Earnings warnings roil software sector

A market consolidation in the EAI sector could be coming

Citing purchasing delays and the troubled economy, a flurry of software vendors have already warned that the numbers will be grim later this month when they release their financial results for the quarter that ended June 30. In the particularly hard-hit enterprise application integration (EAI) sector, the across-the-board shakiness reflects the deeper problems of a market that's likely to consolidate within the next few months, analysts said.

While PeopleSoft Inc. unexpectedly lived up to earlier forecasts despite pressure from Oracle Corp.'s hostile takeover bid (see story), fellow enterprise applications maker Siebel Systems Inc. warned for the second quarter in a row that it will miss its earlier guidance. Systems management software developer BMC Software Inc. also fell short of expectations for its most recent quarter, as did all four of the major pure-play EAI vendors: Tibco Software Inc., WebMethods Inc., SeeBeyond Technology Corp. and Vitria Technology Inc.

Still, while most of this quarter's financial warnings are coming from software companies, analysts said the problems are concentrated around certain companies and niches and that the software sector overall remains healthy.

"I'm more looking at the glass as half-full. In general, I'm seeing a lot of buying," said Joshua Greenbaum, an analyst at Enterprise Applications Consulting in Daly City, Calif.

In the turbulent enterprise applications market, top vendors SAP AG, Oracle Corp., PeopleSoft and J.D. Edwards & Co. are all holding on, said Greenbaum, who sees Siebel's string of rough quarters as a company-specific issue. "Siebel wants to blame the economy for the trouble, but I really think fundamentally they have some serious holes in their product strategy that are really coming home to roost," he noted.

While other developers offer clients full portfolios of applications to handle a variety of corporate operations, Siebel has remained focused almost exclusively on CRM -- and that focus will continue to cost the company sales as customers increasingly seek integrated suites, Greenbaum said.

Gartner Inc. analyst Tom Topolinski disagreed that Siebel's future is that bleak.

All of the CRM vendors are adjusting to a market that will never again grow at the rate it did in the late '90s, and none of them has yet perfected its formula for projecting sales in the new environment, said Topolinski.

But Siebel has staked out a different direction than others at the top of the CRM pack, he acknowledged. While SAP, Oracle and PeopleSoft focus on internal integration of their own end-to-end software products, Siebel is offering customers the tools to buy products piecemeal and externally integrate them. Although the suite approach is in vogue at the moment, it's too early to tell which tactic will prove most successful in the long run, Topolinski said.

The rate at which sales are declining has slowed, but CRM vendors won't hit bottom and begin to turn the corner toward growth until the third or fourth quarter of this year, he said. Gartner estimates that new worldwide CRM license sales declined 25% in 2002 to $2.8 billion and will fall another 16% in 2003 before finally ticking up for a 1% growth rate in 2004.

The EAI market has unique challenges: While surveys consistently show integration as a top software spending priority for IT departments, the composition of the sector has changed radically, analysts say.

Large vendors, including IBM and BEA Systems Inc., have carved a share out of the integration market. At the same time, a standards-based, Web services approach to integration has gained favor. Customers aren't interested in buying expensive software products to solve their integration problems if those problems are going to go away within the next few years because of Web services functionality, said Janelle Hill, an analyst at Meta Group Inc. in Stamford, Conn.

"It's a market that's a mess. There's a number of trends that are going on simultaneously that are negatively impacting these players," she said.

Since the pure-play EAI companies still have technology that's often more advanced than that offered by their larger rivals, Hill said she expects most EAI products to survive, even if the companies behind them can't. She anticipates that by the end of this year, consolidation will sweep through the market, leaving one or two dedicated EAI vendors standing -- Tibco and WebMethods are the strongest candidates, Hill said -- while the rest fade either through acquisition or by refocusing on other development areas.

With their technology being commoditized and applications vendors paying closer attention to built-in integration features, there may not be much EAI developers can do to stem their dwindling sales, Greenbaum said. "They're on a long, slippery slope down."

With even the strongest companies sensitive to the tough software sales climate, the vendors' bane can be the customers' boon.

J.E. Henry, CIO at movie theatres operator Regal Entertainment Group, recently went shopping for a CRM system for the company's Denver-based Regal CineMedia advertising subsidiary. After evaluating several vendors, he settled on PeopleSoft's technology as the best match for Regal CineMedia's needs, but all of the vendors he talked with offered more flexibility than was common two years ago.

"The software vendors are very open to negotiating, as far as pricing and contract terms," he said. "That tells you something about the market."

Copyright © 2003 IDG Communications, Inc.

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