Rewind to 1996 and you'll get a glimpse of software's outlook this year. That was the take of Oracle ( ORCL) 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.
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 ( NET), 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 ( SYMC) buy because he likes both stocks' valuations. He also has a buy on Internet Security Systems ( ISSX), which he said is more expensive but still has strong fundamentals. Of those three, his firm has done banking business with only Network Associates. 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.' " 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.