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Follow UsSiobhan Kennedy
NEW YORK: Little deals mean a lot in software these days. Software firms that
relied on mammoth contracts for explosive growth during the technological boom
are now finding that when times get rough smaller is better, analysts say.
Nimble firms prepared to take on smaller chunks of business that don't need
approval from the top tier of management are surviving best.
"In many cases, you're flying under a much lower level of approval
threshold than you would be with larger deals," Steve Gardner, chairman of
software firm Peregrine Systems Inc. (PRGN), told Reuters in a recent interview.
Corporate cultures geared toward landing
‘Big ones’ are finding it hard to adjust in a market, where major
customers are slashing budgets and seeking only modest additions to their
software armory, analysts said. Smaller companies that relied on big deals got
hit especially hard, while the biggest software firm, Microsoft Corp., found its
reliance on smaller deals has helped soften the blow.
"The higher your average selling price is, the weaker your quarter
was," Brendan Barnicle, an analyst with Pacific Crest Securities said. It
was clear across the board. Chief information officers and company management is
not interested in buying multimillion-dollar projects right now, he added.
Thinking big
A recent survey of chief information officers by analysts at Morgan Stanley
showed that many have no plans to increase technology spending in the second
half of the year. The survey also found that CIOs are reducing the numbers of
software vendors they work with and remain reluctant to undertake large,
expensive projects.
"There aren't many things people are willing to spend $20-$30 million on
right now," said Morgan Stanley software analyst Chuck Phillips, who noted
that companies are looking for easy, low-risk projects.
In a case illustrating the trend, business-to-business software firm i2
Technologies Inc - long the leader in the business of connecting manufacturers
to their suppliers over the Web - last month posted a whopping second quarter
net loss, of $861 million, widening its prior year's $281 million loss.
Analysts attributed much of i2's problems to its dependency on mega software
deals and its inability to train its salesforce to go after smaller deals
quickly enough. Even it's decline to $1 million per deal, from $1.9 million in
the past, may not be enough. "In i2's case, we don't think they'll get back
to profitability until the second half of next year just because there's so much
wrenching change in their business," Tom Berquist, an analyst with Goldman
Sachs said.
Variety helps
By contrast, software behemoth Microsoft is riding out the downturn, in part,
because it has a much wider assortment of products and its average deal size is
far smaller, typically below $100,000, analysts said. It also has a huge
business in packaged software selling for $100 and less in stores.
CIOs were most likely to say they would increase second-half spending on Windows
2000 desktop and server upgrades, Microsoft Office upgrades e-commerce
initiatives and network equipment, the Morgan Stanley survey found.
Peregrine's Gardner agreed that having a big percentage of smaller deals was
one of the main reasons that it was managing to survive and thrive in tough
economic times. "I'd put it in the top three factors as to why we've been
somewhat blessed in our ability to weather it through," Gardner said,
noting Peregrine's average deal size is about $300,000.
Like Microsoft, Peregrine has also found that having a wider variety of
products has helped it cope better. "We haven't put all our eggs in one
basket," Gardner said. "In any given quarter, I never know exactly
what's going to be the strongest (product) but the fact that we have the
diversity and the ability to reach customers with different messages helps a
lot," he said.
Going for base hits
It is not just i2 that's feeling the pain. From giants like Siebel Systems
Inc. to small fry like online marketplace firm, Commerce One Inc., software
firms are grappling with the new sales paradigm. "It is a painful process
to change but I think the firms that can make the change will end up being
better off because they can rely on a balanced mix of business in the
quarter," Berquist said.
Investors looking for bright spots in software should look to companies that
can manage best in the new trend of incremental sales increases, such as
Microsoft, analysts said.
"Just look at our stock ratings, I have "strong buys" on
Microsoft and Peregrine (Systems Inc) that have lower average sales
prices," Barnicle said. He also named BEA Systems Inc. and Citrix Systems
Inc. as companies that are succeeding amid a tough economy by managing with deal
sizes.
"I like companies like Veritas and Mercury Interactive who have mixed sales
channels," Berquist said. In Mercury's case, the company does 15 percent to
20 percent of its sales on over the phone, with virtually no sales or marketing
expense at all.
In the end, not making the transition fast enough will start to hurt margins,
Berquist said. "The challenge that these guys all face is figuring out ways
of altering their distribution strategy to make it less expensive to distribute
their products."
(C) Reuters Limited 2001.