U.S. consumer confidence is improving. But many consumers
returning to the shopping aisles have a different set of
expectations than they did during their pre-recession shopping
Shoppers have become smartphone savvy, more aggressive about
using wireless devices to comparison shop and, in some cases,
even pay for their purchases. They can turn frustrated with
businesses that fall behind the technological curve.
Businesses also have rapidly evolving expectations.
Manufacturers, financial services firms, retailers and others
want to crunch more data, more closely track customers and more
seamlessly link to employee and customer wireless devices. They
want better ways to manage the growing reams of electronic data
that are the backbone and livelihood of their businesses.
The top enterprise software companies are poised to cash in on
these trends, says Joanne Correia, vice president of the software
market research team for Gartner, a research firm.
"We are in the middle of a modernization of applications that
people installed in the 1990s and early 2000s that are all aged
out, so that is why you see growth (in the market)," she
Cloud-based computing is another driver of this "replacement
cycle." Cloud computing allows companies to store and access
their data over the Internet, through remote, often
For many companies, cloud technology means faster, more agile
business processes, says Karl Keirstead, an analyst for BMO
"Speed to market is something I hear more and more about," he
said. "As you move your applications to the cloud, the speed in
which you can make changes and get live and download new versions
Enterprise software is a big market. Estimated by Gartner to
hit $278 billion in sales this year, it touches on nearly every
aspect of operations across a multitude of industries. Large
systems integrators includingOracle (
) andIBM (
) have traditionally presided over the top of that food
But a thriving pack of competitors target niche markets within
the field, with an increasing focus on cloud computing.
NetSuite 's (
)software includes the all-important areas of enterprise resource
planning, customer relationship management and e-commerce. All of
its offerings are cloud-based.
) is the leading provider of cloud-based customer relationship
management software.Ebix 's (EBIX) software is geared for the
insurance industry.Manhattan Associates ' (MANH) software helps
companies better manage their warehouses. Another
firm,Synchronoss Technologies (SNCR), manages transactions such
as text messages between connected devices for telecom companies
Still another, theUltimate Software Group (ULTI) focuses on
human capital management, which helps companies handle everything
from hiring to setting up benefits programs for employees.
For many companies, having the best-of-breed product is the
difference between success and failure, says Christine Dover, an
analyst for market tracker IDC.
"If I can start to pull together information about my
workforce, about what is happening with my financials, I can
actually improve how my business works," she said.
But the playing field is largely uneven. Some companies are
growing faster than others. Many are profitable, but not all. Of
the 46 companies in the sector, only three have EPS Ratings above
90; 35% of the group trades below 10 a share.
By 2016, global sales of enterprise software will grow to
$359.7 billion, says Gartner. The researcher expects worldwide
enterprise software sales to grow 6.4% next year, to $295.8
The replacement cycle is a big part of the growth and why
companies such as NetSuite and Salesforce.com are posting
quarters with year-over-year revenue growth of 30% or better,
"People are modernizing their apps, they are investing because
that is how you keep your customer," she said.
Enterprise software makers are also benefiting from
software-as-a-service systems, where customers pay per month for
the software they use. This SaaS approach is fast becoming a
preferred alternative to on-premise services, which require
companies to prepay a large license fee.
The SaaS-based model also gives companies more flexibility
with their accounting, says Correia.
"A lot of the software is moving to software-as-a-service
because you can move it from a capital expense to general expense
line and pay for it as you go vs. paying $5 million upfront to
refresh your customer relationship management system," she
Mergers and acquisitions are also providing some benefit, says
IDC's Dover. "There's a lot of cranky old systems out there that
(companies) acquired through an acquisition so they are
modernizing them," she said.
Venture fund investments in the entire sector of private
software companies through the first nine months of the year
reached $6.13 billion vs. $7.31 billion for the entire calendar
year of 2011, says PricewaterhouseCoopers and the National
Venture Capital Association.
An improving economy will likely only increase the pace of
investments, says Tracy Lefteroff, global managing partner of
PwC's venture capital practice.
"Once the economy picks up, you are going to see more capital
expenditures at some of these companies, which is going to
provide a real boost to some of these younger companies
developing products to sell into that space," he said.
Software continues to dominate technology-related mergers and
acquisitions. In Q3 there were 20 such deals with a cumulative
value of $14.2 billion, vs. 27 deals valued at $5.9 billion in
the year-ago quarter, says PwC.
The enterprise sector will likely lead M&A activity in the
next 12 to 18 months, says Todson Page, a partner for PwC's
transaction services practice.
"Obviously, the buzz words are cloud, applications management
software, storage-related software and security -- those are
significant areas that are going to be hot," he said.
Cloud computing is becoming a rallying cry in enterprise
software. And several companies are trying to cash in -- fast. In
), a leading maker of database management software, launched
several in-house, cloud-based software initiatives. The company
has also been acquiring cloud-based companies to quickly boost
its cloud competency.
), Oracle's biggest rival, has also stepped up its push into the
cloud with acquisitions. It spent $3.4 billion on SuccessFactors,
a maker of human capital management software and $4.3 billion on
Ariba, which manages a cloud-based e-commerce market for
But SAP has challenges, says Gartner's Correia.
"They are in the manufacturing space in Europe and the U.S.,
which has also been hit (by economic weakness) so a lot of
manufacturing is just starting to retool -- it's one of the last
legs when you look at an economic recovery," she said.
Salesforce.com has applied social media to help fend off
rivals. The company's Chatter social media service for businesses
to exchange information between departments has been instrumental
in the company staying ahead of rivals, says BMO's Keirstead.
"The ability to download and use Chatter for free does make
the client relationship stickier, so that has proven to be a good
move on the part of (Salesforce.com Chief Executive Marc)
Benioff," he said.
Upside: Companies rely on enterprise software to help shape
and direct their businesses. Cloud-based computing, the
software-as-a-service model and the need to replace antiquated
systems are clear market drivers that should continue to push
The public market has also warmed to newcomers. Shares for
Workday, a maker of human capital management software, shot up
more than 73% on its first day of trading on Oct. 12, despite
having no profits.
Risks: The cloudy uncertainty of business taxes associated
with the so-called fiscal cliff is an issue. Companies can't set
spending budgets without knowing how much they must set aside for
Uncle Sam, says Gartner's Correia.
"Not having an agreement on the debt ceiling and taxation
freezes everything -- it affects hiring and capital
expenditures," she said.
Competition could also be a factor. Larger software companies
will likely continue to push to get a bigger share of the cloud,
says BMO's Keirstead.
"The mega vendors, SAP, Oracle and Microsoft in particular,
become more aggressive in embracing this cloud shift and begin to
get traction and slow down the growth of these pure plays," he
said. "That has long been a fear."