In an environment where they forecast IT spending to be down 4% in '09, Goldman anticipates software spending to be flat with '08.
Though spending will be flat, there will be winners as customer spending should consolidate towards larger companies. Expect Suite providers to continue to gain share at the expense of 'best-of-breed'. Moreover, 'must-have' software segments including security, storage, and tangible ROI technologies (e.g. virtualization) should garner increases at the expense of 'nice-to'have applications (e.g. SFA).
They are bullish on CA as they see continued margin expansion due to their leveraging their deep product suite, coupled with 60% of revenues derived from maintenance. In addition, they like Citrix's product suite and cost discipline.
Though concerned about MSFT and the 'anemic' PC environment Goldman expects a MSFT RIF in the 10% range to reign in expenses. The stock is trading at a P/E of 9x '09 earnings...a deep discount to the Software peer group. If the RIF happens, they like the value of the stock at today's prices.
Similarly, they like Oracle, BMC and Symantec as they offer mission critical products and have disciplined management that is showing expense sensitivity (maintenance revenue of 46%, 55% and 47% help too) in a difficult environment.
Goldman has a SELL rating on Salesforce.com as they view their products as not being mission critical. Moreover, an intensifying competitive environment augers potential price erosion that may hinder growth. The other sells are on CommVault (concerned about management discipline) and Akamai (pricing pressure).
My take-aways were:
1. It was revealing that the most innovative, and potentially disruptive, technology discussed was virtualization.
2. An industry average P/E of 12x is at historic lows
3. The reliance these vendors have on maintenance revenues highlights that leading software vendors really are operating SaaS business models. The predictability is great, though it's amazingly difficult, absent large M&A deals (did anyone say Yahoo) to deliver growth above the mid-teens.