Posted on January 31, 2008
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After having some success bottom fishing American Express and MBIA recently we started to look at AllianceData post the drop from the potential failure of the Blackstone deal.
Our interest was piqued because before the deal was announced ADS was considered to be a great business and had a long record of consistently good performance. (27 consecutive quarters)
The recent Q4 report and outlook for 2008 make it clear that the company did not have their operations or planning disrupted by the activity surrounding Blackstone.
Due to the situation with Blackstone there was no Q&A on the call but the level of detail was fairly high. Management did have a little bit of an edge in their tone suggesting that they are clearly annoyed with their experience so far with their "partners" in the private equity world.
These are not the type of situations we are likely to do a great deal of unique work or detailed financial analysis but we can do some quick figuring. Given 20%+ growth we’d say a 15x multiple on current year cash eps is reasonable. Taking a 10% haircut on management guidance gets us to about $4/share this year and suggests a $60 share price. It’s lower than the $81 proposed acquisition price but a good deal better than the current $43 or so the comapny is fetching in the market.
We established a long position in the market on January 30th looking more for a short term bounce in the shares from these levels.
More news on the legal and acquisition front my push the share price around but fundamentals will eventually carry the stock to higher levels.
– Kris Tuttle
Tags: ADS, Blackstone, Stocks
Posted on January 30, 2008
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We can crunch the numbers SAP (SAP) released today from now until when the SAP 20-F comes out in March or April, and still not explore all the modeling possibilities. I have applauded SAP in the past for its transparency in meetings like this—both explaining past results and future plans—with pretty solid numbers. And simply because modeling nerds such as me like having this kind of data.
But I have been critical of SAP’s Core Enterprise Applications Vendor Share metric, most recently at the link noted. One interesting factoid that I saw in the SAP presentation January 30 was a list of the vendors it uses in its Core Enterprise Application Vendor Share market claims. Perhaps this list has been released before but I don’t recall seeing it.
Now I think my criticism is justified. Why Synopsys (SNPS) but not Cadence (CDNS)? Why some financial services software suppliers but not SunGard? Why Cerner (CERN) but not the HBOC-heritage product revenues within McKesson (MCK) or the Shared Medical Services heritage product revenue within Siemens (SI)? Why Parametric (PMTC) but not the UGS-heritage product revenue of Siemens and Autodesk (ADSK)? Why Intuit (INTU) but not Sage (London: SGE.L)? Why Lawson (LWSN) but not Exact (on Euronext Amsterdam)? Why Interwoven (IWOV) and Vignette (VIGN) but not the Documentum-heritage product revenue within EMC (EMC)? And on and on.
I suspect the reason is not a matter of SAP trying to hide anything but has something to do with the availability of the data, much of which is buried in large company financial reports. But that’s the issue. A market measurement needs to include both.
The real important questions from an investment perspective are:
Did SAP gain or lose ERP market share against Oracle (ORCL) and Microsoft (MSFT) in 2007. Probably it lost.
Did SAP gain or lose middleware market against Oracle, IBM (IBM) and Microsoft in 2007. Probably it gained based on the NetWeaver figures released on January 30 (even accounting for the Business Objects (BOBJ) and BEA (BEAS) acquisitions).
Did SAP gain or lose enterprise applications market share against Microsoft’s former Great Plains/etc. business buried within the Microsoft Business Division as well as other SME-oriented enterprise application offerings? Probably it held its place.
The core enterprise application vendor market share metric doesn’t help answer any of these questions. And I am not going to try to correct it because at least 20% of the vendors have gone or will go away (BEA, Business Objects, Cognos, Manugistics and Kronos; the latter because it has gone private).
I say “at least” because it is very likely more of this group will merge or be acquired in the next year.–Dennis Byron
Tags: ERP, NetWeaver, SAP, Oracle, Business Objects, BEA Systems
Posted on January 28, 2008
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Because of the valuation Sun (JAVA) put on its acqusition of MySQL’s open source database software business on January 16, we said that open source infrastructure and middleware software companies would need to start pairing up with “proprietary” partners fast (see second point in linked blog post). Their value was dropping.
