The falling dollar is giving U.S.-based software companies a significant fourth-quarter boost.
"A weak dollar is to software as holidays are to retail," said Richard Williams of Garban Institutional Equities.
So far this quarter, the dollar has fallen by 6.47% to a record low against the euro, and by 7.7% to a four-year low against the yen. Assuming an average of 30% international sales, the average software company will gain 2.05% in revenue via currency effects, Williams wrote in a Monday note to clients. (His calculation blends the currencies by weighting the euro at 70%.)
Although a 2.05% boost may not sound all that significant, the effect on the bottom line is much larger. That's because currency gains are essentially cost-free, without the associated increases in SG&A, for example, typically associated with a bigger top line. "Now that most management teams have been pressured by falling stock prices to do the rightthing and cut costs, the inherent profitability of the software business and its mid-90% margins means that even a modest top-line improvement can turn into a powerful bottom-line result," Williams wrote.
Williams, who has hammered on this theme for several years, maintains that many technology companies owe much of their recent growth to currency effects.
, for example, avoided several quarterly misses in early 2004 and 2003 only because of substantial help from the weak dollar.
"Investors shouldn't be paying the same P/E
price to earnings for a company that grows on its own as they pay for one that grows because of currency," he said.
Many companies, Williams claims, play down currency gains in an attempt to make growth appear organic, and thus more likely to recur.
During its August quarter, database giant
reported that currency added just over 4% to the top line. The most striking gain was in the combined region of Europe, Middle East and Africa, where the falling dollar boosted revenue by 11.9%.
There are, of course, penalties for companies with a very large presence overseas. Oracle employs 40,000 people worldwide, including 23,000 outside the U.S. Even if salaries are figured in dollars, the company still has large expenses that must be paid in the local currency. Overall, the weaker dollar added 3 percentage points to Oracle's operating expenses, and 5 percentage points of operating income.
And for companies like Germany's
which report revenue from U.S. operations, the reverse is true: The weaker dollar hurts revenue more than it helps the expense side.
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