Observations and analysis of trends in the enterprise software market.
Consolidate or Die
The enterprise applications market continues to evolve (devolve) as the larger fish swallow tthe smaller fish. The most recent example is last week's announcement that Infor Solutions (formerly known as Agilisys) would acquire MAPICS for roughly a 10% premium over the lastest closing price and about 2x 2004 sales.
With the acquisition, Infor, which has been buying companies left and right, now boasts of having over 17,000 customers worldwide. All fine and good, but is it sustainable? MAPICS suffered under the weight of its own acquisition of Frontstep and a depressed market that saw MAPICS increasingly being outflanked in the market, a market that is increasingly being targeted by those with far greater resources (e.g., Microsoft, Oracle and SAP) . Combining a morbund MAPICS with the host of other has beens that Infor has acquired and one is left wondering what Infor will do to bring some synergies to this hodge podge collection of enterprise apps they have acquired (both sales and development).
As a private company, they do not have to divulge anything to the market as to what their plans are. For the time being, it looks like the strategy is to milk the base for maintenance fees (a very high margin business), do the minimum to keep products "fresh" and continue to build through acquisitions. Fine or now, but longer term this could be like a house of cards and tumble down once customers start asking for more and development resources are spread thin across so many product lines. A risky strategy Infor has going and though on the outside does not appear to be much different then SSA-Global, inside, Infor's strategy to bring its products into a common development environment is still very elusive. At least SSA has clearly stated its plans.
The simple fact is consolidation in the enterprise market will accelerate this year as companies look to acquire the last viable companies available. Acquisition targets will also be on the look-out for suitable parents as they will increasingly ffind it difficult to compete in the global market. Who are likely candidates? As the Oracle acquisition of PeopleSoft showed, virtually all app vendors are in play with the exception of Microsoft, Oracle and IBM. Stay tuned, this will be a very interesting year.
SAP this week announced its preliminary 4th Qtr earnings, which give SAP a 4th Qtr yr over yr uptick of 8% for software (constant currency 11%) and '04 vs '03 for software of 10% (constant currency 13%). Total 04 vs 03 revenue is up 7%.
For the regions in the 4th Qtr, EMEA is flat, Americas up 26% (US up 19%) and APAC up 4%. Based on the presentation that SAP Brd member & CFO Brandt gave on 1/7/05 in NYC (see http://www.sap.com/company/investor/index.aspx), PSFT/JDE have been the big losers losing significant market share to SAP going from 25% market share to roughly 19% Oracle is also down from 18 to 15% (since Q3 '02). These are SAP's estimates, not mine, but they seem to be in the realm of possibility due to the hostile and long drawn-out battle btwn PSFT & ORCL. SAP also continues to make headway against best of breed suppliers as companies look to streamline their IT infrastructure.
While this appears to be very good growth for this dominant enterprise software company, it seems that the financial analysts were less then impressed. If one takes a closer look, there is some reason for concern. APAC is the fastest growing market today and a number of software companies are doing quite well there (e.g., Dassault) but SAP reported a paltry 4% growth - something is certainly amiss here. In EMEA, where SAP is virtually the defacto standard, there was no growth. Sure EMEA is not a booming market like Asia and there is the issue of currency, but still, SAP should have seen some growth here for at least its extension apps. Also, SAP has increased its operating margin by only 1% this year - nothing to write home about. Though it does match their guidance analysts today expect companies to exceed guidance, not match it.
So what is happening? SAP continues to capitalize on the ORCL-PSFT debacle and will continue to do so in 2005, so sales in the Americas should continue at an above ave. growth rate for base ERP-type functionality. The company is also starting to make some headway in the SMB market, but though volume of license sales may be high, the $ value of these sales will be porportionally lower and subsequently follow-on maintenance revenues will also be lower. One can also expect quite a fight for each and every sale in the SMB market as just about every ERP supplier today (and there are still too many) will be VERY competitive in their pricing. Extension apps such as CRM, SCM and PLM should continue to do well in SAP's installed base as SAP builds in more specific vertical industry functionality to match those of best of breed suppliers. Netweaver also has a lot of potential in the future, but exactly how much is still tough to gauge.
While SAP has a lot going for it, there is certainly reason for concern. '05 should be good as ORCL will have difficulty with the PSFT acq, beyond that, SAP may run into some problems. It will be important to follow adoption of Netweaver and how well SAP expands its business in the developing markets of Eastern Europe and Asia - these wil be bell-weathers for the future of this key player in the IT market.
An area of increasing interest is that of software as a service. Formerly known as ASPs, (application service providers) and the rage of dot comers and their VC partners, ASPs had a famous flame-out, but like the Phoenix, they are rising from the ashes.
Salesforce.com is certanly getting a lot of press, but I'm seeing many others, in other application areas now getting into the mix. Oracle has been providing a hosted version of its ERP suite for sometime now and among the leading ERP players, argueably has the lead in providing a hosted solution. In the PLM space, you have small best-of-breed supplier Arena, which has put together a nice, simple solution structured to serve smaller companies and their Bill of Materials (BOM) mgmt needs. The success of Arena (which now has over 200 customers) has attracted the ire of Agile, which introduced its own hosted solution in late '04.
Key reasons driving adoption of hosted solutions is the ability to "go live" in a matter of days or weeks not months, (rapid time to value), little internal hardware needed, few internal IT resources required for long-term support and fairly low cost pricing that can be expensed. And for some, it is a great way to grow into software as needs grow as with some solution providers allow one to "buy" the software at some later date and bring it in-house.
As with any product or service, there are always drawbacks, and software as a service is no different. There is data integrity and security, which today is not that big an issue - though many bring it up. Customization is also an issue as hosted solutions typically provide a standard workflow/template for all subscribers - thus they are often ideal for commodity (not strategic, market differentiating) processes, and small companies that wish to adopt best practices of others, as theirs are still immature. Lastly, over time (5 yrs or more) the subscription fees often total up to be greater then what it would cost to bring a solution in-house.
The move to Service-oriented Architectures (SOA), use of standards, and open source, will all contribute to the growth and adoption of hosted solutions as they all support, in their own special manner, the rapid deployment and use of hosted software. These trends, combined with hosted offerings is creating a nascent market for fully hosted services built around specific business processes (business process outsourcing).
An interesting confluence of technology and services that has the potentiaal to greatly change the landscape of the software industry as we know it today.
UGS pulls in TCNO
One of the areas of PLM that I have been following "Digital Manufacturing" pertains to the connection between a designer's intent and the actual manufacturing of a product (and simulating the manufacturing of a product prior to actual line/control logic and mfg asset deployment). This is seeing increasing interest on the part of both end users and suppliers of PLM software. Leading players Dassault and UGS are increasingly focusing on this area. Dassault, with its Delmia suite has been the leader and Tecnomatix and UGS have been working together through a strategic partnership for the last several years.
UGS, with this acquistion, will now be able to more aggressively build-out the integration between their respective platforms and allow UGS to better compete with its number one foe in PLM, Dassault. This also insures that no other vendor would swoop in and out-flank UGS by acquiring Tecnomatix, which would be quite a blow to their developing efforts in this space.
A couple of questions remain: What will UGS do with the recently acquired MES business, US Data that TCNO previously acquired. There willl be some challenges here in pulling an MES solution into the realm of Digital Mfg - something that TCNO was struggling with and forsee the same problems for UGS. Also, TCNO was the first supplier to develop a techniqueto model/simulate control logic and then automatically download such logic into PLC controllers (something they developed with Siemens to serve the automotive industry). TCNO has been extremely slow to capitalize on this technology and Dassault has captured the market's attention with its own solution, called Delmia Automation. Hopefully, UGS will see the little gem they have here and further build out its capabilities, otherwise they will just be playing catch-up to Dassault, who honestly has a far grander vision of PLM then UGS has demonstrated to date.
For several years, analyst firms were rolling in business and profits as CIOs were looking for assurances that the huge amounts of money they were spending for their companies was going to the right places. As funding and subsequent size of IT projects declined, so did the need for expensive analyst firms.
Of course, the decline in IT spending had a big impact on the companies provding such solutions, with many, such as i2, MANU, CommerceOne (remember them) all but shadows of their former selves and with that, not spending nearly as much with the analyst firms. Even the still successful companies such as SAP, Oracle, Microsoft etc, have trimmed their analyst budgets. Most do not realize that suppliers typically make up well over half of an analyst firm's revenue and for many, over 75% of revenue.
So as with the rest of the IT industry, analyst firms are feeling some pain. The future for analyst firms is cloudy. Continued consolidation will occur and would not be surprised to see AMR acquired (they had hoped to go public, but then IT IPO market went pear shaped), IDC is in the hunt to expand its presence/services beyond straight number crunchin' and will make a move on a smaller firm (probably one that does know how to do market research reports - quantitative analysis). Other firms will simply go out of business, or serve small, well-defined, niche market needs (Daratech, CIMdata, Nucleus, etc.).
Aberdeen is trying something new, with a relatively low cost (think Southwest) model, but it remains to be seen whether or not this model will actually fly as they need a hell of a lot of subscribers to make it work. They also have an image problem leftover from former mgm) and many suppliers are still reluctant to get to close to them. Basically the jury is out for Aberdeen and will have to wait and see but their low cost model may appeal to mid-market buyers of IT, the strongest growing sector today.
Interesting times in the IT market, including analyst firms. Expect more changes in the coming year. The firms have basically sweated out the last three years, with some at the end of their ropes who may finally give it up for more engaging and profitable ventures. While I still believe that analyst firms can and do provide an important role in the industry, how they serve the IT industry in the future will need to change to remain relevant.
Its Over for PeopleSoft
Oracle always had the upper-hand in this battle, though PeopleSoft did put up a good fight. In the end, however, the institutional investors won out, forcing the PeopleSoft Board to talk with Oracle and work out a deal. At $26.5/share, looks like they got what they wanted (heck, it even surpassed what most institutional analysts hoped for by a couple of dollars/share).
While this may be great for the folks on Wall St., I do pity those that actually use PeopleSoft software and even, to a lesser extent, Oracle users. Why? PeopeSoft customers, in time will be forced to use Oracle apps and if Oracle has its way, will also be purchasing Oracle databases on which to run them - an expensive upgrade to say the least for even though Oracle may basically give the applications to PeopleSoft customers, the cost of re-engineering processes and moving to a new database, along with all the follow-on training will be a huge, hidden expense. One can also not ignore what Oracle will do to start cutting costs. Rumor has it that up to 50% of PeopleSoft employees will be axed. Thus, customers, who have come to rely on say a given technical support person, regional sales guy/gal, etc could very well be left with no one to turn to in an emergency.
Even Oracle customers will suffer in the short-term as they take a backseat to Oracle's number one objective now, to quickly integrate PeopleSoft (and make the necessary cuts). Oracle spent a lot of money on this acquisition and they'll want to try and recoup (or at least minize future costs) ASAP.
All in all, for this analyst, it is a sad day. Granted, the market is rapidly consolidating, but to see such a major, innovative player as PeopleSoft get acquired by a company such as Oracle (whose app biz has seen little in the way of innovation) is a sad state of affairs. Frankly, the market would have been better served if PSFT remained a stand-alone. This would have provided the market with three very strong players in SAP, PSFT & Oracle, with up and comer Microsoft (who still struggles in this space with larger enterprises) coming in a distant fourth.
What this does do to the mid-market players like SSA, Infor Solutions, IFS, Intentia & QAD - it puts a lot of pressure on them to do something soon, either acquire or be acquired. It will be increasingly difficult for these companies to compete in the future. 2005 will see a continuation of the consolidation that has taken place over the last couple of years.
Looks like my prediction on Monday was spot-on. Through this announcement, Dassault has sent a clear signal that it will have a dual platform strategy going forward, one on their traditional partner's platform, IBM WebSphere and Microsoft .Net on the other.
Though Dassault has long used MS technology and has several products running exclusively on MS technology (SmarTeam's on .Net), this announcement takes it up a significant notch. Both Dassault's CEO, and MS's Gates were together to sign the agreement. Gates liken this agreement in scope and depth as one of its single largest agreements at a level similar to their agreement with SAP.
This is a non-exclusive agreement. MS is simply doing an end run around IBM with this agreement and looks to become the defacto backbone standard for the PLM sector.
See below for full press release:
Microsoft and Dassault Systèmes Form Strategic Alliance
November 17th, 2004
Redmond, Wash., U.S., and Paris, France – Nov. 17, 2004 - Microsoft Corp. and Dassault Systèmes (DS) (Nasdaq “DASTY,” Euronext Paris: #13065, DSY.PA) today announced a multiyear, global strategic alliance to deliver Dassault Systèmes’ product lifecycle management (V5 PLM) and 3D design solutions to companies of all sizes taking advantage of the Microsoft® software platform.
Dassault Systèmes’ software enables companies to simulate products virtually in 3D from conception to maintenance across the extended enterprise, reducing the time and cost to develop products and increasing innovation. By capitalizing on the Microsoft platform, the companies intend to deliver greater customer value through solutions that are easy to use, deploy and maintain with reduced ownership and integration costs. This alliance enables a far broader set of customers to realize the benefits of 3D collaboration and PLM.
