This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Software Firms Face Recession Ripple Effect

SAN FRANCISCO -- If the economic downturn hits the information technology sector, investors in business software companies are probably safe for one more quarter of earnings reports.

"If we see it, we'll see it in the second quarter," says Joanne Correia, managing vice president for Gartner. Yet Correia isn't convinced that software companies will report much damage even then.

Still, results for 2008's first quarter will be telling, says Stuart Williams, senior analyst at Technology Business Research. "Everybody's been very quiet about their results."

Earnings reports out so far this year showed that the final quarter of 2007 was strong, with IBM (IBM) landing deals that had slipped out of the prior quarter. "There is no indication that the train has come off the tracks," Williams said.

But some companies may have worked hard to pull deals into the fourth quarter, and that would show up as lower first-quarter revenue, he added.

It would also suggest an economic slowdown will hurt IT vendors more than expected this year.

On Wednesday, Gartner forecast that worldwide business software growth will slow to 8.2% ($190.7 billion) from the 10.3% rise recorded in 2007, according to Correia.

If softness in IT spending shows up in the next three to six months, "it's an opportunity to see how well the vendors of enterprise software are doing at pitching their products as strategic investments rather than tactical investments," Williams said.

In addition to the financial services sector, retail is the sector that will most reduce IT spending, both analysts agree. "Anything that sells to consumer markets would be slushy," Correia says.

Businesses are continuing to replace IT systems, according to Correia, who says Gartner analysts don't see any pullback in demand, or they see very little, at most. "We don't have clients calling and saying their IT budgets have been cut."

The weakness of the dollar will account for three to four percentage points of the projected growth, Correia says. Exchange rates account for three percentage points of Microsoft's (MSFT) growth and six points for IBM during the most recent quarter.

Correia advises investors to look at any company's growth numbers on a constant-currency basis.

The dollar's slide will also be a boon to U.S. vendors with a strong presence in Europe and may help those trying to break in there, Williams says.

The telecommunications sector abroad is very strong for software sales, and manufacturing and government sectors in the "BRIC" nations of Brazil, Russia, India and China are big sources of growth to global software companies, Williams says.

Another metric to watch in next quarter's earnings reports is any elongation of days sales outstanding (DSO), which is a barometer of how quickly companies are able to collect. DSOs had typically been 60- to 70-plus days, Correia says. A few years ago, that stretched to 80 to 90 days.

Also, keep an eye out for big changes to deferred revenue balances, she advised.

Software developers in the best position to weather a downturn are those that have created a good mix of geographies and products, serving a variety of industries with a range of sales and revenue models: direct sales and channel partners, and subscription sales as well as traditional new license contracts with maintenance revenue streams.

By those parameters, Oracle (ORCL) and Microsoft are well positioned. The business software leaders have followed the weather-a-recession playbook, building their portfolios in-house or through acquisitions.

An anticipated slowdown in the PC market would show up late in Microsoft's numbers on Vista and Office sales, possibly not until the fiscal first quarter of 2009, which ends in September, Correia says.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,265.99 +109.14 0.64%
S&P 500 2,011.36 +9.79 0.49%
NASDAQ 4,593.4250 +31.2360 0.68%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs