|TechWeek Scorecard |
|Goldman Sachs Software||147||-2.6%|
Today's conventional wisdom: Avoid software companies with significant exposure in EMEA -- that is, Europe, the Middle East and Africa. After all, Business Objects ( BOBJ) and SAP ( SAP) blamed their recent profit warnings on soft business conditions in Europe. But like all conventional wisdom, it bears closer examination. Consider SAP, which normally fires on all cylinders but which
stumbled as deals evaporated at the end of the second quarter. Superficially, the problem did seem to have a European flavor: Constant currency software revenue growth was 21% in the Americas, 3% in EMEA and 4% in Asia Pacific. But on closer examination, the weakness was actually concentrated in the U.K. and the Nordic region, the company said, while growth was strong in Germany, France and Russia. Then there's FileNet ( FILE), a provider of, among other things, document management software. In its March quarter, the Costa Mesa, Calif., company grew software revenue by 17%, despite having a European exposure of about 30%. "I haven't seen any reports or gotten any input from our team indicating weakness in Europe," said FileNet CEO Lee Roberts. "In fact, our European business is growing faster than our U.S. business," he added during an interview. That's not to say Old World IT honchos are opening their wallets with abandon. Indeed, IDC is going to lower its forecast for IT spending growth in Europe to 5% from 7%, and ratchet down the software spending forecast to 6% from 7%, says IDC global spending analyst Stephen Minton. Making the issue even more complicated are differences between sectors of the software market. Spending for applications, the heart of SAP's business, is weak, while spending on infrastructure items such as network management, security and operating systems is relatively strong, Minton said. A recent IDC survey showed that European executives who were holding off on major IT projects were doing so for much the same reason their U.S. counterparts were: worries over the general health of the economy, the rising price of oil, higher interest rates and the frightening instability in the Middle East.
It's also worth noting that finding a U.S. software company without much European exposure gets tougher all the time, since the continent represents about 25% of the software market. On average, says Minton, U.S. software companies derive 20% of their revenue from Europe. But averages being averages, the risk is not evenly spread. JMP Securities analyst Patrick Walravens surveyed companies that he covers and found that business software vendor SPSS ( SPSS) derives 42% of its revenue from Europe, Business Objects, 42%, Oracle ( ORCL) 35%, Cognos ( COGN) 33% and Hyperion ( HYSL) 32%. Meanwhile, a spending survey by Citigroup indicates a softening of confidence in the U.S. The survey found that:
"U.S. CIOs are decidedly less excited about the outlook for the economy in the next 12 months vs. our 1Q survey. There was a big drop in the percentage of respondents that expect the economy to improve in the next 12 months (from 41% in 1Q to 25%)." "Consistent with their outlook for the economy, U.S. respondents have become significantly more cautious regarding IT spending for the next 12 months. Only 33% vs. 49% in 1Q's survey expect an improvement over the next 12 months. There was some good news -- about Europe -- in the survey. "Of those European CIOs that expect the economic recovery to continue in 2006, just over 50% expect growth to accelerate in 2H, which is a noticeable increase from 32% in our March 2006 survey." That ray of hope probably won't do much to dispel the lighten the gloom surrounding the software sector, which (as measured by the Goldman Sachs Software Index) is off 15% since late April, and 11% since the beginning of the year. Citigroup analyst Brent Thill says we are experiencing "a buyers strike" by investors. "We expect investors to take a wait and see approach until early September. Historically, July is the worst month for software stocks. This year, investors are not willing to step in front of a seasonally weak second quarter, they are weighing stock option back-dating risk, and evaluating second-half IT spending," he wrote in a note clients. The bottom line: Screening out stocks based on exposure in Europe would probably be an over-reaction to a fluid situation; instead, consider a company's overseas position as yet another data point in your analytical arsenal.