Enterprise Software: Continued Growth Through Economic Uncertainty

Includes: CA, IBM, NTWK, SAP
by: Tony Daltorio

In 2010, technology consultancy firm Gartner predicts that the majority of enterprise software markets will see positive growth. With worldwide information technology (IT) spending expected to reach $3.4 trillion this year, a 5.3 percent increase from 2009 levels, it is not a stretch to believe the software sector of this market will also see growth.

More specifically, the infrastructure market, which includes all the software to build, run and manage an enterprise, is anticipated to be the fastest-growing sector of the industry for the next four years. The hottest segments include virtualization, security, data integration/data quality and business intelligence.

Why is this industry growing so much faster than others? Today companies operate in an extremely complex environment. In order to survive, they now have to manage sophisticated production and control operations, advanced communications networks and regulatory requirements, among a multitude of other challenges.

The expertise and technology required to deal with these challenges has become far too large for most businesses to handle in-house. Consequently, firms have turned to outside vendors to handle these specialized operations. Some of the major companies targeting the services and enterprise software industry include International Business Machines Corp. (NYSE:IBM), SAP AG (SAP), CA Technologies (NASDAQ:CA) and NetSol Technologies (NASDAQ:NTWK).

This area of software has become very competitive, with the larger companies like IBM and SAP vying for growth opportunities and market share aggressively. Both firms have become acquisitive. SAP recently launched a $5.8 billion bid for Sybase (and its mobile software), while IBM announced a planned $20 billion shopping spree over the next five years. IBM has already made several acquisitions this year and is well on its way to meeting its target.

For those aggressive investors interested in small-cap companies, NetSol is an interesting company. It has a blue-chip client base including companies such as Cisco Systems (NASDAQ:CSCO), Capital One (NYSE:COF), JPMorgan Chase (NYSE:JPM), Ford (NYSE:F), Volkswagen (OTCPK:VLKAY), Nissan (OTCPK:NSANY) and Hyundai (OTC:HYMTF).

Although all four companies – IBM, SAP, CA Technologies, NetSol – have reported positive sales growth in the most recently ended quarter, none is more impressive than NetSol Technologies. The company excelled across the board with revenue growth of 77.8%, net income per share of $0.02 versus loss of ($0.19) a year ago, gross margin of 61.3% compared to 10.7% a year earlier, and EBITDA of $1.9 million, or $0.05 per diluted share, versus an EBITDA loss of $3.5 million, or a loss of ($0.13) per diluted share, in the year-ago period.

The company also recently reiterated previous guidance for fiscal year 2010 projecting revenues in the range of $33.0 million and $35.0 million, representing full-year revenue growth of between 25% and 32% over fiscal year 2009. Expecting license revenues for fiscal year 2010 to increase more than 100% over fiscal year 2009, the company predicts a return to GAAP net income for fiscal year 2010, versus a GAAP net loss of $0.30 per diluted share for fiscal year 2009.

NetSol is attempting to write for itself an exciting comeback story, which will hopefully be successful. It definitely has the industry tailwinds at its back to help it move forward. As always, please make sure to do your due diligence before investing your money into any company's stock.

Disclosure: No positions