Software
Market analysis
Worldwide IT spending is projected to total US$3.7tr in 2013, a 4.2% increase from 2012 spending of US$3.6tr. The 2013 outlook for IT spending growth in US dollars has been revised upward from 3.8% in the 3Q12 forecast.1
The public cloud services market is forecast to grow 18.5% in 2013 to total US$131bn worldwide, up from US$111bn in 2012. Infrastructure as a service (IaaS), including cloud compute, storage and print services, continued as the fastest-growing segment of the market, growing 42.4% in 2012 to US$6.1bn and expected to grow 47.3% in 2013 to US$9bn.2
Adobe reported solid results driven by strength in the Digital Media and Digital Marketing segments. Management noted that approx. 10,000 users per week (versus approx. 8,000 per week in Q3) subscribed to Creative Cloud during Q4, reflecting approximately 326,000 total subscriptions (versus the company’s guidance of 325,000) that have transitioned to the subscription-based Creative Cloud. However, analysts are cautious on Adobe’s transition to a subscription-based licensing model for Creative Suite and on Adobe’s investment in digital marketing opportunities. Although they view revenue growth as the main driver of future operating income growth, they also believe that many of Adobe’s solutions are maturing, the combination of which would reduce revenue and EPS growth as compared to the past decade and, therefore, limit multiple expansion.3
Intuit reported a plunge in its profit this quarter vis-à-vis last year as its revenue declined while costs escalated. Looking forward to the next quarter, Intuit expects earnings of US$2.83 to US$2.88 per share, and revenues of US$2.22bn to US$2.28bn.4
Microsoft reported December quarter results essentially in line with consensus expectations. Windows returned to double-digit growth in spite of a decline in PC units, but analysts are skeptical on whether Microsoft can maintain this momentum going forward in a weak PC environment. Windows 8 does not seem to have reversed the continued decline in PC shipments, but contribution from Surface and continued strength in volume licensing should help drive growth. Microsoft’s penetration in the tablet space remains modest, but revenue from this segment is incrementally positive and should help offset the decline in PC units. PC shipments negatively impacted Microsoft’s Business Division growth in 4Q12, but analysts expect the release of Office 15 to be a tailwind.5
Oracle reported strong fourth quarter results, with the applications business growing 30%+. The impressive applications performance likely reflects growing customer traction for the Fusion product cycle. Oracle's outlook is mixed as 3Q EPS and new software license/subscription guidance assumes slower growth, partially owing to tougher comparisons, but could also reflect a cautious viewpoint toward current IT spending trends. Analysts believe Oracle's internally-driven new product-cycles are gaining traction within the base, and over the next 12-18 months it should start yielding greater operating leverage and serve as a catalyst to drive the company’s stock.6
SAP posted 4Q12 results with top line metrics and operating margin largely in line with the company’s pre-announcement. On the positive side, SAP registered 13% growth in 2012 Software and Software-related revenue, above the 10% to 12% guidance; registered triple-digit booking growth in 4Q12 from HANA and cloud; its quarterly revenue exceeded €5bn for the first time; and the company issued 2013 revenue growth guidance that is more than double the industry rate. However, the company missed its 2012 operating margin guidance owing to increased investments for future growth.7
Symantec reported a solid quarter and announced the company’s new strategic and capital allocation plans. Under the new direction, Symantec will seek to sell integrated suites of its products and streamline the company to deliver on 5% revenue growth and 30% operating margins. Although analysts are encouraged by the improving momentum, they remain cautious as they believe that the strategic plan does not materially alter the product portfolio of the company, and leaves it susceptible to the same growth risks that it has been exposed to in the past. PC demand trends continue to be weak, which is a negative for its endpoint business, and the storage business will continue to be impacted by UNIX headwinds.8
VMware delivered a positive quarter, but announced a below-Street FY13 outlook. The company also announced a two-tiered realignment plan to allocate necessary resources to core areas such as SDDC, cloud and end-user computing, while de-emphasizing non-core (i.e., SlideRocket). New management believes it's the right time for this two-tiered alignment to capture long-term growth.7
- Gartner press release, Jan 2013
- Gartner press release, Feb 2013
- Credit Suisse, Dec 2012
- Nasdaq.com, Feb 2013
- Credit Suisse, Jan 2013
- Oppenheimer, Dec 2012
- Oppenheimer, Jan 2013
- Deutsche Bank, Jan 2013
Revenue and gross margin
Software companies reported a strong 4Q12, with all the companies registering revenue growth both sequentially and YoY, except for Intuit which had a 5% YoY decline in revenue. Intuit’s decline was attributed to lower accounting professional revenues and other business revenues, which includes Quicken, Intuit Health and Intuit’s global business. Adobe’s revenue was flat YoY, but sequentially it registered revenue growth of 6.7% due to record Adobe Marketing Cloud and Document Services revenue. Microsoft’s revenue grew by 34% sequentially and 2.7% YoY, driven by the launch of Windows 8 and Surface and strong sales of Server and Tools products and services. Oracle’s growth in revenue was due to an increase in software business revenues, which was attributable to growth in new software licenses and cloud software subscriptions revenues as well as growth in software license updates and product support revenues. SAP registered 33.1% sequential growth and 8.5% YoY growth in revenue despite a continued uncertain market environment. Revenue growth was strong in the AP region, while EMEA also reported an impressive quarter. Growth came from key innovation areas, namely SAP HANA, Mobile and Cloud. Symantec’s 4.4% YoY growth in revenue was driven by strength in the EMEA region and information management and license revenue. VMware’s revenue grew US$233mn YoY due to a 16% growth in Licenses revenue and a 27% growth in Services revenue.
