A mixed picture for software

IT spending has fallen and companies are still slashing their IT budgets, but some UK-listed software companies are doing far better than others. So, while there have already been a number of credit-crunch casualties, a recent barrage of trading news from companies such as Intec Telecom and Fidessa have provided mixed signals about the sector's overall health. The results is that this has become very much a stock pickers' market.
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Providers of trading software have stood out among the companies that have reported numbers recently. Fidessa surprised its critics last Monday with a strong set of final results for 2008. Sales rose an impressive 40 per cent - 34 per cent on an organic basis - with profit margins also improving to 14.2 per cent. Similarly Patsystems, which provides derivatives trading systems and reported its results a week earlier, also beat analysts' expectations with double digit revenue growth. Fidessa's shares have since surged 16 per cent to 680p, while those in Patsystems have gained 25 per cent to trade at 20p. But this does not mean that these companies are defensive investments.

It may seem odd that the results from both Fidessa and Patsystems were so strong as their clients are to be found in the troubled financial services sector. Nevertheless, there are industry trends such as greater compliance reporting which can be expected to continue to benefit companies such as Fidessa. However, this kind of business can only do so much to mitigate the tumultuous state of the end-markets. Many once bustling trading rooms now sit largely empty, and, worse still, both banks and clients have been declaring shocking losses and even going bust. Patsystems seems the better investment option out of the two as future growth will be driven by its expanding Asian operations. Still, the group did issue a profits warning a year ago on the back of contract delays.

Ailing end-markets have also hurt performance at industrial design software specialists Aveva, which has seen its shares fall 45 per cent in the last 12 months alongside the severe contraction in the shipbuilding arena.

Conversely, Intec Telecom, which operates in the defensive telecoms industry, posted a positive trading statement for its half-year to 31 March 2009. Management have revealed they were anticipating "substantially" higher revenues and operating profits for the period.

However, end-markets that were hailed as defensive are often not proving to be as defensive as investors first anticipated. With revelations of "significant" savings expected in the public sector's £30bn IT budget, the public sector players, such as RM, Redstone and System C, are now looking vulnerable.

Cost cloud
But while end-markets are crucial, companies' technology offerings are equally pivotal, especially now that returns on investment and cost controls are often seen as more important by customers than technological advances. Even healthy companies are cutting costs to offset anticipated falls in revenue as the economy continues to struggle. So companies with products that can cut costs or boost efficiency should see continued or greater demand

"Finance directors have come to the fore," says Julie Meyer, chief executive of technology advisory firm, Ariadne Capital. She points out that some companies may begin to question the need to undertake substantial upgrades, and pay out yearly licence fees. This could even affect the larger players, such as SAP and Oracle. So the downturn is accelerating the migration to new technologies.

In particular, this cost-conscious environment is providing an opportunity for companies offering services which are accessed over the internet rather than loaded on to a business's own computers. This is known as a software as a service (SaaS) model, or "cloud computing". Businesses are charged for their use of the software, which can work out being a significantly cheaper alternative to buying systems and then paying licence fees. Small and medium enterprises (SMEs) are the most obvious beneficiaries of this service, and the downturn has already prompted a growing number of SMEs to adopt it.

The concept of SaaS has gained added weight through the launch of Google's online hard drive earlier in the year. Further endorsement came through IBM's announcement early last week that it had joined the ranks of Amazon and Hewlett-Packard by creating a cloud computing division. One UK company offering cloud computing is Aim-quoted Nasstar. Its software allows users to access their desktop, files and applications such as e-mails. Their software also permits users to access other niche applications such as Sage accounting software.

Sunny intervals
The RBC Global Disruption Technology Survey, a random selection of 700 representatives from within 7,500 companies, has confirmed that IT spending plans are falling significantly. But according to this survey, there are two areas of software which should see growth in spending in the short term: security, and web conferencing and collaboration.

Worryingly, though, 17 per cent are expecting to delay all discretionary deployments and upgrades, while 15 per cent are looking to reduce software costs. Of those intending to increase spending on software, which are a distinct minority, 20 per cent will do so to replace outdated software, while 16 per cent plan to spend to reduce costs or improve return on investment (ROI) .

In terms of hardware, PC sales are still expected to fall and the only robust area of hardware is in data storage.

FAVOURITES...
Telecity - data storage should continue to grow despite the downturn, and Telecity, which operates in this area, has just produced an impressive set of results to prove it.
Autonomy - size matters, especially in a downturn. Size is something Autonomy has and the search software group's shares have gained 27 per cent in the past 12 months.

...AND OUTSIDERS
Aveva - the Baltic Dry Index may have shown some signs of life in January and this could signal an improvement in the fortunes of Aveva, which produces ship design technology. However, major uncertainties still loom in its end-markets.
Fidessa - Another case of poor end-markets. Fidessa's impressive set of full-year results may only intensify its fall from grace as end-markets worsen throughout 2009.

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BY Malar Velaigam
Source：INVESTORS CHRONICLE

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