To paraphrase Charles Dickens, Q2 2010 seemed like the best of times or the worst of times for the big software vendors. For Microsoft, it was the best of times; for IBM, it was (comparatively) the worst of times; and for SAP it was in between. IBM on June 19, 2010, reported total revenue growth of just 2% in the fiscal quarter ending June 30, 2010, with its software unit also reporting 2% growth (6%, excluding the revenues of its divested product lifecycle management group from Q2 2009). Those growth rates were down from 5% growth for IBM overall in Q1 2010, and 11% for the software group. In comparison, Microsoft on June 22, 2010, reported 22% growth in its revenues, with Windows revenues up 44%, Server and Tools revenues up 14%, and Microsoft Business Division (Office and Dynamics) up 15%. And SAP on June 27, 2010, posted 12% growth in its revenues in euros, 5% growth on a constant currency basis, and 5% growth when its revenues were converted into dollars.
What do these divergent results for revenue growth say about the state of the enterprise software market?
First, it indicates that the consumer part of the software market did better in the first half of 2010 than the business and government parts. Neither IBM nor SAP of course is a player in the consumer market, with IBM having sold off its personal computer division several years ago to Lenovo and neither vendor having a consumer software business. In contrast, we estimate that Microsoft gets about a third of its revenues from sales to consumers. That matters, because Microsoft (as well as Intel and PC vendors) reported that growth in consumer purchases of PCs (and related OS software) has been much stronger than corporate purchases. In addition, Microsoft reported that its consumer sales of Office grew by 51% while its sales to business grew by 8%, with revenues for Microsoft Dynamics growing by just 4%. Of course, consumers represent less than 10% of the total software market (even for Microsoft Office, consumers are less than 20% of total sales). But it is likely that other software vendors with sales to consumers (e.g., Symantec, McAfee) will post better growth than those who sell exclusively to business and government.
Second, SAP’s and IBM’s software results raise questions about how strong the recovery is in business software purchases. We are currently forecasting 2010 growth of 9% in business and government purchases of software in US dollars (check out our report, “US And Global IT Market Outlook: Q2 2010: Despite Financial Market Jitters, 8% 2010 Global ICT Market Growth Is On Track”). With IBM software representing about 7% of the total global software market and SAP about 4%, IBM’s 2% growth and SAP’s 5% dollar-denominated growth in Q2 2010 would seem to suggest our forecast is too high.
However, I think the outlook for the enterprise software market is more optimistic than the top-line revenue numbers for IBM software and SAP would suggest. Within IBM Software Group, WebSphere revenues grew by 17%, and Tivoli revenues by 18%. What hurt IBM’s software revenues were a 6% decline in Lotus revenues, a 2% decline in nonbranded middleware revenues, little or no growth in Rational and operating system revenues, and just 6% growth in information management revenues. In SAP’s case, license revenues grew by 14% in euros, and 8% measured in US dollars – better than its total revenue growth. Other software vendors had a similar pattern of stronger growth in license revenues than in total revenues. Lawson’s revenues in its quarter ending on May 31, 2010 grew by 6%, but its license revenues rose by 13%. Swedish vendor IFS had total revenues increase by 2% in Swedish krona (7% in US dollars), with license revenues rising by 20% (25% in US dollars). While IBM does not break out its software revenues by license vs. maintenance vs. subscriptions vs. services, its software is primarily sold on a license-based model so it probably also had stronger growth in license revenues than in total software revenues.
This matters, because growth in license software revenues pulls in its wake growth in maintenance and implementation services revenue. So, the stronger growth in license revenues at SAP, Lawson, IFS, and presumably IBM mean that total software revenues for these and other vendors should be stronger in Q3 and Q4 2010 than they were in Q2. That, along with the strong performance from Oracle, Microsoft, and many smaller vendors suggests that our forecast of 9% growth in the global software market is still realistic.