Genuity Research 2007 software outlook

Here is a summary of Genuity Capital Markets’ software analyst Lawrence Rhee’s take on the Canadian public co. software landscape for the coming year:

The software industry rebounded in 2006 after a disappointing performance in 2005. The Goldman Sachs Software Index (GSTI) was up 10.8% in 2006, a strong recovery from a decline of 4.8% in 2005. Competition for software acquisitions have driven the P/E multiple spread between the S&P 500 Software Index and the S&P 500 Index to almost three-year highs.

Recent quarterly results from bell-weather software names such as SAP, Oracle, and Symantec have showed lower-than-expected growth in license revenues. We believe the slowing economy in the U.S. will create a challenging software selling environment in 2007 with IT spending growth rates between 2.8% and 6.6%, which are down from 2006 levels of approximately 6-8%. As a result, we expect SaaS solutions to become more attractive to corporate buyers due to its lower costs.

For 2007, we would look for enterprise software investment opportunities that provide a high degree of visibility, in order to minimize exposure to revenue and earnings volatility. In our view, companies that generate a high proportion of recurring revenues (defined as maintenance revenue, transaction-based revenue, subscription-based revenue, and even license revenues that are recognized on a percentage of completion basis) will provide a similar degree of downside revenue and earnings protection as is provided by SaaS-type companies. In this light, we believe Descartes Systems, Emergis and Constellation Software represent good investment opportunities for 2007.

What is wonderful about this is that both DSG and Emergis were largely left for dead in 2002, and as with Wi-LAN and Certicom and the like are now back in full force! Even Diversinet has an analyst following it again.

The software market might just be coming back.

MRM