Trolltech of Norway has wasted little time, agreeing to be acquired by Nokia (NOK). The issue for most of the open source software (OSS) folks now is that
– Citrix paid somewhere north of 100x 2007 revenue for XenSource in October 2007, betting it would be 10x 2008 revenue
– Sun paid 20x 2007 revenue for MySQL in January 2008, betting it can take on the market-dominant Oracle (ORCL) database without having to spend the R&D dollars to develop a database from scratch
– On January 28, Nokia looks to have paid four times Trolltech’s 2007 reveue (subject to a guess at Trolltech’s growth in 2007 over 2006’s 174.1 Norwegian Krone and subject to my doing the currency conversion correctly).
If there’s big value in OSS now, it’s in the applications side of the market, exemplified by Yahoo’s (YHOO) 2007 acquisition of Zimbra.
But that window may be closing fast as well.– Dennis Byron
Tags: open source, OSS, Yahoo, Sun, MySQL, Nokia
Posted on January 26, 2008
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I am not sure why my last post was shoe-horned into this ZDNet blogpost concerning Dreamworks, Viacom, the NY Times and Wall St. fairy tales but “Thanks for spelling my name right.”
It is hard to follow the ZDNet bloggers’ thought process because a statement about BusinessWeek and Forbes readers links to InfoWorld and a statement about my analysis of the Sun (JAVA)-MySQL deal links to C-Net. (Here is my actual analysis as opposed to Martin LaMonica’s news story.)
The only line in my Research 2.0 post that sort of relates to what I think the ZD-Net guys are saying is “The leading software suppliers, with the exception of Microsoft (MSFT), long ago bought into OSS terms and conditions and development techniques.”
At least relative to open source, isn’t that the same thing the two ZDNet OSS bloggers are saying? I can’t speak to their points about BusinessWeek, Forbes, Connecticut and New Jersey. It’s winter here on the Cape Cod; all those folks have gone home.–Dennis Byron
Tags: open source, OSS, ZDNet, Sun, MySQL, Microsoft
Posted on January 24, 2008
Filed Under Research, Software, Technology & The Web | 3 Comments
In the so-called battle between proprietary (also called closed-source) software companies and open source software (OSS) companies, there’s no competition. We don’t mean one set of companies is better than the other. We just mean that there is not two separate sets of companies arguing over the OSS idea.
The leading software suppliers, with the exception of Microsoft (MSFT), long ago bought into OSS terms and conditions and development techniques. IBM (IBM), Oracle (ORCL) and so forth have been big users of OSS for years as well as the main sponsors of efforts such as the Apache Software Foundation, the Linux Foundation, and so forth providing both hard cash and in-kind contributions. Now the leading software suppliers are reaping the rewards in revenue. Microsoft got on board in 2007, has already had two of its licenses approved by the Open Source Initiative and even is cooperating with the Samba project (albeit through some intriguing cut-out procedure that would take John le Carré to explain).
The “battle” between open and proprietary, which was pretty much contrived by a few bloggers for OSS-based startups in the first place, doesn’t exist.
Now we’ve put some hard numbers behind that opinion. For example, we estimate IBM realized as much OSS-centric revenue in 2007 as Red Hat (RHT). A report on our research has been released over at ebizq.net. Over at Infoworld, Bill Snyder gives the report a look from the OSS VC’s point of view, echoing an opinion we have noted here at Research 2.0 in the past, most recently around the first of the month.
The ebizQ article looks at the question “Who are leaders in OSS market penetration?” The answer, as one of the article’s headlines says: “The Money was Spent with IBM, Sun and Oracle as Well as Red Hat, Mozilla and mySQL.” More important, we find IT users just want “good software that doesn’t break often. And when it does, they want a substantial company available to fix it.” The report, available for free download, also looks at how the idea of OSS market “leadership” should be calculated.
Now the blogosphere is going to have to find another controversy to obsess about.–Dennis Byron
Tags: open source software, OSS, IBM, Oracle, Apache, Linux Foundation, Microsoft
Posted on January 23, 2008
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As I read it, for IBM (IBM) 2007 represented the first year this decade that the growth rate in internal software revenue (e.g., the Software Group from Global Technology Services) dipped down into single digits. In 2004 and 2006, the internal growth rate was twice the external rate at 12% and 14% respectively. In 2003 the internal growth was three the times the external growth rate at 32%. In 2002, software revenue from down the hall grew 25%, representing a large percentage of the growth of the IBM Software Group that year.
I’m not sure how to interpret that. Maybe somehow when IBM sells itself software it adjusts for exchange rates in a way you can’t do with real money. Therefore the internal growth rates are closer to the constant currency rates that IBM reports. I also suspect it has something to do with the transitional period vis a vis IBM mainframes (a large percentage of IBM software sold deploys on mainframes).
