Data Doghouse - performance management, business intelligence, and data warehousing

Oracle is dragging down other canaries

Oracle (ORCL ) released its fiscal third-quarter results last Wednesday matching analyst overall expectations but spooking people with lighter than expected new application software licenses. The next day its stock was down about 8%.

With a jittery market, people are looking for any sign of a recession or a recovery depending on whether you are a bear or a bull. Analysts started downgrading other software stocks or decreasing price targets after the Oracle earnings announcement. Companies suffering guilt by association include: SAP ( SAP ), Informatica (INFA), Parametric (PMTC), Salesforce.com (CRM), Tibco (TIBX) , Kenexa (KNXA), RightNow (RNOW), Taleo (TLEO), VMware (VMW), CA (CA) and Citrix (CTXS).

That’s a wide spectrum of software firms but the general feeling (bear case) is that a recession is going to reduce IT spending. There are two key considerations, besides your normal due diligence, when deciding to buy, hold or sell on a software stock.

First, how much of its software sales are generated from the financial services sector. Financial firms are generally significant IT systems buyer but are very much impacted by this economic climate. One may argue that any merger & acquisitions (M&A) activity creates IT sales opportunities but that will not make up for projects delayed or cancelled. Many of these firms will be struggling with new regulations, liquidity issues and adjusting to changing or disappearing revenue streams rather than implementing major software projects.

Second, software firms that are dependent on big-ticket projects for their sales may be impacted by IT/business groups delaying these purchases or even outright cancelling them for this year. Do not fool yourself into thinking that cool new software is too important to delay. Most everything can be delayed if business conditions warrant.

On the flip side, downturns may be the best time for companies to invest for the future. You cannot cut yourself into growing your business. Slashing costs may help your bottom line in the short-term but it rarely ever helps you increase sales or improve the customer experience. Some companies may follow this advice but many will just be stalling or slashing costs. It’s the deer in the middle of the road at night syndrome – too frightened with the oncoming car to just jump out of the way.

Mark Veverka in his Barron’s “Plugged In” column this weekend titled “Oracle: No Profit of Doom” states “A disappointing top line is never a good thing for a software company, but Oracle's results weren't a huge shock. They were more a function of the economy than anything amiss at the Redwood Shores, Calif., outfit. But investors didn't see it that way… I'd suggest that investors pay more attention to Oracle's earnings expansion going forward, rather than obsess about revenue growth in a sluggish economy.”

The shares of software companies are already down 13.1% YTD as reflected in the iShares S&P GSTI Software Index (IGV). The downturn may continue until people see a light at the end of the tunnel. Historically, the end of the summer has been an opportune time to buy software firms selling to corporate customers.

Failing to meet expectations

  When teaching about data warehousing (DW) and business intelligence (BI) fundamentals to IT groups, business people or students at a university I always mention the failure rates of these projects that are often quoted. Those number are always over fifty percent and often much higher. If the failure rate was really that high then I doubt so many people at so many companies would be using DW/BI to operate and manage their businesses. The question arises as to what people mean by failure.

Most DW/BI projects are completed and business people use the resulting information. Clearly failure in this context does not mean that the technology used and the applications build are not working. We are not talking technical failure such as your dishwasher or cell phone not working. But many BI/DW projects have two traits that would lend credibility to the term failure.

First, many BI/DW projects are late and over budget. They get completed but the time, resources and costs are greater than anticipated. People often underestimate the level of effort to get requirements; have the business people agree on definitions, transformation and metrics (the more groups involved the longer it takes; develop data integration that includes cleansing and making data consistent; and, managing scope creep during BI (dashboards, reports and analytics.)  Depending on the amount of the miss in schedule, resources and costs, one would not five the BI/DW team an F grade but maybe a C- or even a D.

Second, and of more concern, is that BI/DW projects often fail to meet expectations. Everything might have gotten done as the IT group, systems integrator or software vendor said but the business just does not feel it was as promised. Maybe the expectations were that many more business people would have found the resulting BI reports/dashboard/analytics easier to use or of more value. So the shortfall is that only a small portion of the expected business users are customers of the BI solution. Maybe the business people expected a lot more analytics built for them rather than reports or “roll your own” analysis (self-service had been the industry buzzword for this.) Or maybe some of the critical information that the business was expecting has not become available or is not clean enough to use with the BI solution. I might give them a D+ on this but the business groups who paid for the BI project would porbably be inclined to give grade of F.

