05.04.09 

DROPPING RESEARCH COVERAGE
We are dropping research coverage of the following companies as the analysts are no longer with the firm: Blackbaud, Inc. (BLKB), Morningstar Inc. (MORN), Clean Energy Fuels Corp. (CLNE), NetSuite(N), Peet's Coffee & Tea (PEET), Dover Saddlery, Inc. (DOVR), Rackspace Hosting, Inc (RAX). Contact Us for Full Report - PDF

05.28.08 

DISRUPTIVE INNOVATION AND THE FUTURE OF THE SERVER VIRTUALIZATION MARKET
Server virtualization technology has seen significant growth over the last ten years. Much of this growth can be explained by a pattern first observed more than 15 years ago by Harvard Business School professor and Innosight founder, Dr. Clayton Christensen. In his seminal works The Innovator's Dilemma and The Innovator's Solution, Christensen explains how disruptive innovations can create entirely new markets or significantly transform existing ones. Specifically, Christensen demonstrates how disruptive innovations will often trade off raw performance to deliver simplicity, convenience, accessibility, or affordability for the customer. These innovations often start in areas of a market that are deemed inconsequential or uninteresting to established market leaders. By increasing the utilization of existing hardware, customers deploying server virtualization were able to enjoy good enough performance at a far lower cost than if they invested in additional data center capacity. The technology initially took hold in the least demanding applications within the enterprise (typically Windows-based test and development servers). Over time, vendors improved the performance of virtualization to the point where it could enable an entirely new benefit-mobility-functionality that was previously unattainable with physical infrastructure alone. The category-creator, VMware, has driven much of this innovation and has captured much of the market's tremendous growth. After a decade of dominance, the Company continues to stand as the unquestioned leader, controlling over 86% of the market. VMware's reward for creating the category is the challenge of replicating its own phenomenal success in an environment of increasing competition. Technology leaders such as Citrix, Novell, Oracle, Red Hat, and Sun have come off the sidelines and are starting to respond. The once disruptor now faces the threat of becoming the disruptee as Virtual Iron and Microsoft also join the race and attempt to unlock non-consumption by establishing a foothold position in lower tiers of the market.This report applies Christensen's theory of disruptive innovation and other tools to assess the future of server virtualization within the enterprise, providing a framework for investors to assess investment opportunities. Contact Us for Full Report - PDF

05.16.08 

DROPPING RESEARCH COVERAGE
We are dropping research coverage of the following companies as the analyst is no longer with the firm: Akamai Technologies, Inc. (AKAM), Ariba, Inc. (ARBA), BEA Systems, Inc. (BEAS), Computer Associates Int'l. Inc. (CA), CMGI Inc. (CMGI), McAfee, Inc. (MFE), NeuStar Inc. (NSR), Openwave Systems, Inc. (OPWV), Oracle Corp. (ORCL), Red Hat, Inc. (RHT), Symantec Corp. (SYMC), VeriSign, Inc. (VRSN), Wind River Systems, Inc. (WIND). Contact Us for Full Report - PDF

03.26.08 

ENTERPRISE SOFTWARE AND INTERNET: EDITION 2.0 - RECOMMENDATIONS, THOUGHTS AND PERFORMANCE REPORT CARD
Investing in technology stocks and capturing 'alpha' are becoming tall orders for most portfolio managers (PMs) and analysts as the IT tech market continues to 'bifurcate' between large and small cap and the number of IPOs coming to market continues to dwindle. In our view, IT and, more notably Software, Internet, Content, Telecommunications and IT Services, are simply too complex and comprise too many sub-sectors (that are generally impacted by different market forces) to be summed up by a single call or by holding just a few large cap tech names. That said, we believe that it is critical to incorporate numerous screening/quantitative techniques to complement our fundamental knowledge of the overall technology space. Moreover, we believe that by incorporating technology into various aspects of our research methodologies, we can provide better stock-related information flow rooted in a valuation discipline, allowing us to 'get the call right' rather than reacting to news flow. This Enterprise Software and Internet: Edition 2.0 attempts to incorporate our stock picking thoughts / ideas, the disruptive forces at work in the investment marketplace, and a proactive stock picking approach design to make money for our clients. Contact Us for Full Report - PDF

