Software

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Market analysis

The Software sector had mixed results in terms of year over year and quarter over quarter in Q2 2016. Year over year it grew by 5%, but sequentially it declined (4.1%). In terms of net income it was a really poor quarter, with sharp declines in net income year on year for Intuit and Symantec. VMware and SAP were the bright spots, with 54.1% and 75.2% increases in profits year on year and 64.6% and 44% sequentially, respectively.

Despite poor company performance, worldwide spending on information security products and services is expected to reach US$81.6 billion in 2016, an increase of 7.9% over 2015. Consulting and IT outsourcing are currently the largest categories of spending on information security. Until the end of 2020, the highest growth is expected to come from security testing, IT outsourcing and data loss prevention (DLP). Preventive security is also expected continue to show strong growth, as many security practitioners continue to have a buying preference for preventive measures. However, solutions such as security information and event management (SIEM) and secure web gateways (SWGs) are evolving to support detection-and-response approaches.1

The average selling price for firewalls is expected to increase by at least 2% or 3 % percent year over year until the end of 2018. This is driven by the market benefiting from higher demand for high-end equipment among cloud and other service providers, due to larger bandwidth needs and an increasing number of devices. While vendor competition continues to put pressure on pricing, enterprises, service providers and web-scale organizations are moving toward deploying bigger and more expensive firewalls. As a result, the deployment of large firewalls by cloud service providers will remain an important source of revenue growth for vendors. By 2018, 90% of organizations will implement at least one form of integrated DLP, up from 50% presently.1

While global software spending is forecasted to hit US$332 billion in 2016, many organizations can cut spending on software by as much as 30% by implementing three software license optimization best practices. The keys to reducing software license spending are application configuration optimization, recycling software licenses and by using software asset management (SAM) tools. Achieving software savings is a complex exercise, but the potential savings are too large to ignore.2

Automated software license optimization is a relatively new discipline and most organizations are at lower levels of maturity. The variety of license entitlements also makes it tough for IT leaders to spot savings, especially in environments with many software publishers and titles. But it's worth pursuing, as spending reductions contribute directly to the bottom line. Organizations with mature software license optimization processes that were automated using SAM tools reported reducing software expenses, on average, by 30%.2

It is expected that more than US$1 trillion in IT spending will be directly or indirectly affected by the shift to cloud during the next five years. This will make cloud computing one of the most disruptive forces of IT spending since the early days of the digital age. The market for cloud services has grown to such an extent that it is now a notable percentage of total IT spending, helping to create a new generation of start-ups and "born in the cloud" providers. The average amount of cloud shift in 2016 is expected to reach US$111 billion, increasing to US$216 billion by 2020.3

In company news, Adobe Systems has gained momentum led by strong demand for digital experience solutions. Such demand drove revenue growth of 20% in Q2 2016 and resulted in quarterly revenue of US$1.4 billion. Strong adoption rates in Creative Cloud and Document Cloud helped push digital media annualized recurring revenue to US$3.41 billion at the end of the quarter. Operating income leapt 78% in the quarter on a year-over-year basis. More than 80% of Adobe's second-quarter revenue was of the recurring variety, which gives the firm considerable visibility into its future operations. Adobe's asset-light business model enables it to generate huge free cash flow. Adobe also has expansion opportunities by upselling of current customers.4

Capitalizing on another major trend, SAP has been already using IoT-based systems, and it is increasingly focused on the Internet of Things (IoT). It is working on various offerings to support customers already using IoT-based systems and also working on a future wave of SAP IoT implementations. It is currently seeing three key uses for the technology: (1) For the industrial customers using heavy equipment and aiming to optimize operations cost, maintenance cost and turnaround time; (2) For the aftermarket, which includes end-consumer and other businesses which have traded a product and are getting feedback to improve design, marketing and create better engagement with customers; and finally, (3) For customers with large moving assets such as fleets, cars, trucks, who are using the service to track and trace on a real-time basis. These comprise the three segments which SAP plans to target to get its next leap in revenue.4

1. Gartner.com, Aug 2016
2. Gartner.com, July 2016
3. Gartner.com, July 2016
4. Seekingalpha.com, July 2016