The usual suspects for this expectation shortfall is often shared by many people: the software vendors or systems integrator (SI) who were a little over zealous with their commitments; the IT group who were a little inexperienced or did not do enough due diligence with the vendor or SI promises; and, the business people who were naïve enough to believe the claims proclaimed in PowerPoint slideshows from sales people. If it looks too good to be true, it probably is.

It would be great if all it took was buying the right tool and your business would get comprehensive, cleansed, consistent and current business information from data created from across an enterprise and from interactions with customers, suppliers, partners and stakeholders.  You do need to buy tools but it does not happen in minutes, hours or days. It takes time and hard work.

For your next DW/BI effort do your due diligence, understand what it will realistically take to deploy what the business wants and, above all, set the proper expectations. I have heard many people tell me that is not what the business wants to hear but let me tell you the pushback in the beginning is nothing to what will happen if you fail.  And it does not matter how much you feel has been delivered, it only matters what the business, your customer, feels happened.

Fyi: The picture is of Tom Brady walked off the field at the end of this year’s Super Bowl where the New England Patriots failed to meet expectations. A perfect t regular season and many football records broken but the Patriots in the eyes of many fans and players failed because they lost one game.

Oracle’s “Miss”: The Canary in the Coal Mine

Oracle (ORCL ) released its fiscal third-quarter results last night. Net income was $1.3 billion or 26 cents a share with revenue of $5.3 billion or 30 cents a share excluding special items. That is increases of 30% in profits and 21% in revenue. These numbers matched analyst expectations. In addition, Oracle reaffirmed guidance in line with Wall Street’s expectations.

Oracle is a software titan and this level of growth is terrific. One may argue the merits and transparency of growth fueled by acquisitions versus primarily through organic but the results speak for themselves. The Street’s reaction was an 8% drop in Oracle’s stock in after-hours trading and a 5% drop in its rival SAP ( SAP ).

The reason for the drop in prices are the “miss” in the growth of new software licenses for business applications of 7% to $451 million versus analysts’ estimates as high as $550 million. The concern is that these licenses are the “canary in the coal mine” indicator of future growth and may be signaling recessionary pressures on IT spending in respect to Oracle’s business. Chief Financial Officer Safra Catz reinforced these anxieties when he stated "Customers got a little more cautious at the end of the quarter, given what was going on in the financial markets."

The Oracle bull case is that Oracle’s acquisitions strategy, its world-wide footprint, and its diversified software portfolio would shield it from a US-based recession or slowdown in IT spending. In addition, according to Goldman, Oracle derives “only” 13% of its revenue from financial-services market versus the 20% dependence that an average technology company. Clearly, this quarter, Oracle was able meet expectations and post impressive growth numbers (notwithstanding it being acquisition enhanced.)

The Oracle bear case is that none of the software titans are going to be except as the US recession or slowdown (that is another discussion) impacts IT spending. It is still an open question whether overall IT budgets are being reduced significantly or discretionary spending merely being delayed until companies get a better handle on this economic cycle.  Specific industries, such as financial services who are big IT spenders, are being hit hard. The stocks of IT outsourcers who are heavily dependent on financial-services have taken a beating. It would be wise to examine the exposure of any of your technology investments to the financial-services industry. This is not to discourage those investments but this due diligence should be at least a factor in your investment decisions.

Oracle’s results may be a good indicator of enterprise application sales to large customers but may not offer much insight into the SMB (small to medium size) market where, at least in the apps market, it is not a dominant player.

It would be naïve to assume any market segment, including business intelligence (BI) and data warehousing (DW) is except from reductions in IT spending, however, it would be equally simplistic to assume all IT spending is going to be reduced across-the-board, across all industries and across all sizes of enterprises. BI and DW projects have been rated in the top three priorities in IT spending surveys for the last few years. These projects, although not exempt from being reduced or postponed, are more likely to move forward because of their business ROI compared to other projects.

The canary appears to be fine for now based on Oracle’s results, but the reason we have them in the mine is to indicate immediate danger. Trouble may be growing, and it may appropriate to be cautious, but the canary has not dropped yet.

Disclaimer: No canaries were harmed in writing this post.

On-Demand (or SaaS) Index: The Bottom or More Pain

Momentum is fun on the rise but not so much fun on the decline. The clichés like “this time it is different” used to justify investing in companies solely for a trend, i.e. the latest hyped technology, seemed prophetic on the upside but a little naïve on the downside. Business 101 is not suspended in the long-run meaning companies need a solid business model that they execute well with customers and profits both growing.