02.06.08 

ENTERPRISE SOFTWARE AND INTERNET: EDITION 1.0 - TIME FOR A 'DIFFERENT APPROACH' FOR PICKING WINNING STOCKS
Investing in technology stocks and capturing 'alpha' are becoming tall orders for most portfolio managers (PMs) and analysts as the IT tech market continues to 'bifurcate' between large and small cap and the number of IPOs coming to market continues to dwindle. In our view, IT and, more notably Software, Internet, Content, Telecommunications and IT Services, are simply too complex and comprise too many sub-sectors (that are generally impacted by different market forces) to be summed up by a single call or by holding just a few large cap tech names. That said, we believe that it is critical to incorporate numerous screening/quantitative techniques to complement our fundamental knowledge of the overall technology space. Moreover, we believe that by incorporating technology into various aspects of our research methodologies, we can provide better stock-related information flow rooted in a valuation discipline, allowing us to 'get the call right' rather than reacting to news flow. This Enterprise Software and Internet: Edition 1.0 attempts to incorporate our stock picking thoughts / ideas, the disruptive forces at work in the investment marketplace, and a proactive stock picking approach design to make money for our clients. Contact Us for Full Report - PDF

04.16.07 

OUR TOP PICKS
Our top picks going into March quarter earnings are BEA Systems (BEAS: Buy) and Blackbaud (BLKB: Buy), which we highlight in this report. Contact Us for Full Report - PDF

06.29.06 

FQ2 EARNINGS PREVIEW
Heading into Q2:06 earnings season, we believe investors should remain focused on the mid/small cap investment pond as we believe these companies are best-positioned to leverage the developing trends within the overall software universe. In particular, we like names that leverage the 'triple-play' of voice, video and data. Our favorite name in this area remains Akamai, as we believe 35+% organic growth is achievable through FY:06. Secondly, given that we are entering the summer period, we believe it is prudent for investors to look at areas that have underperformed YTD and offer investors the best risk/reward profiles for the remainder of the year. We believe the Security sector fits this bill, with McAfee being the best-positioned for H2:06 outperformance as fears over market share losses to Microsoft's Live OneCare abate. One area of concern are the rumblings of large-deal telco/data infrastructure pushouts during the quarter, which may have a negative impact on BEA Systems and NeuStar over the longer-term. Bottom line, we continue to favor those names that are within 'emerging technology' areas with dominant competitive positioning in their respective verticals. Contact Us for Full Report - PDF

04.13.06 

FQ1 EARNINGS PREVIEW
As we head into Q1:06 earnings season, we reiterate our view that investors should continue to focus on emerging areas in the Mid / Small Cap investment pond of software that are expected to exhibit the highest growth. The disappointing results from Check Point, Websense, and Internet Security Systems (ISSX: Hold), among others, have put investors in a wary frame of mind regarding security names. That said, we believe the damage appears isolated to the security networking space, and we expect Q1 results to be mostly in line for the rest of the group. Companies that we believe have the highest likelihood of outperformance for the quarter are Akamai (AKAM) and Blackbaud (BLKB), due to continued strength in the fundamentals of their businesses. Looking forward, investors will likely be keen on the Q2 outlook given the number of pre-announcements and overall macroeconomic environment (i.e. higher oil/energy prices and rising interest rates). Accordingly, we continue to recommend that investors look at those sub-sectors that are expected to garner the lion's share of potentially tight IT budgets. Specifically, we continue to favor those names that are within 'emerging technology' areas with dominant competitive positioning in their respective verticals. Contact Us for Full Report - PDF

