Software Design Industry



The Software Design Industry includes companies providing PC software, middleware, enterprise application software, and other computer software products. These products help businesses, government organizations, banks, and other organizations run, manage, and automate their IT operations. Emerging trends include the growing demand for open-source applications and the increasing popularity of web-based applications. Encouragingly, IT budgets devoted to software-related innovation are rising, with an estimated 31% of overall IT spends dedicated to innovations on new products and services in 2007. IT infrastructure, ERP systems, and Security Solutions still remain the top priority.

Results Better Than Street Expectations - Higher License Subscription Fees and contributions from maintenance and support services helped most large-cap firms record top-line growth in the low tens during the quarter ended June 2007. Eleven of the top 12 players, including Microsoft, Oracle, and SAP, exceeded Street estimates. Most firms expanded product lines and added more clients, thanks to new products, software upgrades, and acquisitions. However, operating margins contracted, impacted by high restructuring charges, as well as mounting sales and marketing expenses. As a result, Net Income grew modestly, in mid-to-high single digits. Nevertheless, this trend suggests that M&A activity, subscription growth, and strong retention rates have overshadowed rising costs.

New Products Make Striking Debuts - Most new products introduced in the first half of 2007 have made a grand entry. For instance, Microsoft took the whole world by surprise with the success of its latest operating system, Vista. By the end of May 2007, Microsoft had sold more than 40 million copies of Vista. Considering that over 90% of the world’s PCs run on Windows, an immediate update to Vista will also provide business demand for laptop and desktop computers. Adobe recently released Creative Suite 3 (CS3), its most significant product rollout in several years. Encouragingly, demand for this product has been robust and should light up Adobe’s top line in quarters to come. Going by prevailing trends, 2008 also promises to be a year of big product launches. Microsoft has lined up a number of big product launches, including updated server software as well as its highly awaited videogame title, Halo 3.

Small and Mid-Sized Firms Feel SaaS Threat - Many companies have embraced the Software as a Service (SaaS) model, under which software is sold through subscriptions rather than an upfront fee. Gartner says this sector will grow from 5% of business software revenue in 2005 to 25% by 2011. While this may seem a healthy transition, it has taken its toll on some small and medium-sized software firms, even those with strong customer bases, products, and niche markets. These firms have been finding it difficult to switch to the new model as they are caught between two forces. On one side are industry giants like Microsoft, SAP, and Oracle, who command over 70% of available revenues, and on the other are start-ups like who do not have any legacy burdens. Meanwhile, storage and security software has been the main focus of corporate IT expenditure in 2007. Regulatory compliance is creating new opportunities in this space, in turn, driving demand for security software, especially compliance management suites.

Growth Likely to be Stable in near future - Recurring revenues, such as maintenance and service fees, are expected to remain steady during the second half of 2007, given the strong license and new-product sales of the first two quarters. Healthy license revenues also indicate a steady stream of revenue from future product maintenance and upgrades.

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