Wednesday, April 25, 2007

Enterprise Software Earnings Watch: Solid License Growth Amidst Increasing Customer Backlash on Maintenance Pricing

Recent positive earnings announcements from SAP, Oracle, Microsoft, Business Objects, Agresso, and Epicor signal that the enterprise software market remains quite healthy. Despite doomsayer analyses that talk about the slowing economy, high single to double digit growth in license revenue demonstrate the success of recent initiatives to capture new industries and market segments (e.g. SME and services industries). Both Agresso and Epicor show significant success in net new license growth in the SME market.

Agresso- 2006 FY License revenues up 16% to €56.8M
Business Objects [BOBJ.O]- Q1 2007 License revenues up 9% YOY to $137M
Epicor [EPIC.O]- Q1 2007 License revenues up 14.1% to $22M
Microsoft [MSFT.O] - Q3 2007 License revenues up 20% (MBS Dynamics break out not disclosed)
Oracle [ORCL.O]- Q3 2007 License revenues up 57% $423M (organic/acquisition mix TBD)
SAP [SAP.N]- Q1 2007 License revenues up 16% YOY (Constant Currency) 563M

However, the real story remains the growth in maintenance revenues which account for 2x to 3x of license revenues. Many vendors report a 25% to 50% increase in maintenance revenues and retention in the 90%+ range. Estimates on profitability for maintenance range from 25% to 90% margin.

As maintenance costs average from 20 to 25% of the license fees, customers continue to express outrage over the value they are receiving. Despite the number of Y2K replacement projects slated for 2008 to 2011, many customers express ERP upgrade fatigue. Consequently, expect upgrade projects to be pushed out to 2009 through 2012 and third party maintenance options to remain attractive.

(The personal contents in this blog do not reflect the opinions, ideas, thoughts, points of view, and any other potential attribution of my current, past, or future employers.)
Copyrighted 2007 by R Wang. All rights reserved