I know part of the reason is because the numbers I’m using for comparison (from the IBM Investor Relations page) are not backcast for IBM’s software acquisitions. That tends to inflate the external growth-rate number vs. market reality. Using a pure apples-to-apples comparison to take into account the 2006 acquisitions of Filenet, Internet Security Systems, MRO, Vallent and so forth might reduce the GAAP-compliant external growth rate of 10% down a point or two. But it would still be higher than the 7% growth in internal software sales.
Maybe the booming services groups are buying someone else’s software, when they win an outsourcing or management consulting contract. I recall a story—surely just a story—about former CEO Lou Gerstner writing one too many seven-figure checks to that company out in Islandia and immediately sending someone out to acquire Tivoli. Who’s looking at the outgoing checks these days?
Or maybe open source software (OSS) is being used in a lot of the contracts won by the IBM services divisions. As I have researched and reported in depth, OSS does not mean “free” unless you have a bunch of highly trained and highly motivated computer scientists on staff. Without expert staff, it is very hard to maintain and upgrade OSS without a service contract from someone. There are very few organizations that have that kind of expertise hanging around but Big Blue’s services organization is definitely one that does. Wouldn’t that be interesting?
Tags: open source software, OSS, IBM, Global Technology Services, Filenet, Vallent, MRO
Posted on January 18, 2008
Filed Under Companies, Markets & Finance, Software, Technology & The Web | 2 Comments
Sun (JAVA)-MySQL. Oracle (ORCL)-BEA (BEAS). As I said (see in the Oracle-BEA post put up on this site on January 17), there is one major interconnecting theme in the two major software-supplier acquisitions this week: For users and investors the independent middleware market as we know it is going away.
In Oracle acquiring BEA, the thought process behind that statement is (hopefully) clear and explicit.
In the Sun-MySQL deal, which also will lead to the collapse of middleware independence, it’s actually implicit in Sun’s statement that it wants to get into the database market. That really means Sun wants back into the whole infrastructure stack market, offering a framework from hardware up through business process management, and even applications if you count openOffice.
Think about that (“Sun as a competitor against Oracle in the database market”). That makes Oracle the winner in both deals. Now, instead of worrying about competing against a bunch of hungry nerds toiling away in an aggressive freestanding start-up, conducting guerilla marketing worldwide the way Sun did against DEC and Data General 20 years ago, Oracle just needs to think about Sun as a competitor in the database market.
And on the same day, it put BEA out of its misery!!! A two-fer.
But of course that is not Sun’s objective. Sun wants to take on Oracle, IBM (IBM), SAP (SAP) and others and make sure the others think of Sun as a competitor all the way up and down the stack. As Larry said in the context of his deal, it was “a great day for Java.”
Sun CEO Jonathan Schwartz said the MySQL deal was the “most important acquisition in history of Sun” But he also said the MySQL acquisition was complementary to Sun’s JavaDB (Berkeley) and postgreSQL offerings. The latter are other open source software (OSS) projects in which Sun is involved that compete with MySQL. That the competing projects complement each other may be Sun’s intention but that’s just not human nature.
First point: Watch for a tumultuous period starting almost immediately (the deal will be finalized plus/minus April 1) where the multiple OSS database offerings sort themselves out within Sun’s sales force. This will retard MySQL’s growth from what the OSS database might have otherwise achieved in 2008. MySQL may even lose; IT development and marketing guys play hard ball. We have already seen aggressive PR campaigns badmouthing MySQL product and support quality.
Speaking of MySQL’s revenue, the losers in this acquisition were the OSS pureplays and those OSS dual-license guys that still like to call themselves OSS pureplays. Research 2.0 and others estimate MySQL did about $75 million in revenue in 2007. We applaud Sun’s negotiating skill. Even if MySQL only did $50 million in 2007, the lowest estimate we have heard, it means Sun “only” paid 20x annual revenue. In October 2007, Citrix (CTXS) acquired Xensource for some where north of 100x 2007 revenue. To be fair to Citrix, it believes it paid about 10x 2008 revenue for Xensource. But of course we won’t know if that’s true for a year and Citrix won’t tell us if it was wrong anyways.
Second point: The value of pureplay-heritage OSS hybrid companies, which is what MySQL was, is dropping by that valuation measurement, coming back to earth from the JBoss, Zimbra and XenSource acquisitions. As I said in my initial blog post on this acquisition, the OSS IPO parade band is turning into a quintet and might simply become a guy accompanying himself on a harmonica by the end of 2008. And as I said when MySQL was beating the IPO drum back in July, a good business case is still more important than a buzzword such as OSS.
