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On-Demand Index: YTD is in the green (and it's not St Patty's Day)

On-Demand Index spiked even higher than the jubilant market yesterday gaining 8.43%. With yesterday’s gain the On-Demand Index moved into a positive territory for YTD (year-to-date) returns just as it did for two days last week. The index has matched the broader S&P Software Index with a 3.88% YTD.

From an IT market perspective, on-demand software or software-as-a-service (SaaS) offers compelling TCO (total cost of ownership) characteristics versus traditional (on-premise) software which is why most IT research analyst firms estimate this type of software will fare well during recessionary and cost-cutting times. That’s the glass is half full argument but the other side, i.e. the glass is  half empty,  is that the new business model does not offer the high return (cash flow and profits) of the traditional software vendors.

Add in many of these firms being relatively new, half not making a profit, some still needing availability to credit markets, still high expectations (high P/Es) despite stock prices being hit hard last year and a recessionary constrained IT spending environment.

There is a lot of great software by companies in this index that offer terrific value to their customers but these stocks continue to be momentum plays in this type of stock market regardless of fundamentals. These firms may be tempting acquisitions if the price is right but since many of these firms’ software being industry specific they may be attractive to non-traditional IT players as acquirers if M&A activity occurs.

The following chart lists the ranked YTD perfromance by company:

Business Intelligence (BI) Index: Treading Water

The Business Intelligence (BI) Index has outperformed the major stock indexes YTD on a relative basis but lags behind the S&P Software Index (IGV). The BI Index kept pace with the NASDAQ yesterday.

The YTD performance of the individual company stocks comprising the index is listed below.

Sun (JAVA) is the top gainer YTD but with no substantial changes to its business model it appears that after being the poorest performer in the index last year, its rise may just be an oversold bounce. There are a few factors to cause caution if considering jumping on this badwagon: hardware budgets are one of the first targets in IT budgets to be slashed, open-source source's impact of company of Sun's size not yet proven and no significant services group to smooth out perfromance.

The bottom dwellers YTD are the two analysts firms: Gartner(IT) and Forrester (FORR). These firms actually had slight gains in 2008 while most of the companies they review were experiencing bear market returns. Just recently  investors have become concerned that these firms' services and consulting were also likely to get impact by the reduction in IT spending. Although we may feel their advise is invaluable, their services are a nice-to-have rather than essential.

The financial industry, by some estimates, accounted for 20% of IT spending prior to this bear market and whatever remains of this industry after the recovery is likely to be more frugal in its spending and will have less money to spend.

Another bottom dweller is Hewlett Packard (HPQ).  HPQ and its CEO Mark Hurd had been Wall Street darlings until recently.  Selective acquistions, cost-cutting and missteps by competitors have fueled handsome revenue and income growth during his tenure. But the weight of the recession and its impact on IT spending, particularly in hardware (servers, PCs and storage), has finnaly caught up with the stock. Excellent company and management but the depth and duration of the recession will determine where it goes from here.

The software companies in the BI index, although many being in the middle of the perfromance rankings YTD, alre likely to fare better and rebound quicker than other industries and even other high tech firms.  

On-Demand Software Index: A selective bounce

The On-Demand Software Index continues to outperform the major stock indexes on a relative basis but remains behind the S&P Software Index (IGV). Yesterday the on-demand software index beat the high flying NASDAQ.

It is interesting to examine the YTD performance of the individual company stocks comprising the index (below.) Overall the index is down -10.28% YTD, however, half the stocks are break-even or positive. This split in performance is most likely related to the usual factors impacting growth stocks: industry, competition and growth projects.

With our current economic conditions a company’s financial picture in the regards to cash flow/debt, profitability and capital requirements will be used to ascertain a company’s survivability.  In addition, it is critical to determine if a company’s products/services are likely to be maintained or even expanded by its customers and prospects. For example, more scrutiny will be placed on prospects’ finances than usual.

For these reasons, we have discussed earlier that companies such as Blackboard (BBBB) and Constant Contact (CTCT) are servicing markets that should continue to generate growth even through a recession.

Great BI, or Getting By? [Webinar] - Today at 2pm ET

Sorry about the late notice but I am speaking in a very interesting webinar today. Besides listening to me, you will hear an intriguing case study on Gallup Organization using BI.

Date: March 5, 2009
Time: 02:00PM ET
Hosted by: Information Management (formerly DM Review)
Sponsored by: Oracle

Register for today's webinar

In today’s uncertain global economy, companies worldwide must make tough decisions to make their businesses more profitable by concentrating on the most important projects and running more efficiently.

To help you meet these challenges, register today for our LIVE WEBCAST.
 
Join Oracle and the Gallup Organization to find out how Gallup uses Oracle BI to maximize the value of their customer interactions.

You will learn:

• How to rationalize your BI products to reduce your total cost of ownership;
• How the latest advances in BI infrastructure can process exponentially increasing data volumes without affecting query times;
• Ways to take advantage of the latest predictive analytics and BI applications and empower end users to create their own reports without risking data integrity;
• How to use BI to drive better decisions about how the business should be run.

Speakers:

• Jim Collison, Technology Manager, Gallup
• Rick Sherman, Founder of Athena IT Solutions
• Glenn Hoormann, Director, Optimum Solutions
• Tobin Gilman, Senior Director of Business Intelligence, Oracle’s EPM & BI Global Business Unit