TORONTO, May 14, 2008 — After five years, Canadian emerging software company CEOs are still facing the same challenges. According to the annual PricewaterhouseCoopers (PwC) Report on Emerging Canadian Software Companies: The CEO Perspective CEOs continue to view growing revenues with quality customers as their biggest issue as well as establishing effective sales channel partnerships and building a reputation and brand. However, the CEOs are also able to see the possibilities offered by the strongest mergers and acquisition (M&A) market since the early years of this decade. A full 95% of respondents expect to be acquired within four years.
"Current activity levels and deal pipelines suggest that deals are still very much on the boardroom agenda of technology companies," says Peter Matutat, PwC Partner and National Emerging Company Practice Leader. "The larger buyers are looking for well-placed emerging companies to diversify or complement their current product and service offerings. The financial dynamics that have been driving the accelerating consolidation in the software sector is expected to continue, thus the expectation of companies to be acquired is well placed. The challenge now is for these emerging companies to make sure they are well positioned financially and strategically before making any move to putting a for sale sign up."
Growing revenues with quality customers continues to be the most significant challenge, with more than 90% of CEOs stating this was at least somewhat of a challenge. Almost half of the respondents predict their revenues will grow by at least 50% next year, with one quarter expecting to at least double sales in 2008. However, as we have seen in previous years, respondents continue to be optimistic about their fortunes for "next year."
"The history of our survey results shows that CEOs are likely overstating their growth prospects. And this year the gap between forecast and actual growth is on the rise," notes Matutat. "For example, in last year's survey 40% of respondents forecasted revenue growth of more than 50% for 2007. In this year's survey, only 24% of respondents achieved more than 50% growth. This gap is a slight increase from last year's survey where 41% had forecasted greater than 50% growth and 30% achieved that target. This increase is a trend that should be monitored carefully, since accurately forecasting revenues and results is critical to emerging software companies and contributes to the success of many key strategic goals, including raising needed venture capital, securing key partnerships and attracting senior management."
Survey respondents continue to have difficulty executing on their sales channel strategies and this has been the case for a number of years. However, this year there was a significant decline in both the use of channel partners and CEO satisfaction with channel partners. In 2005, approximately 70% of the companies surveyed were using sales channels. This declined to 62% in 2006 and has now declined further to 50% in 2007. Not surprisingly, there also continues to be dissatisfaction with the channels currently used. When asked to rate the success of their channel partnerships, approximately 52% of the CEOs stated their channels were not yet successful or had displayed limited success. The levels of dissatisfaction were greater for CEOs using OEMs and System Integrators, at 53% and 55%, respectively and slightly lower for Value Added Resellers (VARs) at 47%.
On the positive side, 31% of CEOs believe achieving profitability and positive cash flow will not be a challenge, and the majority (50%) characterize profitability as only somewhat challenging. CEOs are also upbeat about raising capital within the next two years: 34% say it is not a challenge and 42% characterize it as only somewhat challenging.
Other issues examined in this year's survey included:
The Scientific Research and Experimental Development program
More than 75% of respondents participate in the program. While the program is well received, CEOs would like to see a number of improvements, including:
- A quicker and more efficient review process
- Clearer eligibility definitions
- Consistent application of the assessment rules
- Increased expenditure limits
Intellectual Property
Given the ever-increasing importance of Intellectual Property ("IP") for emerging software companies, we examined how our survey respondents view the importance, value and role of IP in their business. National law firm Fasken Martineau assisted with our analysis and found that:
- Almost one in five of the CEOs polled indicated they had been involved in a legal dispute involving IP.
- The majority of CEOs have an understanding that IP drives their business model or is at least a top priority.
- When considering IP issues in greater detail, however, the survey results suggest that there may be a disconnect between the general understanding of the importance of IP and the CEOs more specific understanding as to the nature of each IP asset in their businesses and how to best leverage those assets.
- While many CEOs recognized the value of their own IP, there was less recognition of the role of third-party IP in their businesses, and how to minimize risks associated with such third-party IP.
Tech trends:
- Approximately two thirds of the CEOs surveyed have noted the transformation of traditional data centres — repositories of information and some basic services — into a more modern and agile Comprehensive Information Technology centres. The modern IT centre services the mobile workforce by providing always-on network connectivity, support for mobile computing and constant access to corporate data and social networking tools.
- Also of note is the increased understanding of the importance of virtualization: more than 90% of CEOs surveyed agree virtualization will drive efficiency and more than three quarters expect it will enable new types of enterprise applications.
Going green:
90% of CEOs surveyed believe their customers were either not at all or only somewhat concerned about energy use in their data centres. Accordingly, in a separate survey from PwC "Technology Executive Connections: Going Green: Sustainable Growth Strategies", it found that software executives noted that they have seen little demand from customers that they, as suppliers, need to go green (16%). However, this may change in the future. Going green requires transformation along every step of every value chain, including relationships with suppliers.
For more information on this year's PricewaterhouseCoopers (PwC) annual Report on Emerging Canadian Software Companies: The CEO Perspective please visit www.pwc.com/ca/CV2R.
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