In my opinion, the investment opportunities—and OSS’s future—lies on the application functionality side of the market, not the infrastructure side. Alfresco, Compiere, Jaspersoft, etc. are still in the parade but the others best get out of line and find their “proprietary partners” as soon as possible.
As for partners, MySQL allies such as Google (GOOG), HP (HP), IBM (IBM), and Unisys might really be thinking twice about Sun’s acquisition. Intel (INTL), Red Hat (RHT) and SAP (SAP) pulled a few dollars out of the deal because they were major MySQL investors. But presumably SAP would have preferred that MySQL stay independent because it was probably going to bet on MySQL as a counterweight to Oracle (it doesn’t like having its major competitor “owning” most of the file systems its customers’ SAP applications access). With this acquisition, SAP will now be equally beholden to Sun. But SAP can still switch easily to Ingres or postgreSQL, or even–although unlikely–its own SAP DB.
Smaller MySQL partners, many of whom are also OSS companies, should be helped by this move, as explained over at my OSS blog on ebizQ.net, where I research about OSS all the time.
As for users Sun believes it can drive new adoption of MySQL’s database in more traditional applications and enterprises. Today MySQL shows up more in embedded applications and “Web 2.0 stuff.” Sun says, “The integration with Sun will greatly extend the commercial appeal of MySQL’s offerings and improve its value proposition with the addition of Sun’s global services organization.” Schwartz said Sun’s research found that the lack of “peace of mind” by large enterprises was holding MySQL back. But some very large enterprises such as Nokia and Google weren’t having that problem.
The companies also said more than 100 million copies of MySQL’s OSS database software have been downloaded. A very large percentage of those were for Windows but MySQL said that by the time the database gets to production (only one in a thousand downloads turn into business MySQL had said previously), most are on Linux, with Windows and Solaris second and third in popularity.
Third point: So even major Sun partner, Microsoft (MSFT) might get some benefit out the acquisition.
But in the end, the real winner is Oracle.–Dennis Byron
Tags: open source software, OSS, Microsoft, Sun, Oracle, MySQL, SAP
Posted on January 17, 2008
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Oracle-BEA. Sun-MySQL. Now that the enthusiastic financial-analyst briefings and press conferences have been held (well at least the Sun-MySQL was enthusiastic) and now that we’ve had time to crunch the numbers, let’s look at the details. Who wins and who loses in terms of competitors, partners, investors and users.
I analyze the two deals in two separate blog posts in order to pick up some separate issues such as the depressing effect of the Sun-MySQL deal on open source software (OSS) pureplay valuation and the depressing effect of the Oracle-BEA deal on WebLogic and AquaLogic revenues for the rest of 2008 (and maybe forever).
Oracle-BEA is discussed below. But there is one major interconnecting theme in the two deals: For users and investors the independent middleware market as we know it is going away.
BEA pretty much launched the independent middleware market as a separate entity in 1995 by acquiring several Bell Labs/Novell TUXEDO-based distributors, IMC and ITI. To be completely accurate, investors still have a few choices. TIBCO (TIBX) is left because Reuters spit it out a few years ago. And Iona (IONA)–which predated BEA–and Cape Clear are still standing presumably totally because of Irish hardheadedness. In addition, IBM (IBM) and Oracle have succeeded in changing the definition of middleware such that some might argue that Attunity (ATTU) and SAS Institute make middleware.
When I say middleware, I mean run-time code that’s really in the middle of something. And when I say independent I mean “pure play,” software suppliers not selling other types of information technology.
So what does this sea change mean for the users? In the 1990s, users did not buy from pure plays because they were pure but because they offered a choice other than–at the time–depending on the middleware built into application suites such as SAP R/3, built into their relational database, or spit out as a by product of their mostly systems-supplier-centric development tools. The bottom line for the user community now, as I have been modeling for years, is that because of the end of the independent middleware market each enterprise has to choose whether to get in bed with an application suppliers’ middleware—SAP’s NetWeaver or Oracle’s Fusion—or an infrastruture suppliers’ middleware. (The above paragraph summarizes extensive portions of a Research 2.0 client deliverable, so if you want to dig deeper, give us a call.)
