage group. Q: Any thoughts on the general market? Is it still overvalued? Or is p-e overrated? And what about tech valuations specifically? You just mentioned concerns in data storage. A: Valuations are still a cause for concern in the technology area. However, as the economy comes back, earnings should come back for these companies, and we think that current valuations will be justified. For a group such as semiconductors, valuations may reflect that we're halfway into a recovery, when in fact the recovery is just getting started. For many chip companies, the September or December quarter of 2001 was the bottom for revenue, so a fundamental bottom was made, but the stock prices raced ahead in October and November to reflect that initial move off the bottom. Technology is in the process of putting in a major fundamental bottom. In some cases, the stock prices have run ahead. In some cases, they have not run ahead, like Nortel and Lucent. So investors have a spectrum of choices at this stage. You can choose chipmakers that have no inventory overhang, or software makers or service providers that have steady income, and expect to pay fair valuation for those, or you can proceed more speculatively and try to pick companies that are still washed out, such as Nortel and Lucent, or chipmakers such as AMCC [Applied Micro Circuits], PMCS [PMC Sierra], and others whose stocks are low now and apt to remain low for a long while because the end market recovery will be slower. S&P works with a 6- to 12-month time horizon on our STARS picks, so those of you with an eye for a 4- or 5-year horizon need to do some more thinking on your own. Go to www.businessweek.com to see all of our latest stories.