Gross margin for Software companies improved sequentially, backed by higher revenues, with the exception of Microsoft which had a marginal decline. Microsoft’s decline in gross margin was attributable to increased costs related to the manufacture of Surface and higher headcount-related expenses. Gross margin for Adobe, Symantec and VMware was almost flat sequentially. When compared to the same period last year, gross margin for Software companies declined except for Microsoft, Oracle and VMware. Companies continue to innovate and offer better upgrades to existing software, leading to a higher cost of sales and, hence, lower gross margin.
R&D expenditure
Software companies continued the trend of increasing R&D expenses, with all the companies in the analysis raising their R&D expenditures this quarter except for Oracle, which had a marginal decline of US$2mn sequentially, and Adobe, which registered a YoY decrease of US$0.4mn. Microsoft registered a 6.6% YoY growth in R&D expenses, reflecting an increase in headcount-related expenses primarily related to the Entertainment and Devices Division. Oracle’s 8.8% YoY increase in R&D expenses was also related to increase in employee-related expenses, including salaries, benefits and stock-based compensation from increased headcount. SAP and VMware reported a significant YoY growth of 14% and 23.7% respectively in R&D expenditure.
Net income
Net income for Software companies showed a significant improvement QoQ. However, when compared to the same period last year, all the companies registered a decline except for Adobe, Oracle and VMware, which reported a net income growth of 28%, 17.7% and 2.7% respectively. Adobe’s growth in net income was attributed to lower operating expenses largely due to the absence of restructuring costs this quarter. Net income for Intuit improved from US$(19)mn in the third quarter to US$71mn in the current quarter, driven primarily by higher revenues. However, the profit was lower by US47mn when compared to 4Q11 as the company incurred lower operating expenses in the year ago period. Microsoft’s YoY decline in revenue was primarily driven by other expenses which consisted of interest expenses and losses related to derivatives and foreign currency measurements. On a sequential basis, Microsoft recorded a profit growth of 42.8% as the holiday season resulted in a significant growth in revenue for the company. Better than expected top line coupled with improved expense management led to the sequential growth of net income for Oracle, SAP and Symantec. On a YoY comparison, SAP and Symantec reported a 10.6% and 11.7% decline in net income. Net income for VMware increased from US$200mn in 4Q11 to US$206mn in the current quarter.
Inventory and receivables
Days sales in receivables (DSO) increased sequentially for all the companies in the analysis. Intuit, Symantec and VMware had significant increases of 25 days, 15 days and 26 days respectively. These increases were directly related to a sharp rise in receivables. Receivables for Intuit increased from US$184mn in the previous quarter to US$541mn in the current quarter, while for Symantec it increased from US$735mn to US$1,081mn and for VMware receivables increased from US$684mn to US$1,151mn. Adobe, Microsoft, Oracle and SAP reported DSO in line with previous quarters,registering an increase of 1 day, 5 days, 2 days and 3 days respectively.
EPS
Software companies showed an improvement in EPS this quarter. Adobe and Intuit’s record revenue and lower operating expenses led to the sequential growth in their EPS. The December quarter is always a high revenue quarter for Microsoft due to the holiday period which led to 43.4% sequential growth in its EPS. SAP and Symantec reported lower EPS YoY, while there was significant growth in sequential EPS for Oracle, SAP, Symantec and Vmware.
P/E ratios for Software companies were in line with the previous quarter. Adobe’s P/E increased marginally to 20.85x as its transition to subscriber revenue has been decent so far, but the process is still at a very early stage. Microsoft bears the negative impact of a slowing PC environment, leading to a decline in P/E this quarter. Analysts feel more touch devices, stability in the PC market and a reacceleration of earnings would drive the company’s stock. Oracle’s stock price faces a threat from deterioration in IT spending and accelerated share losses from cloud-based alternatives leading to low investor confidence and, hence, a lower P/E. P/E for SAP improved from 22.26x in the previous quarter to 26.37x in the current quarter. Analysts feel that SAP is likely to show positive trends and believe that this is already reflected in the stock as it currently trades at a premium compared to market competitors. Investors are positive on Symantec’s new strategic plan of reducing complexity across every facet of the organization leading to an overweight rating to its stock.
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