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Market analysis

Six of the seven Software companies in our scope (Adobe, Intuit, Microsoft, Oracle, SAP, Symantec, VMWare) experienced either flat or declining revenue year over year in Q2 2015, even though sequentially five out of the seven companies reported positive growth. The largest sequential gains were reported by Oracle (+14.8%), SAP (+8.3%) and Adobe (+4.8%). Adobe had the largest year-over-year gain (+8.8%) due primarily to an increase in subscriptions. In terms of net income, Adobe reported the largest year-over-year gain of 67%. Microsoft reported the largest loss in net income
(169.3%), mostly due to a US$7.5bn impairment related to the acquisition of the Nokia Devices and Services business.

Geographically, growth in the software market was spearheaded by the US, followed by EMEA (Europe, Middle East and Africa). Asia-Pacific (APAC) showed mixed results with China's software market slowing in the first half of 2015, growing by 17.1% compared to 21.0% growth achieved in the first half of 2014.1

Product value is shifting from device hardware to the software running on the device. The Internet of Things (IoT) is turning many manufacturers of devices into first-time software vendors using licensing and entitlement management (LEM) solutions to protect, differentiate and monetize their offerings. The key differentiator for manufacturers is the software. Applying the right licensing strategy is critical to monetize this value. With over 25 billion 'things' in the marketplace, software revenue of US$5 from each of the installed units would translate to additional revenue of US$125bn.2

Spending in the enterprise software market is expected to decline 1.2% in 2015 to reach US$310bn from US$314bn in 2014. This is a revision from the 2.3% growth previously forecast for 2015.  The projected decline is due to software as a service (SaaS) vendors keeping prices low to gain market share and also due to the strengthening US dollar, which will greatly reduce earnings realized in non-US currencies.3

Microsoft revenue in Q2 2015 reached US$22.2bn, a year-over-year decline of 5.1% over US$23.4bn in Q2 2014 but a sequential gain of 2.1% over US$21.7bn in Q1 2015. Among the top performing segments, Surface revenue grew 117%, driven by Surface Pro 3 and the launch of the Surface 3. Commercial cloud revenue grew 88%, driven by Office 365, Azure and Dynamics CRM Online. Growth was partly offset by Windows OEM revenue, which decreased 22% due to PC market declines following the XP end‐of‐support refresh cycle. Despite positive revenue performance, Microsoft incurred a large net loss of US$3.2bn in Q2 2015. This includes the impact of a US$7.5bn impairment charge related to assets associated with the acquisition of the Nokia Devices and Services business, in addition to a restructuring charge of US$780mn. There was also a charge of US$160mn related to the previously announced integration and restructuring plan. In total, Microsoft incurred US$8.4bn in charges. The strengthening of the US dollar also had a significant impact on quarterly results.

Adobe reported revenue of US$1.2bn in Q2 2015, a year-over-year growth of 8.8% and a sequential growth of 4.8%. Subscription revenue saw an impressive growth of 62%, however it was largely offset by a 43% decline in product revenue. Services and support revenue grew by 1%, but cost of revenue for services and support increased disproportionately by 30%. This was primarily due to increases in compensation and related benefits driven by additional headcount and third-party fees to support the increase in Adobe’s professional services business. Geographically, Americas and EMEA saw increases in revenue, driven by the Digital Media and Digital Marketing segments. The increase in EMEA revenue was partly offset by the US Dollar’s rise against the Euro, the British Pound and other EMEA currencies. Revenue in APAC declined due to the Digital Media segment, which saw a decline in perpetual license revenue. Adobe’s Q2 2015 net income of US$148mn was 67% higher year over year and 74% higher quarter over quarter. The improvement in net income was primarily driven by higher revenue, higher interest and other income and lower interest expenses.


1China Daily, Jul 2015

2Gartner Press Release, Jul 2015

3Gartner Press Release, Jun 2015