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

To: Wizard who wrote (11046)	4/14/2002 2:05:52 PM
From: stockman_scott	Respond to of 57684

Tough Times Linger for Software Industry By KENNETH N. GILPIN April 14, 2002 MARKET INSIGHT The New York Times Computer software stocks have been shrinking in value. Excluding Microsoft, a group of 116 companies tracked by Morgan Stanley has lost 22 percent of market capitalization since the start of the year. That number is now around $550 billion. Last week, Thomas Siebel, chief executive of Siebel Systems, rattled investors when he said the contraction was not over. At the start of the year, Mr. Siebel was bullish. Charles E. Phillips, computer software analyst at Morgan Stanley, talked last week about the difficult conditions in this high-margin business. Following are excerpts from the conversation. Q. Why were so many people initially optimistic about prospects for software companies? A. The December quarter was good enough to get people excited. People were allowed to do a lot of year-end budget spending. In hindsight, what went on then was an aberration. It was assumed that an improving economy is a good thing, and that technology spending would closely follow that. But from a profitability standpoint, corporate customers are still under pressure. Q. What are the prospects for the two broad components of the software business, applications and infrastructure? A. Applications software is a packaged business process. Intuit, which sells tax software, is an applications company. Infrastructure is for backup and recovery, tools you need to help back up applications. Companies like Veritas Software, Computer Associates and Oracle are infrastructure software companies. During a downturn, infrastructure software tends to do better. Applications software sales are totally dependent on new projects. So the applications guys tend to fall off farther and faster. Q. What is the outlook for software? A. The first quarter tends to be the toughest of the year. We do monthly surveys of chief information officers. Those surveys got worse all through last year, stabilized at the end of the year and have gotten a little worse since then. I don't expect to see much of a recovery until the fourth quarter, with better prospects for 2003. When the pickup comes, it won't mean big numbers, but improved numbers. The likelihood of returning to the days of 50 percent growth are pretty much gone. Excluding Microsoft, the independent software companies generate about $90 billion worth of revenues. In the aggregate, we will be lucky to get growth of 10 percent to 12 percent. The industry is maturing. Q. Is the software business bad everywhere, or just in the United States? A. Business in the United States has definitely fallen off more, but things are slowing in Europe and Asia now. But the decline there will not be as severe. Those regions did not have the same excess Y2K- and Internet-related buying binge as American customers. Q. Mr. Siebel predicted that a lot of small software companies would go out of business this year. Would consolidation help? A. Consolidation will help some, may help margins a little bit, but these small companies weren't relevant anyway. A lot of them shouldn't have been started in the first place. Q. Are the barriers to entry in software low? A. Some segments have high barriers. There won't be any new database software companies. Microsoft, I.B.M. and Oracle will battle it out there for years to come. And SAP, PeopleSoft and Oracle have the back-office applications segment for accounting and manufacturing. Q. Are software stocks attractively priced? A. The stocks have come off a lot, but they were overvalued. And earnings are less now than they were. For the most part, valuations are in line with where they should be. But the stocks are not bargains. In the near term, most of the sector will be revising guidance on earnings down, and the second-half numbers will be coming down. Q. Should investors avoid software? A. The average investor should probably stay away. They are volatile stocks with a lot of risk, too much risk for the average investor. There are definitely companies that will be around for 10 years, but they could still underperform the market during that time frame. Companies like SAP, PeopleSoft, Oracle, Veritas Software and Computer Associates are going to be viable for years to come. Q. Do you give any of the the stocks an "overweight" rating, Morgan Stanley's highest? A. SAP and Peregrine Software, which builds software to track assets in a company, are rated "overweight." Lots of the rest are rated "equal weight," which means they will perform in line with the rest of the market. nytimes.com