04.07.06 

THOUGHTS FROM INFOSEC WORLD CONFERENCE & EXPO
Earlier this week, we attended the InfoSec World Conference & Expo held in Orlando, Florida. The consensus among conference attendees was that security spending remains a top priority for both government and commercial organizations, and we did not hear of any downturns in enterprise IT security spending. We believe that the federal government and major telco providers will be increasing spending to address ongoing identity theft, database security, and cross-platform information accuracy issues. According to keynote speaker Tom Ridge, the national ID card program is being pilot tested at several airports throughout the US, and the government will likely release guidelines for the program in the near future. We believe the rollout of the national ID card bodes well for biometric vendors that may end up sourcing the technology behind the integrated biometric features. We also had the opportunity to talk to McAfee (MFE: Buy) to get a feel for where the company's business was heading exiting Q1. Based on our discussions, we believe McAfee's enterprise business is tracking at or slightly above plan, and the weakness seen in the prior quarter was strictly a timing issue rather than any negative fundamental indicator on the enterprise side of the business. Finally, we discussed Microsoft's security strategy with attendees, and left with the impression that Microsoft's penetration into the security market will likely be limited to the consumer market, as most enterprises believe Microsoft's security vision is still two to three years behind the rest of the competition. Contact Us for Full Report - PDF

02.21.06 

RSA CONFERENCE 2006: A GLIMPSE OF FUTURE SECURITY TRENDS; OUR KEY TAKEAWAYS
We attended the 15th annual RSA Conference in San Jose, CA last week. With over 14,000 security professionals and 275 exhibitors from around the world in attendance this year, the event provided a great setting for vendors to display their wares and issue product/partnership announcements. Coming away from the conference, we believe the long-term outlook for the industry remains robust as infrastructure security continues to be one of the top spending priorities for CIO's given the significant ROI potential over the long-term. Despite the strong fundamentals of the market, however, we have been getting more cautious on the security space due to the increasing competition within the industry and generally high growth expectations for the group. That said, we do believe growth opportunities exist for those companies with exposure to emerging trends within the security market that are leveraging software innovations to combat new threats. We believe companies with exposure to these new trends will be best positioned to benefit from the future shifting of IT and consumer spending patterns over the long-term. In this note, we highlight several key trends we noted during the conference, which we believe will enable new business opportunities for security software companies in 2006 and beyond and list potential derivative impacts on some of our names. Contact Us for Full Report - PDF

02.08.06 

THOUGHTS ON SYMANTEC AND MICROSOFT CONSUMER SECURITY SERVICE ANNOUNCEMENTS
Yesterday, Microsoft released pricing details for its Windows OneCare Live security service and set a launch date for early June. Symantec (SYMC: Buy) also announced it will be developing a competing consumer security service code-named Genesis that is slated for launch in the fall. We believe these announcements were made to maximize buzz and interest heading into next week's RSA Conference. The long-awaited pricing announcement from Microsoft was not a surprise, as investors have been expecting further details on Microsoft's OneCare strategy for several months. In addition, most anti-virus vendors already incorporated Microsoft's entry into the market when setting forward guidance. We believe the real questions for investors are: 'What were Symantec and McAfee's (MFE: Buy) assumptions regarding Microsoft's pricing strategy when they gave guidance for CY:06?', and 'How much of this was factored into their numbers?' Given that Microsoft's entry into the market has been expected for quite some time and pushed back from its original launch date, we do not believe yesterday's announcements regarding pricing and launch dates will have a major impact on the consumer security landscape. We believe investors have already priced these concerns into the stocks, and do not expect increased volatility as a result of yesterday's announcements. Contact Us for Full Report - PDF