Larry Ellison explained in his conference-call script how Oracle fits in both camps because of his commitment to open standards but that is not the same as open source. And therefore the Oracle approach does not really represent independent choice for the user.
Partners such as smaller ISVs that used BEA middleware in their products and even much larger companies than BEA that use BEA middleware in their services offerings face the same more limited middleware choice as users.
For investors, the independent middleware market was a great leading indicator of the overall IT market. This acquisition makes the challenge easier or harder depending on your investment-research technique. Do you try to understand the upstream/downstream aspects of the market when you are investing in auto makers? If so, your life just got harder because there is no more equivalent of Behr, Dana (DCNAQ), Delphi (DPHIQ), Eaton (ETN), Honeywell/Bendix (HON), Magna (MGA), Modine (MOD), Tower (TWRAQ), ZF and so forth in the IT market. But if you just bet on an auto maker because you like the looks of the latest coupe, and an IT supplier because the user interface looks cool, you’re all set.
The most important short term investment aspect of the deal is that it will probably kill BEA license sales until the deal is signed, sealed and delivered in about 6 months. I think the two companies recognize this, accounting for the difference between the $21 asking price and the $19.375 final bid. And the two companies will probably make every effort to prevent it from happening (but I’m not sure of that given the coldness of the joint conference call).
As for competitors, well, as I said above, there are none left– Dennis Byron
Tags: open source software, OSS, middleware, Sun, Oracle, BEA
Posted on January 16, 2008
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Some open source software (OSS) purists on the blogosphere–and some outright double-dipping conflicted for-profit OSS company executives–have been beating the drum for over a year about the upcoming parade of IPOs that we would see from the OSS movement. But reality happened, market forces intervened, Yahoo bought Zimbra, Citrix bought Xensource (paying way too much) and the OSS IPO marching band kept getting smaller and smaller. Today Sun (JAVA) acquired MySQL, pulling the lead trombone of the OSS IPO parade, out of the line of march. The marching band is about to become a quintet.
A conference call is scheduled for later this morning so news at 11. But two weeks ago I wrote about the rapid convergence of the open source software movement with the enterprise software world’s leading suppliers. Sun had already begun to open source many of its software assets and switch to the subscription accounting that is the primary way of measuring OSS in the market so in a way this means no change to that opinion.
But it does mean the MySQL OSS database is less of a threat to Oracle (ORCL) buried in the bowels of Sun along with SeeBeyond and other piece parts than MySQL was as a separate organization. It does mean that the Google (GOOG) usage of MySQL gets a little more complicated. And it seems to mean that Sun wants back in the game up and down the stack, competing with Microsoft (MSFT) and to a lesser extent with IBM (IBM).
– Dennis Byron
Tags: open source software, OSS, IBM, Sun, Oracle, MySQL
Posted on January 15, 2008
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At first we took a beating after we published our initial report on NetSuite (pdf) on December 18 which suggested that a fair value for the stock might be closer to the *original* filing range of $12 instead of the revised one of $16 to $19.
All the institutional clients we talked to seemed to share most of our views and were staying away from the IPO. As the stock zoomed to $40 we felt a little out of step with the market. We know that the cash-flow aspects of a SaaS model are tantalizing but it doesn’t invalidate the importance of traditional business elements including features and functions, competition, market opportunity and so on.
In the last few days there have been a few more critical eyes cast in the direction of NetSuite stock. The Economist recently ran a story calling into question some of the market hype around the software as a service movement in general and the valuation of NetSuite in particular. Then this week a traditional Wall Street firm, Citibank, initiated their own coverage of the stock with a sell rating. Their price target is still a fairly charitable $28/share.
We have the deepest possible conviction on the extremely high value of software in general and are fond of elements of the SaaS model from both a functional and a financial perspective. But that doesn’t mean that SaaS is the only story to be paying attention to. From an architectural perspective we see more opportunity in the form of more hybrid approaches that leverage cloud computing and the SaaS model but may contain large elements of traditional software delivery and licensing methods. Just because the old implementation of perpetual software licensing was sometimes problematic doesn’t mean that perpetual licenses don’t make sense.
Software companies are getting smarter at delivering software that works well out of the box and integrates well with other applications and information sources. Many applications are perfectly suited to an online subscription model, others are not.
We continue to feel that NetSuite as a stock investment only looks attractive at much lower levels.
– Kris Tuttle
[Disclosure: Research 2.0 has not as yet held a short position in NetSuite as of January 16, 2008.]
Tags: NetSuite, SaaS, Valuation
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