Friday, October 10, 2008

Software industry, up or down?

As I visit some old friends from my JBoss days a lot of them ask me what the whole crash means for them.

Here are some back of the envelope factors.

Negative. IT is a servant of the financial industry. Conventional wisdom says that there is no way but down. Consider SUN valued at a paltry 3.8B with 3B of cash. It is a poster child. Private equity and management should take out this company. Who's got $800M? anyone? I should leverage right now with a few private equity friends and go buy it out...

Very Negative. Widely known dirty secret of the software industry is that earnings were 30% investment revenues. These are now strongly negative but probably wont be realized. Nevertheless that is a drop in 30% in earnings, possibly more as the markets tank. If you realize a -20 when you were clocking +10 then the hit on earnings is -60%. Ouch... RHT was trading at 24 this summer it is now at 13... yep, numbers work out.

Very positive. With all the banking consolidation going on, plus the amount of regulation that will surely rain on this activity, my software integrator friends will be busy for many, many, many years to come.

When the first financial world war (FFWW) is over and the bombers have stopped levering the field we will need to rebuild. The software skills, the integration skills will come in handy. There is a bright future for my friends. And I feel good about that.

From an investor standpoint. Adjust Cash flows on the way down. Look for maintenance revenue. In a crash like this people will not pay new licenses but will certainly continue paying maintenance. Buy Oracle, Short MSFT. IBM should fare well in the long run (services).

4 comments:

Daniel Brum said...

2 good reads on a related topic:

http://blog.jeffhaynie.us/

http://www.techcrunch.com/2008/10/10/sequoia-capitals-56-slide-powerpoint-presentation-of-doom/

Marcf said...

interesting.

Short version
get the money now, sell now, fire now, recomp now.

any questions?

I think this just means longer time to exit. I think the VC community is going to split. With monetary levels going down, I suspect most VCs will die a quick and horrible death. I can see that the tier 1 will bumble along, looking more like the more patient LBO private equity, their expectations of return is going to go down as the time-frame expands. It will however be a cottage industry at the fringe of innovation and the best should in fact profit from this consolidation.

pcleddy said...

fun stuff, i am a sucker for the doom and gloom, i know. if anything, good for the imagination: "Transition to the new currency will be at terms highly beneficial for those banks, companies, citizens, allies and other "preferred allies and friends" of the US who will get One New Dollar for each "old" dollar. Then, certain powerful holders of dollar-denominated instruments - cash, US Treasury Bills and Bonds, and the like - will be given some preferential treatment based on specific US geopolitical and geoeconomic interests such as, for example, the governments and interests of the European Union, Japan, maybe China, and specific institutions and global corporations who will be able to change their old dollars for New Dollars at acceptable rates of exchange, say 2, 3 or 4 old dollars for every New Dollar.

"For the rest of dollar-holders - i.e., vast numbers of private investors in all parts of the world in countries in Latin America, Central Europe, the Muslim World, Africa, etc. - the US Government will simply say that their respective local markets will need to determine how many old dollars will buy a New Dollar, and that this will be governed by the market forces of supply and demand. We will then see currency traders of all shapes and sizes offering One New Dollar for every 8, 10, or 20 old dollars in the hands of desperate masses of people trying to get rid of those creased green-backed bits of paper of falling value.

Marcf said...

I sure hope it doesn't get to that. This would be hyper-inflation for certain parts of the world.

The US will keep it status by not defaulting on its debt. For all the talk of the end of the US supremacy, if in fact the US govt makes good on its debt, it will regain the trust of the world in a eye blink. The Bush administration may have alienated the rest of the world, the next one (and the one after that) will undo this by doing the right thing where it counts: the money.

Let's get real, even if the losses amount to 5T, like the doom and gloom scenario of Marc Faber, it is not much compared to an economy that clocks at 60T.

Bush did say one good thing today; this is big economy, you won't sink it with this...

All the world is hearing from the US govt (eg Fanny and Freddie rescue to honor the SWF senior positions) is "we honor our debts"