by Frank Sparacino

With any hope of a technology spending recovery in the second half of 2002 all but erased and humble expectations setting in for 2003, it is difficult to identify subsectors of technology, and software specifically, that have recorded growth (or simply not contracted at a significant rate) in the last 12 months or offer investors hope for the coming year. The September quarter marked a new low point for the seven publicly traded business intelligence (BI) companies in our universe (Actuate Corp., Brio Software, Business Objects, Cognos(*), Hyperion Solutions, Informatica, and MicroStrategy). Cumulative software license revenue was $211 million during the 12 months ended Sept. 30, down 12% from the June quarter ($239 million) and even below the 2001 third quarter ($217 million) that was affected by the events of Sept. 11.

Given the attention dedicated to other sectors of software such as integration, which numerous CIO and IT executive surveys consistently cited as the top or one of the top technology spending priorities, there appear to be better opportunities outside of business intelligence. The following statistics, however, prove otherwise. Over the past 12 months, software license revenue from our business intelligence universe was down 7% but outperformed every single sector of software (enterprise resource planning (ERP) down 9%, integration down 22%, customer relationship management (CRM) down 33%, and supply chain management (SCM) down 48%) with the exception of security, which is difficult to compare for a variety of reasons, including a consumer focus for large vendors such as Symantec and the fact that many vendors do not provide a detailed breakdown of total revenue by license, maintenance, and services. (We note our growth rates are calculated on a revenue-weighted basis, meaning the larger vendors have more impact on the overall sector performance.)

There were a few other surprises over the past 12 months, including the relatively good performance of the ERP sector (consisting of J.D. Edwards, Lawson Software, PeopleSoft, Oracle, and SAP AG), which may be indicative of a future trend toward single-stop shopping instead of a best-of-breed vendor approach. Not surprisingly, the best performing business intelligence vendors were Business Objects and Cognos. However, these two vendors are headed in different directions, with Cognos clearly having more momentum as of late. In addition, the results for the SCM sector were skewed by the poor results at the largest vendor, i2 Technologies, which has seen trailing 12-month software license revenue decline a startling 70%.

There are a number of reasons we believe business intelligence is receiving a higher percentage of technology budget dollars, even as budgets are being reduced. These reasons include: 1) a significantly lower price point in terms of software, hardware, and services (services related to implementing integration technology generally cost 3x or more the cost of the software license), 2) minimal business disruption in terms of process change, culture, and 3) the relatively short (i.e. weeks versus months) implementation cycles and time to value. In our view, investors are becoming increasingly aware of many of these facts, which is one of the reasons (the major reason still being the rebound in the NASDAQ) stock prices have risen sharply in recent weeks without any underlying change in fundamentals. Informatica, for example, has more than doubled from approximately $3 per share on Sept. 30 to a recent price above $7. We believe many BI stocks are now reasonably valued. In some cases, they are valued well ahead of even optimistic prospects for the coming years, which we do not believe will be boom years for technology investors, making it all the more important for investors to be highly selective.

About the Author

Frank Sparacino (fs@fana.com) specializes in research and investment at First Analysis, a research-driven investment firm. His area of expertise is infrastructure software with a focus on business intelligence.

(*) First Analysis Securities Corp. has received compensation for investment banking services from this company within the 12 months before the publication date of this document.