3Q checks demonstrate improvement for enterprise spend
Our recent checks support an improved software spending environment for
companies selling to the enterprise with varying degrees of strength depending on
size of target customers and vertical end-market (i.e., larger companies are
spending more with pronounced improvement in earlier cycle industries like
financial services). While the bulk of the improvement in closure rates, increased
RFP activity, and spending will be felt in 4Q, we see near-term expectations set
conservatively and anticipate 3Q earnings calls to generally be a positive catalyst.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
Industry Update
Top picks
Adobe Systems (ADBE.OQ),USD32.03 Buy
Ariba (ARBA.OQ),USD11.89 Buy
salesforce.com (CRM.N),USD55.06 Buy
Taleo (TLEO.OQ),USD22.81 Buy
Intuit (INTU.OQ),USD28.27 Buy
This report changes price targets for several
companies under coverage. For a detailed
listing of these changes, see Figure 1 on
page 2.
Global Markets Research Company
Signs of normalcy and more aggressive investment postures
The 21 application software firms at our Tech Conference two weeks ago were
generally more positive than we would have expected. While the increased sense
of optimism came with caveats and few outright bullish comments that would
warrant expectation raises, we believe demand levels and purchase cycles have
become far more predictable and increased activity levels amongst customers is
likely to have a measureable impact in 4Q. Consistent with this, our coverage has
started to pick up recruiting efforts and have begun to start hiring again. Of the
majority of our coverage companies for which we track online job postings, almost
half have increased postings significantly versus only one that has decreased the
past 9 months; Adobe, the one company that showing a decrease in postings did
so coincident with their announcement of their intention to acquire Omniture.
Handicapping who comes out of recovery the strongest
We believe increased CFO involvement and scrutiny in deal signings negatively
impacted closure rates during 1H09 while also creating a backlog of potential
deals (creating larger pipelines) that could bode well for the close of the year as
customer CFOs get more visibility to their businesses and release pent up
purchase plans. This dynamic has only partially been factored into estimates; We
see potential for revenue and earnings outperformance, particularly in 4Q09.
What did we learn about SaaS in 2009 and what should we expect in 2010?
SaaS firms reacted aggressively to the downturn, which suppressed 2009 growth
rates more than we expected but drove margins ~700 bpts higher on average
(only one SaaS company had an operating margin decline). While bears fear
accelerated investments ahead, we believe SaaS adoption of continues and see
category leaders expanding respective competitive leads through the downturn.
We also see excess sales capacity preventing margin degradation and view scale,
maturation, and increased saleforce average tenure as productivity enhancers.
Top picks
Our top picks for more bullish investors are Salesforce.com, Taleo and Adobe. We
recommend Intuit, Lawson, and Ariba as top defensive picks.
Software valuations still at reasonable entry points; risks
We value software companies on cash flow given the different accounting
treatment across companies. Our targets are based on EV/uFCF/G, which takes
into account free cash flow ("unlevered" or adjusted for effects from interest
income or expense) and 5-year FCF growth. Risks: further weakening of macro
scenario, market slowdown, changes in competitive positions (see p. 11).