February 27th, 2009
(c) 2009 MGI RESEARCH, LLC
We attended a three day tech conference sponsored by Pacific Crest Securities, a technology focused investment bank. Day 1 was dedicated to Data Center and Cloud computing, Day 2 was focused on On-demand/SaaS software, and Day 3 targeted Clean Tech. The event was well-organized, well-attended, and offered a bevy of market and company insights. Unsurprisingly, the overall tone of conference presentations was muted, downbeat and cautious. The following themes dominated:
Timing is Uncertain
Most companies expressed a great deal of uncertainty about the timing of the current recession. There is no clear sense that the economy will recover during the second half of 2009 and several CEOs have expressed a great deal of anxiety over the length of the current recession.
Unclear Economic Drivers
No product or sector jumped out as a “must-have” product or technology in 2009. IT buyers are under no pressure to buy anything – or even pay their maintenance bills – in 2009.
Stimulus Money Out of the Picture
Largely absent in the prepared remarks and the Q&A of nearly every presentation of Day 1 and Day 2 was mention of how the government stimulus money would impact a given sector or company. Even on Day 3, clean tech companies provided minimal information on the topic.
Demand Visibility is Zero
No surprise, nearly every CEO/CFO lamented the lack of pipeline visibility. Of deals that slipped out of Q4, 15-25% may be completely lost, with another 25-30% that may or may not happen in the first half of 2009.
Software Maintenance Revenue Risks
There is now a more clear sense among market participants that maintenance revenues and SaaS renewals are in play. Even companies with considerable maintenance revenue streams (e.g., Symantec, MGI-X: 1,361 NASDAQ: SYMC) lacked conviction in their presentations. As MGI Research predicted earlier in 2008 (Software Maintenance Revenue – Sacred Cow or Hamburger Meat?), maintenance revenues are now under pressure thus highlighting the need for companies to optimize their execution and business models for survival in 2009.
Current Economy Testing Management Teams
The current investor psychology bias is clearly in favor of those management teams with defensive plans and that have the leverage to adjust their business models and generate cash. In our view, companies with MGI Index scores below 1,000 are going to be struggling and those with scores below 500 are at risk.
Lack of ROI Proof is Hurting Tech
Many CEOs mentioned the 9-16 month maximum timeline for Return on Investment (ROI) that customers are now demanding. With a few exceptions, most conference presenters did a below average job at articulating their core value and ROI either through direct savings or through new revenue generation. Despite a common refrain that “customers are taking longer to buy, and demanding shorter pay-back periods, very few companies produced or even mentioned a credible ROI or TCO model or a case study.
VDI is DOA, Long Live the Cloud
While VMWare core server-based products continue to win market share, VMware’s efforts to bring virtualization to the desktop, via its VDI (virtual desktop infrastructure) initiative appears to be falling short of expectations in the marketplace. In defense of VMW, Citrix was surprisingly quiet about its Xen success at the desktop, and Desktone, a DaaS (desktop as a service) company was equally unexciting. Even though VMWare may not be winning at desktop virtualization but no one else is either. It is not clear if the VDI market will reach maturity and if it is worth dominating. At the same time, in many sessions and panels, presenters sang praises to various forms of public and private cloud computing. There seems to be a consensus emerging on some sort of a federated, public/private cloud computing model and corresponding desktop and server tool set needed to support access and security for this paradigm.
Deluge of M&A in 2H09?
A well-run panel on SaaS/On-demand sector M&A was standing room only. Corporate development representatives from Microsoft, Netsuite and Concur sat on a panel, along with Ed Booth, the former CEO of IDeaS (acquired by SAS). Tellingly, two-thirds of the people in the room were VCs, and one-third of the panel attendees were executives. The panelists agreed that private company valuations have yet to re-set as deeply as public company valuations. A panelist from Microsoft has re-iterated his company’s view that there should not be a premium to valuation of SaaS companies even if one takes deferred revenues into account and correctly pointed out that enterprise software companies have plenty of deferred revenue items themselves. While it may be self-serving for Microsoft to state that, it is also factual as many mature enterprise software firms boast ratios of deferred to reported revenues that are similar to those from established SaaS companies like Salesforce.com. Conversations with various conference participants and attendees furthers our view that in spite of challenges, the second half of 2009 and early 2010 will see a deluge of M&A as many private companies seek the shelter of larger, more profitable public and private companies or merge with equals in the hopes of fusing a larger, more stable business platform.
Clean Tech - Dead Money for 2009
Day 3 of the conference was devoted to clean tech companies, and over 30 companies presented, from Applied Materials to Xjet Solar. The recession is clearly having a major impact on clean tech, as depressed energy prices are altering the economics of many clean tech projects, frozen debt markets have locked up major infrastructure projects (e.g., large scale solar and wind projects that require debt financing), and green initiatives have been slammed into the back seat as survival con-cerns top the corporate agenda. Given the confluence of dynamics, most public clean tech companies appear to be stuck in neutral, at best, and at risk if the recession worsens or extends far into 2010.