Staff Writer, CNET News.com
Do IBM's strong software sales point to brighter days in the enterprise software business? Yes—but only in some select areas, said analysts.
In reporting its fourth-quarter and full-year results for 2004 on Tuesday, IBM said it had performed well in all its major lines of business—services, software and hardware—and voiced an optimistic note for the coming year. Revenue growth year-over-year for software in the fourth quarter was 7 percent, with its Tivoli systems management growing at 25 percent and WebSphere middleware revenue increasing 18 percent.
The report raised hopes that the corporate software industry as a whole might be turning the corner toward brighter days. IBM intends to deliver a double-digit jump in profit in 2005 as well, buoyed by a stable tech-spending environment among corporations.
But analysts warned that happy days at Big Blue do not mean the return of rapid growth across the board.
IBM's software results slipped downward in the second quarter of 2004, along with those of several other enterprise software companies. Despite IBM's optimism, things are not as rosy for the rest of the software market, said some analysts.
"IBM's results look pretty good, but there is nothing that really jumped out that let's you say here's a definable trend," said Gregg Moskowitz, an analyst at Susquehanna Financial Group.
Instead of a swell in software spending lifting all boats, the recovery in software is turning out to be spotty, with only certain sectors and companies benefiting. In particular, security, management, infrastructure and analytics software stand to do well this year, as do the larger suppliers in the marketplace, analysts said.
In fact, the market overall is expected to grow more slowly this year as compared with last year, even though some areas will remain hot. Based on its surveys of chief information officers at large companies, JP Morgan expects spending on software in 2005 to grow in the range of 4 percent to 7 percent, which is a slowdown from the 8 percent to 10 percent spending growth seen in 2004.
Despite the slowing spending rate, JP Morgan said certain software companies stand to do well this year, as corporate customers invest in software-related projects, such as regulatory compliance, software infrastructure overhauls and business intelligence applications.
"The market has begun to mature with most subsectors decelerating," said a report released by JP Morgan in January, which said software is no longer a high-growth industry. This "means that growth still exists but is harder to find."
Ever the optimists
Still, the cheery report was enough to ignite talk of a sustained turnaround. "We believe that IBM's strong Q4 software numbers provide another indication that the December results for the industry should be positive. It appears that end-of-year budget flush was seasonally very strong," said a Merrill Lynch research report published Wednesday.
Other software companies are seeing better days as well. Earlier this month, customer sales and support applications company Siebel Systems said it would beat out analysts' expectations for revenue in the fourth quarter of 2004, citing a rise in license and hosted application sales. Oracle, too, reported strong earnings; earnings for the second quarter, posted in December, grew 32 percent year over year.
The areas where IBM did particularly well last quarter, such as business integration middleware and management, dovetail with strong financial results in those areas from its competitors, such as Tibco and Mercury, noted Moskowitz. But, he added, IBM's reported growth rate was aided by a weak dollar and acquisitions.
Even with the better financial performance of the large enterprise software companies, some analysts said they believe the software sector as a whole is simply not as vibrant as it once was.
Entrenched suppliers are facing pricing pressure from tightfisted corporate customers as well as growing interest in open-source and hosted software, such as that offered by Salesforce.com. These conditions favor larger companies, which can provide a broad suite of products and services to their corporate clients, who are paring down the number of their suppliers.
For example, the large database providers, such as IBM, Microsoft and Oracle, continue to add data analysis tools to their product packages, which will put pressure on standalone business intelligence companies, such as Business Objects and Hyperion, said Embersits. Indeed, many analysts expect that the business intelligence and data analytics area, which has already seen a wave of mergers and acquisitions, is ripe for further vendor consolidation.
"People are still buying software, and every market has a lot of competition, but there is no clear new niche that someone can grab and own," said Jeff Embersits, an analyst at Shareholder Value Management, which has been shorting much of the software sector since last fall. "The big guys in software will just keeping adding features and functionality (to their products)."