This Day On The Street
Continue to site
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

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 - Get Report) 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 - Get Report) 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 - Get Report) 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

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
INFA $0.00 0.00%
TIBX $24.03 0.00%
CRM $73.81 0.00%
IBM $146.47 0.00%
MSFT $49.94 0.00%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs