Transcript Update and Trends - Accelent Consulting

Strategic Marketing Management
for Software Companies
Enterprise Infrastructure and Applications:
Update and Trends
July 2003
Barbara Angius Saxby
[email protected]
Agenda
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Industry Snapshot
Software Segments
CIO Survey and Forum Data
IT spending
Market Trends
 Verticals
 SMB
 Channels
 M&A and Investing Trends
 Summary
Software Market Trends
2
State of the Industry
“2002 was difficult for the world economy and
the software market. 1Q03 results do not offer
signs of major improvement. However, the
regional trends of the economic slowdown offer
mixed consequences for software vendors.”
Source: Gartner, June 2003
Software Market Trends
3
Recommendations to Vendors
 Business value propositions, which vary by geographic
area, must stay strong throughout 2003.
 Invest at least 10% of marketing and sales resources
on new channels that create greater customer reach
and time-to-market opportunities.
 Research geographic markets and channels before
investing. Spend time and money now to save later by
clearly understanding both opportunities and pitfalls.
Source: Gartner, June 2003
Software Market Trends
4
Infrastructure
Infrastructure software, often called “plumbing”,
represents products that increase the performance
of IT resources.
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Application Development
Application Integration and Middleware
Embedded Software Tools
Relational Database Management
Network and Systems Management
Business Intelligence and Data Warehousing
Security Software
Storage Management
Source: Gartner Segmentation
Software Market Trends
5
Applications
Application software increases the performance
of computing resources to achieve business,
professional or personal goals and objectives.
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Enterprise Resource Planning
Customer Relationship Management
Supply Chain Management
Service Process Automation (or PSA)
Source: Gartner Segmentation
Software Market Trends
6
Emerging Markets
Composite markets are an alternative cut of
baseline market data – may become segments
 Business Activity
Monitoring
 Business Intelligence
Applications
 Strategic applications
 Operational applications
 Analytical applications
 Business Process
Management
 Collaborative Commerce
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E-commerce
ERP II
M-commerce
Mobile and Wireless
Software Solutions
Web Services
Other markets = ASP,
hosted solutions, free
software and new
categories
Software Market Trends
7
Top Priorities for CIO’s
Q: What are the top priorities for your organization in 2003?
1. Application integration
2. Security software
3. Storage hardware
4. Windows 2000/XP desktop upgrade
5. Business intelligence tools
6. Storage software
7. Networking equipment
8. Wireless initiatives
9. ERP application upgrades
10. Customer service applications
same
same
up 9
down 1
up 9
up 17
up 3
down 3
down 5
up 19
Morgan Stanley Survey of 225 top Fortune 1000 IT Executives, April, 2003
Software Market Trends
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Highlights from CIO Survey
 IT spending relatively flat - 36% estimate budgets
will increase in 2003
 61% of CIOs view their own company’s business
prospects as positive
 31% expect the economy to improve in Q3 and
55% in 2004
 71% said the geo-political crisis in the Middle East
did not impact spending
Morgan Stanley Survey of 225 top Fortune 1000 IT Executives, April, 2003
Software Market Trends
9
CIO Forum on IT Trends
 Still seeking cost reductions
 Increased revenues will drive
more IT spending
 Price erosion hitting hard
in IT services for app
development, integration,
consulting and desktop
 Expect commoditisation across
 Software shelfware is
the technology stack
limited – renegotiated on
 Web standards are being
vendor pricing power
adopted, but still too
proprietary for integration
 Onshore and pure play
offshore vendors tout
 Software upgrades are being
competitive advantages
skipped until absolutely
necessary
Morgan Stanley CIO Panel Discussions with 18 Fortune 1000 IT Executives, May, 2003
Software Market Trends
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IT Spending by Segment
IT budget
growth of 2%
through 2004
Spending on
security and
application
infrastructure*
technologies is
expected to
grow at least
twice that rate
*middleware, integration,
database, EDI
Software Market Trends
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IT Spending by Vertical
IT spending, as a
percentage of
company revenue,
dropped 1% - from
4% in 2001 to 3%
in 2002
Software Market Trends
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Market Trends – Go Vertical
 Growth of targeted applications for niche
industries or unique group of users
 Enterprise application vendors are aligning
vertically for solution oriented selling
 Vendors differ in approach to sales, support and management
 Product customization by vertical an important differentiator
 The customer wants proof that you understand his business
 Pre-packaged product solutions in mid-market offer lower TCO
and price point
 More marketing of horizontal technologies
with vertical campaigns to targeted sectors
Software Market Trends
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Market Trends - SMB
 Gartner defines mid-market as enterprises between
$50M and $800M; Meta believes it is $50M to $1B
 Higher budget growth for smaller companies under
$100 million – 10% spent on IT
 SMBs receiving increased pressure to transact business
electronically
 Discretionary spending particularly in financial services
– 22% of IT is new investments
 Big opportunity for application software and networking
 Battlefield for ERP, mid-market vendors, and Microsoft
Software Market Trends
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…SMB Continued
 Market continues to move downstream to $20M
 Require lower price, ease of install, rapid deployment
 But these customers want equal attention and support
 Competition is fierce, particularly on price
 Application vendors have specialized products and
programs for the mid-market, some by vertical
 Vendors increasing numbers and importance of strategic
resellers and regional SIs to sell SMB solutions
 Requires money and significant marketing to be successful
 Hosted solutions are gaining in popularity
Software Market Trends
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Market Trends – Alternate Channels
 Vendors need new ways to extend sales reach
 Direct sales to C level has a long sales cycle, tougher
criteria and a high cost – they aren’t buyin’
 Selling to IT managers is almost as long and need signoff from CFO for 10K purchases
 Price pressures demand new ways to get to market
 Software companies are turning towards a variety of
indirect channels and approaches
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Company needs traction first
Require time and marketing investment to develop
Target and recruit the right kind of partner to be successful
Variety of revenue sharing or business engagement scenarios
Software Market Trends
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Changing Channels
ISP = independent service provider
NI = network integrator
NSP = network service provider
SI = systems integrator
VAR = value added reseller
Source: Gartner Dataquest March 2003
Software Market Trends
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M & A Activity
 1,347 software companies were sold in 2002, 18% of total
 Average deal size $21.5M
 Median valuation 2.0x trailing 12 month revenue
 Expect 10 percent increase in M&A activity in 2003
 Software led M&A activity with 272, or 17% of deals in Q103
 Average deal size $17.3M
 Total value for transactions declined 27% to $4.7B
 Upturn driven by desire to buy competition, snap up bargains,
expand product portfolios and broaden geographic reach
 Hottest targets have tie to customer and lots of recurring revenue
 Companies that serve the government sector
 Operating systems, security, business information and healthcare software
 Price weakness may be ending but don’t expect dramatic increases
Sources Software Equity Group
Software Market Trends
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Software Valuations
 Software valuations recovered strongly in Q4 with
a 20% gain in software market indices.
 Small cap valuations remain 50% below the
historical valuation median based on revenue
multiples, a level not seen since 1990/91
 Large caps trade 13% below the historical median,
but remain well above the early 1990¹s lows.
 P/E multiples provide much stronger support for
large caps with P/E’s close to historical lows.
Software Market Trends
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Software Industry Valuations
Source: WR Hambrecht
Software Market Trends
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Software Ranks as #1 Sector Year After Year
$M invested by sector
1998
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Software ($4,235)
Telecomm ($2,871)
Media & Ent. ($1,815)
Biotechnology ($1,557)
Networking ($1,508)
1999
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Software ($9,301)
Telecomm ($8,478)
Media & Ent. ($6,868)
Networking ($4,323)
IT Services ($4,214)
2000
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2002
Software ($20,239)
Telecomm ($18,236)
Networking ($11,182)
Media & Ent. ($10,673)
IT Services ($8,909)
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Software ($4,319)
Telecomm ($2,878)
Biotechnology ($2,798)
Networking ($2,232)
Medical Devices ($1,862)
2001
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Software ($8,561)
Telecomm ($6,435)
Networking ($5,706)
Biotechnology ($3,300)
IT Services ($2,894)
PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree™ Survey
Software Market Trends
21
Average Deal Size Remains Solid
Average Deal Size ($M)
Number of Deals
2,000
$12.0
1,810
$11.2
1,800
$10.0
1,600
1,400
$7.9
1,269
$8.0
1,200
$7.3
1,078
914
1,000
800
$5.4
$6.0
799
762
$4.3
654
$4.0
600
$4.6
$3.5
392
400
166
200
0
$2.0
$0.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
1996
1997
1998
1999
2000
2001
2002
PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree™ Survey
Software Market Trends
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Software Still Going Strong
Investments in Q1 2003
($ in millions)
$788
Software
Biotechnology
$488
$483
Telecommunications
Networking/Equipment
$433
Semiconductors
$275
$256
Medical Devices & Equipment
$240
IT Services
$169
Business Products & Services
$139
Media & Entertainment
$124
Computers & Peripherals
# of
Deals
166
49
67
% $ Change
from Q4 ’02
(12.9%)
(2.1%)
(11.2%)
38
(13.5%)
34
1.0%
43
(48.1%)
41
3.3%
35
96.3%
22
4.6%
27
(6.6%)
Industrial/Energy
$116
31
(18.5%)
Electronics/Instrumentation
$111
14
75.5%
$96
21
59.9%
16
(15.3%)
8
(55.7%)
8
(71.0%)
3
NM
Financial Services
$79
Healthcare Services
Consumer Products & Services
Retailing/Distribution
Undisclosed/Other
$0
$31
$12
$2
$225
$450
MoneyTree™ Survey
$675
$900
Q1 2003 Totals: $3,842 623
Software Market Trends
(10.0%)
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Summary
 Its tough out there, but getting better incrementally
 Enterprise software displaying the characteristics
of a maturing market
 Markets, customers, and partners must be carefully
targeted and supported
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Verticals
Regions
Buyers
Channels
 Software innovation continues and investment
remains strong – there is plenty of money to be made
 Takes more time, planning and luck to win
Software Market Trends
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