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.
