strategic marketing management for software companies enterprise infrastructure and applications:...

Strategic Marketing Management

for Software Companies

Enterprise Infrastructure and Applications:Update and Trends

July 2003

Barbara Angius [email protected]

Software Market Trends 2

Agenda

Industry Snapshot Software Segments CIO Survey and Forum Data IT spending Market Trends

Verticals SMB Channels

M&A and Investing Trends Summary


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


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


Infrastructure

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

Infrastructure software, often called “plumbing”, represents products that increase the performance of IT resources.

Source: Gartner Segmentation


Applications

Enterprise Resource Planning Customer Relationship Management Supply Chain Management Service Process Automation (or PSA)

Application software increases the performance of computing resources to achieve business, professional or personal goals and objectives.

Source: Gartner Segmentation


Emerging Markets

Business Activity Monitoring

Business Intelligence Applications

Strategic applications Operational applications Analytical applications Business Process

Management Collaborative Commerce

E-commerce ERP II M-commerce Mobile and Wireless Software Solutions Web Services Other markets = ASP,

hosted solutions, free software and new categories

Composite markets are an alternative cut of baseline market data – may become segments


Top Priorities for CIO’s

1. Application integration same2. Security software same3. Storage hardware up 94. Windows 2000/XP desktop upgrade down 15. Business intelligence tools up 96. Storage software up

177. Networking equipment up 38. Wireless initiatives down 39. ERP application upgrades down 510. Customer service applications up 19

Q: What are the top priorities for your organization in 2003?

Morgan Stanley Survey of 225 top Fortune 1000 IT Executives, April, 2003


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


CIO Forum on IT Trends

Still seeking cost reductions

Increased revenues will drive more IT spending

Expect commoditisation across the technology stack

Web standards are being adopted, but still too proprietary for integration

Software upgrades are being skipped until absolutely necessary

Price erosion hitting hard in IT services for app development, integration, consulting and desktop

Software shelfware is limited – renegotiated on vendor pricing power

Onshore and pure play offshore vendors tout competitive advantages

Morgan Stanley CIO Panel Discussions with 18 Fortune 1000 IT Executives, May, 2003


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


IT Spending by Vertical

IT spending, as a percentage of company revenue, dropped 1% - from 4% in 2001

to 3% in 2002


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


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


…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


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 sign-off 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 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


Changing Channels

ISP = independent service providerNI = network integratorNSP = network service providerSI = systems integrator VAR = value added reseller

Source: Gartner Dataquest March 2003


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 increasesSources Software Equity Group


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 Industry Valuations

Source: WR Hambrecht


Software Ranks as #1 Sector Year After Year

1998

Software ($4,235) Telecomm ($2,871) Media & Ent. ($1,815) Biotechnology ($1,557) Networking ($1,508)

1999

Software ($9,301) Telecomm ($8,478) Media & Ent. ($6,868) Networking ($4,323) IT Services ($4,214)

2000

Software ($20,239) Telecomm ($18,236) Networking ($11,182) Media & Ent. ($10,673) IT Services ($8,909)

2001

Software ($8,561) Telecomm ($6,435) Networking ($5,706) Biotechnology ($3,300) IT Services ($2,894)

2002

Software ($4,319) Telecomm ($2,878) Biotechnology ($2,798) Networking ($2,232) Medical Devices ($1,862)

PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree™ Survey

$M invested by sector


Number of Deals

392

654762

914

1,269

1,810

1,078

799

166

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1995 1996 1997 1998 1999 2000 2001 2002 2003

Average Deal Size ($M)

PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree™ Survey

Average Deal Size Remains Solid

$3.5$4.3

$4.6

$7.3

$11.2

$7.9

$5.4

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

1996 1997 1998 1999 2000 2001 2002


Software Still Going Strong

($ in millions)

$2

$12

$31

$79

$96

$111

$116

$124

$139

$169

$240

$256

$275

$433

$483

$488

$788

$0 $225 $450 $675 $900

Undisclosed/Other

Retailing/Distribution

Consumer Products & Services

Healthcare Services

Financial Services

Electronics/Instrumentation

Industrial/Energy

Computers & Peripherals

Media & Entertainment

Business Products & Services

IT Services

Medical Devices & Equipment

Semiconductors

Networking/Equipment

Telecommunications

Biotechnology

Software

# of Deals

% $ Change from Q4 ’02

166 (12.9%)

49 (2.1%)

67 (11.2%)

38 (13.5%)

34 1.0%

43 (48.1%)

41 3.3%

35 96.3%

22 4.6%

27 (6.6%)

31 (18.5%)

14 75.5%

21 59.9%

16 (15.3%)

8 (55.7%)

8 (71.0%)

3 NM

Q1 2003 Totals: $3,842 623 (10.0%)

Investments in Q1 2003

MoneyTree™ Survey


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 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

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