When a company is young it may be investing in growing the business so it burns through cash and does not make a profit. During that period venture capitalists or their proxies are providing the cash for investment. If a start-up is lucky enough to go public during a Bull market then their stock price will soar when they go public. Unfortunately the inflated stock prices in a hyped technology sector sometimes fools people – employees, investors and even customers – into believing that business success is assured.

On the flip side, when we are in a Bear market the hyped technology companies are now grouped together and their stock prices get hit significantly. On the downside, people also disregard the business model and punish all the firms.

The On-Demand Index is down approximately 30% YTD (as of 03-17-2008) and the individual stocks are down approximately 45% from their 52 week high. The Dow is down 9.74% YTD, Nasdaq Composite index is down 17.92% and the iShares S&P GSTI Software Index Fund (IGV) is down 15.87%.

 

The ODI companies not start-ups looking for their first customers and dreaming of the catching the IPO train. They have already proven themselves enough with customers, sales and a business model to justify being a publicly traded company. But almost half of the companies are not profitable yet and the rest sport high P/Es (Price/Earnings) and even P/Ss (Price/Sales) ratios. High multiples are accompanied by high expectations. As some investors have discovered this earnings season, a company can have strong sales growth but still have its stock price drop significantly does not matter if it merely meet Wall Street expectations.

When examining whether to invest in these companies disregard the on-demand software hype and look at:

• What business applications the company offers
• What market segment is targeted:
  • Industry-focused, e.g. healthcare, or cross-industry such as CRM (customer relationship management), talent management, salary administration
  • Large company versus SMB (small to medium size business)
  • Domestic versus foreign
• Customers
• Competitors, both current and future prospects
• Potential acquirers
• Expectations
• Management and business execution

These companies are growth and sometimes hyper-growth story stocks. You have to be some faith in many things clicking in those companies but not blind faith. They are not the classic buy-and-hold stocks (maybe there is not any more of these anyways. If you buy maybe buy some options or stop losses to limit downside. Invest smartly.

fyi: The index is calculated on an equal-weight representation based on closing prices as of 12/31/07.

Disclosure: I have no current stock positions in any of the companies listed in this index and no current business partnerships.

BI from a student perspective

I teach data warehousing (DW) and business intelligence (BI) courses evenings for the Graduate School of Engineering at a university in the Boston area. I have been doing so for a few semesters and enjoy teaching students. It is fun getting the students’ feedback and their academic viewpoints which many times contrast with my day job, i.e. consulting with IT/business groups and software companies.

Last week, I found out that my students are sometimes skeptical of the “war” stories I tell to illustrate the state of many companies’ BI/DW efforts. A former student sat in on my latest class so she could talk to me afterwards about her co-op job and see if I was teaching my advanced course in the Fall. She said that she has been finding herself trying to keep from laughing when she is working with her company’s BI/DW applications and their users. She is amazed at how many data silos the company has created and how dependent the business people are on these data shadow systems, i.e. spreadsheets strung together to provide reporting and analysis.

She said she has listened to my stories with a grain of salt because she could not believe most companies had so many silos especially those who had invested in DW/BI. She had thought that will all the instant access to information we have via the internet about so many subjects that companies would have their internal information freely available to their employees. She was surprised at how difficult it is for business people to get timely, consistent and comprehensive data.  When we talked I laughed. I said I only wish I had been exaggerating in my “war stories”.

This discussion reminded me of the first class that I taught at the University. When the University recruited me to teach DW/BI courses they suggested that I use the same course materials that I was teaching IT and business people in the corporate world with. I assumed there would be some changes but I naively went to my first class loaded with my corporate slides. I was only fifteen minutes into that class when I realized I was in a separate reality from my corporate consulting day job. I was going through some very basic and high-level introductory slides but I realized I was not connecting with the students. It turns out almost all of the three dozen students there were full-time students without a background of working in corporations. When I was talking to them about corporate applications such as ERP (Enterprise Resource Reporting), SCM (Supply Chain Management) and CRM (Customer Relationship Management), they had no frame of reference to understand how business data was created and transformed in a corporation.

The students' frame of reference has also made it more difficult to build the case for data warehousing and data integration since they were having tough time understanding how scattered data is within a corporation and even more so when interacting with customers, suppliers and partners. As soon as I saw their blank stares I stopped using those slides and started discussing how businesses work, at least from a business data and process perspective. I used examples like iTunes, Amazon and being a student at a university to illustrate the creation and slow of data, as well as, what the business people in these enterprises would like to report on and analyze.

It is great getting other perspectives. Hopefully my corporate perspective helps my students. I know their academic perspective keeps me on my toes.

Disclosure: The picture is not the university that I teach at but rather where I am an alumnus. Rensselaer Polytechnic Institute (RPI.)