12.06.05 

THOUGHTS ON 2006: IS IT TIME FOR A NEW SOFTWARE PLAYBOOK?
Keep Sipping on That Large Cap Holiday Eggnog; Not! As we exit 2005, we thought it prudent to reflect on whether or not key emerging software trends will continue their winning ways heading into 2006. We believe that some investors are still waiting for a 'Large Cap' comeback in 2005. Don't hold your breath, but keep sipping on that spiked glass of eggnog. We continue to hear investors singing the following phrase, 'Boy these Large Cap Enterprise Software stocks are cheap and look at all that cash!' And hence, another year passes while traditional growth stocks (Microsoft (MSFT), SAP AG (SAP), Oracle (ORCL: Hold), Symantec (SYMC: Hold), etc.) slowly slip into large value traps and the law of large numbers continues to slow overall growth. We believe this 'Technology' debate of Large Cap vs. Smaller Cap / Traditional Tech vs. Emerging Tech will continue into 2006 and beyond, and we wanted to use this report to update our clients on some specific trends / stock ideas to focus on in 2006. Contact Us for Full Report - PDF

11.30.05 

MICROSOFT ANNOUNCES FREE BETA TRIALS OF ONECARE SERVICE
This morning, Microsoft announced the availability of free beta trials of its OneCare Live computer-security service. The official launch of the service is slated for next year, when Microsoft is expected to begin charging a monthly subscription fee for the service. This announcement is not new news, as the beta testing of this service was widely anticipated. That said, we believe the approaching launch of the official OneCare Live service continues to bear headline risk for incumbent vendors like McAfee and Symantec. We believe this risk will weigh more heavily on these names as the official launch date approaches. OneCare represents Microsoft's first foray into a combined Software-as-a-Service (SaaS) offering, a distribution method that McAfee and Symantec have focused on as their model going forward. We maintain our Buy rating and $36 price target for McAfee, based on our belief that it seems to be gaining share vis-a-vis the rest of the market. However, these market share gains can't last forever, as the headline risk of Microsoft's impending entry in the security arena are appearing to be a reality. Contact Us for Full Report - PDF

10.10.05 

SEPTEMBER QUARTER EARNINGS PREVIEW
The Q3:05 earnings season is around the corner, and we expect it will be an interesting one. The disappointing results from Oracle, Mercury, and Check Point, among others, may have put investors in a wary frame of mind. That said, we believe the worst is behind us and expect Q3 results to be mostly in line for the rest of the group. Companies that we believe have the highest likelihood of outperformance for the quarter are McAfee and Neustar, due to continued strength in the fundamentals of their businesses and somewhat conservative guidance. Looking forward, we believe the Q4 outlook will likely be cautious given the macro events of Hurricanes Katrina and Rita weighing on the minds of most CIO's/CFO's. Accordingly, we continue to recommend that investors look at those sub-sectors that will garner the lion's share of potentially tight IT budgets going forward rather than pursuing the traditional strategy of 'owning the broader group' heading into Q4. Specifically, we continue to favor those names that are leveraging the trend toward the 'applistructure' or 'verticalization' and/or have exposure to emerging areas of software, such as On Demand, Internet Infrastructure, Security, and Search. Contact Us for Full Report - PDF

10.06.05 

QUICK TAKE ON MICROSOFT'S SECURITY ANNOUNCEMENT
This morning, Microsoft gave preliminary details on its security product road map, where the company introduced Microsoft Client Protection, targeted towards client and file server security, and Microsoft Antigen, which will provide anti-virus and anti-spam protection for messaging and collaboration servers. We believe Symantec and McAfee may come under slight pressure today due to this announcement, but we remind investors that this is not new news, and do not expect any near-term fundamental impact. We believe the key takeaway from today's announcement is that distribution and pricing of Microsoft's security products have yet to be revealed. In addition, given that the products are now entering beta in Q4:05 and H1:06, we view this as a slight delay in Microsoft's security launch. Highlighted below are some key points from today's announcement. Contact Us for Full Report - PDF