The alliance brings together Dassault Systèmes’ strength in 3D software with Microsoft’s platform, which includes Web services development via Microsoft .NET, real-time collaboration, and both the Windows® client and Windows Server™ operating systems. Dassault Systèmes’ V5 PLM and 3D collaborative solutions, which currently run on both the Windows client and Windows Server platforms, will leverage the Microsoft platform across a broad range of current and future Microsoft products.
“Microsoft and Dassault Systèmes share a common vision of democratizing 3D and making PLM more pervasive,” said Bernard Charlès, president and CEO of Dassault Systèmes. “This alliance focuses on innovation to deliver an easy-to-use 3D global collaborative environment to create, simulate, manufacture and service any physical goods.”
Dassault Systèmes’ industry-leading PLM solutions include CATIA, DELMIA, ENOVIA, and SMARTEAM; its 3D design solutions include the SolidWorks product line. The alliance will result in the integration of these solutions with Microsoft .NET, SQL Server™, BizTalk® Server, SharePoint® Portal Server, Windows “Longhorn” and Windows XP 64-bit Edition.
“We are delighted to bring together the full power and reach of the Microsoft platform with Dassault Systèmes’ collaborative solutions,” said Bill Gates, chairman and chief software architect at Microsoft. “The winning combination of Microsoft .NET and Dassault Systèmes promises to make product lifecycle management accessible and affordable to a whole new set of customers in the manufacturing value chain.”
Microsoft and Dassault Systèmes have also agreed to explore opportunities to work together to encourage broad market adoption of XML for 3D applications across the design and graphics industry. The two companies will work with industry associations, other PLM software vendors, and 3D graphics technology companies to advance interoperability using common XML-based technologies.
The companies will also explore opportunities to work toward delivering fully [...]
What are Dassault & Microsoft Up To?
The rumor mill is running rampant on what these two powerhouses will announce this Wednesday at noon EST.
Certainly Microsoft is making a concerted push into the Product Lifecycle Mgmt (PLM) space with numerous co-announcements at the recent PDMA conference in Chicago (they were also a major sponsor of the event). Now they are preparing a separate news/conference call for Wed. regarding some new development in their relationship with Dassault.
Dassault, the leading PLM supplier in the market today has their products running within the MS environment and some products, such as their PDM solution SmarTeam and SolidWorks operate within MS desktop platform. So, if Dassault already is using MS technology, what could be so significant as to justify such a call? I have an idea:
Dassault is a long-time partner of IBM and has committed to the IBM WebSphere platform as its backbone. Thus, the only thing that may warrant such a Conf call is Dassault's decision to adopt .Net as a competing backbone to WebSphere. Longtime customer of both of these companies, Boeing, could be the instrumental player behind the scenes here in making this happen for their 7E7 program.
So why is this so important:
- Signals a slight distancing in the relationship btwn IBM and Dassault. This has been going on for the last year or so but seems to be accelerating as of late.
- Gives Microsoft another key player in the PLM market (they are already close with numbers 2 & 3, UGS and PTC).
Of course, this Conf. call could be nothing more then puffery - I certainly have experienced enough of those calls to last a lifetime - in which case the two companies state that they see one another as strategic partners and will work together to improve the lives of their customers, blah, blah, blah...
Stay tuned, will report on Conference call Wednesday.
UGS Firing on All Cylinders
Today, UGS PLM Solutions released its 3Q earnings. By virtually all financial metrics, it appears that the company is outperforming its peers in the PLM market.
Yr to Yr Qtr comparisons show:
18 % revenue growth overall
16% growth in software license revenue (very impressive!)
32% revenue growth for their PDM (they call it cPDm) product suite, more commonly known as Team Center, with 37% growth in license revenue for this suite.
Year to date, the company reports revenue of $724.7M, up 15% over last year's results. At this rate the company will easily exceed last FY results of $897M.
In a recently published 2003 Worldwide PLM Market Study (I was author), we showed Dassault leading UGS by an almost indistinquishable 0.2% margin in the global market. Based on Dassault's recent report and theprogree that UGS has made, UGS has an opportunity to capture the number 1 spot for 2004.
Note, UGS is still a private company having been purchased from EDS earlier this year by Bain, Warburg Pincus and Silver Lake Partners. They will be looking to take UGS public in 2005. With sales on track to exceed $1B for 2004, the 2005 IPO should be one of the larger ones the the Street will see.