How to Tap IT's Hidden Potential

This week's Wall St. Journal Business Insight section looks at the glass wall between IT and the rest of the company, which can lead to missed opportunities and wasted money. The article, How to Tap IT's Hidden Potential, is by Dr. Amit Basu and Mr. Chip Jarnagin.

I teach at a university, provide training to IT groups and consult with companies on their business intelligence and data warehousing issues, so a lot about this article resonated with me. I appreciated that one of the authors' recommendations was:

“Create an IT portfolio by evaluating risks and returns. Just as an investor balances risk and reward in constructing a portfolio of investments, management should analyze the costs, benefits and risks of all IT projects to determine how to get the most benefit from the dollars invested in technology.”

I’m constantly telling my students and clients that enterprise data is a key business investment, so it should be treated like an investment portfolio. They should set priorities, determine budgets and expect a return on investment. The portfolio should include any project that involves data - from its creation in your transaction systems all the way through reporting and analysis.

It takes a lot of preaching to make the students and clients who are enamored with technology to realize that the business does not really care about the how (technology) but the what (results). It takes continual reinforcement just like any other addict who is trying to break a bad habit.

Apparently, business intelligence/data warehousing is where a lot of IT dollars will be allocated in 2008, so let’s hope companies “get” this investment connection and make it more than just an analogy.

(Ron Dimon also blogged about this article.)

Suites (BI, data integration or data modeling): Boom or Bust?

Microsoft (MSFT) vaulted into dominating PC applications when it developed its Office Suite concept a long time ago. Before this suite people bought best-of-breed applications for word processing, spreadsheets, presentations and personal databases. Microsoft arguably did not have the best of any of these applications but had a set of “good enough” applications that (kind of) worked together and were simpler, as well as, cheaper than buying the best-of-breed products. Lotus 1-2-3, WordPerfect and Aldus where the best products once but they have long since faded from most people’s memories. Since becoming the dominant player, Microsoft has increased its Office Suite’s functionality and complexity over the years.

In data warehousing and business intelligence, software companies have introduced suites for various categories of software including BI, data integration and data modeling. Each category of suites were created after software companies initially developed best-of-breed products that targeted specific or niche BI, DI or data modeling tasks. The vendors expanded each of these niches until they overlapped other niches. Over time, either through internally developed product extensions or very commonly via acquisitions, companies developed software suites that provided the functionality of many niches. BI pure-play vendors such as Hyperion Solutions, Business Objects and Cognos developed their BI suites and extended their footprint by acquiring dozens of smaller companies and absorbing their niche products. These companies were themselves bought by the software titans: Oracle (ORCL), SAP (SAP) and IBM (IBM). Besides BI suites, these same software titans have also put together data integration and data modeling suites.

The conventional wisdom is that the suites sold by the software titans will dominate their markets. Based on industry analyst market evaluations and the amount of press released on these products you would think history was repeating itself, i.e. these products are dominating their software category just as Microsoft has done with Office in the desktop application market. There are similarities. The most obvious is that these suites do eliminate the need to buy multiple best-of-breed products and then integrate them together. But the flip side is that these suites have, as they have expanded functionality, gotten more complex and costly.  Microsoft Office has also gotten more complex and costly but there is one significant difference between Office and these new suites: Office because pervasive first and then got more complex and costly. Microsoft captured the market and became the only viable option for companies. It did that by saving companies time, money and resources. BI, data integration and data modeling suites have not become pervasive and there are plenty on options for companies to deploy. History may not repeat itself.

Companies are looking for BI and data integration software that provides the functionality they need but at a reasonable cost in terms of people, skills (both IT and business user), time and budget. The suites may be the most features packed offerings available in the market but that does not mean they are the best fit for everyone. These suites have not become pervasive for a key reason: too high a TCO (total cost of ownership). This provides a market opportunity for software vendors such as MicroStrategy (MSTR), Actuate (ACTU), SAS, Dimensional Insight, QlikTech, Information Builders, SAS and others. In addition, TCO is a prime driver for the interest being shown in open source and On-Demand (or SaaS software-as-a-Service) software offerings for BI and data integration.

Will the software titans win as conventional wisdom implies? Will it become Microsoft’s market based on its dominance of the Office applications, in particular, Microsoft Excel? Will some company breakthrough and become pervasive by offering BI and data integration at a reasonable TCO (of course they will likely be acquired before they become pervasive!)?  Or will the market continue to be fractured?

The journey will take time. There will be hype and surprises.

Features alone will not win the battle.