07.19.05 

JUNE QUARTER EARNINGS PREVIEW
The Q2:05 earnings season got off to a rocky start given the negative pre-announcements from several software companies including Mercury Interactive, Siebel Systems (SEBL: Not Rated), Altiris, WebMethods (WEBM: Not Rated), Manugistics, and Borland (BORL: Not Rated), among many others. It would appear that most of the disappointments seen in Q2 were caused by timing issues with large deals being pushed out rather than lost. In addition, the specter of an F/X headwind has begun to loom, as several companies noted a slight negative impact from currency rates this quarter. That said, conversations we have had with industry sources indicate that IT spending expectations have not materially changed and we do not believe that there has been a major secular shift in the demand environment for software. Accordingly, we believe the outlook for most enterprise software companies in the second half remains intact and expect most to report in-line results this quarter. With the group trading at trough multiples, it appears that many of these issues are already baked into the share price of most software stocks and we would advise investors to use this opportunity to selectively look at names we believe should continue to perform well in this environment. Specifically, we continue to recommend investors pursue those names that are leveraging the trend toward the 'applistructure' or 'verticalization' and/or have exposure to emerging areas of software including On Demand, Internet Infrastructure, Security, and Search. Our favorite pick remains Symantec (SYMC: Buy) given the upcoming catalysts, and we are also bullish on BEA Systems (BEAS: Buy), McAfee (MFE: Buy), and Mercury Interactive (MERQ: Buy) and would recommend those shares for investors with a longer time horizon. Contact Us for Full Report - PDF

07.19.05 

JUNE QUARTER EARNINGS PREVIEW
The Q2:05 earnings season got off to a rocky start given the negative pre-announcements from several software companies including Mercury Interactive, Siebel Systems (SEBL: Not Rated), Altiris, WebMethods (WEBM: Not Rated), Manugistics, and Borland (BORL: Not Rated), among many others. It would appear that most of the disappointments seen in Q2 were caused by timing issues with large deals being pushed out rather than lost. In addition, the specter of an F/X headwind has begun to loom, as several companies noted a slight negative impact from currency rates this quarter. That said, conversations we have had with industry sources indicate that IT spending expectations have not materially changed and we do not believe that there has been a major secular shift in the demand environment for software. Accordingly, we believe the outlook for most enterprise software companies in the second half remains intact and expect most to report in-line results this quarter. With the group trading at trough multiples, it appears that many of these issues are already baked into the share price of most software stocks and we would advise investors to use this opportunity to selectively look at names we believe should continue to perform well in this environment. Specifically, we continue to recommend investors pursue those names that are leveraging the trend toward the 'applistructure' or 'verticalization' and/or have exposure to emerging areas of software including On Demand, Internet Infrastructure, Security, and Search. Our favorite pick remains Symantec (SYMC: Buy) given the upcoming catalysts, and we are also bullish on BEA Systems (BEAS: Buy), McAfee (MFE: Buy), and Mercury Interactive (MERQ: Buy) and would recommend those shares for investors with a longer time horizon. Contact Us for Full Report - PDF

06.03.05 

PICKING WINNERS: THE CURE FOR THE COMMON CALL; INITIATING COVERAGE OF THE ENTERPRISE SOFTWARE SECTOR
Numerous Wall Street firms have recently issued upgrades on the broader software group based on seasonality, valuation, and the expectation that earnings will bloom in the second half of the year. We have seen several variations to this type of call including: 'Overweight the Group', 'Get in Early before the Seasonal Run-up', 'Software Stocks are Cheap' and 'Getting Long the Trifecta'. In this report, we take a closer look at these 'common' industry calls and show that they may not be as effective going forward, from an investment perspective. Rather than looking at software broadly, we recommend that investors seek exposure to specific emerging sub-sectors or drivers of technology that will transform the market. Key emerging areas in software that we believe should produce above-market returns include: 1) 'applistructure' management; 2) on demand/hosted applications; 3) Internet-based infrastructure, and; 4) security. In this report, we highlight the shares of BEA Systems (BEAS: Buy), McAfee (MFE: Buy), Mercury Interactive (MERQ: Buy), Oracle (ORCL: Hold), and Symantec (SYMC: Buy) as companies that we believe are well-positioned to capitalize on these emerging trends in the software market. Contact Us for Full Report - PDF