Why Enterprise Software Market Declined in Q3

Summary

Worldwide enterprise software market continued its year-over-year decline in the third quarter of 2016.  Euro was nearly stable with respect to the US dollar by around 0.3 percent in Q3 2016.  This slight percentage exchange rate fluctuation provided stability to revenues reported in euros that ARC subsequently translated to US dollars for this report.

Suppliers included in this report recorded combined quarterly revenue of $21.4 billion, representing a 1.3 percent year-over-year decline.

Supplier Revenues

This ARC Advisory Group report discusses the most recent quarterly revenue results of the major publicly traded enterprise software companies.  We translated financial results reported in foreign currencies to US dollars using an average exchange rate for the given reporting period.  The suppliers’ reporting period for this analysis was the quarter ending in September 2016, unless stated otherwise.

The R&D expense is a factor of total revenues of the company and not just the enterprise portion considered for this report.

EMC was acquired by Dell and has been removed as ARC is not accounting Dell revenues for the quarter.  IFS is also removed as Q3 results are not released yet.

American Software (Logility) reported total revenue of $26.1 million for the quarter ended October 2016.  This represents a decline of 10.1 percent from the same period last year.  License revenues declined by 43.6 percent to $3.1 million.  Services and other revenues declined by 8.3 percent to $12.3 million, while maintenance revenues increased by 10.7 percent.  Cloud Services Annual Contract Value (ACV) increased approximately 42 percent to $4.4 million for the quarter compared with $3.1 million in the same quarter of the previous year.  The company offers an ACV forward-looking operating measure used for better understanding of cloud services (SaaS and other related cloud services) to its customers to leverage and accelerate their deployments and enhance the operations for the period of 12 months.  Logility acquired AdapChain Inc. at the cost of $4.4 million in this quarter.

Autodesk reported total revenue of $489.6 million for the quarter ended October 2016.  This represents a decline of 18.4 percent from the same period the previous year.  Revenue from the Platform Solutions and Emerging Business (PSEB) segment, which includes the Autodesk Design Suite, declined by 50.3 percent to $80 million.  Revenue from the Architecture, Engineering, and Construction (AEC) segment declined by 5.8 percent to $212 million.  Finally, the Manufacturing segment experienced a 16 percent decline to $147 million.  EMEA revenue was $191 million, Americas was $213 million, and APAC was $85 million.  Revenue from emerging economies represented a decrease of 18 percent of total revenue in the third quarter.  Total GAAP spend (cost of revenue plus operating expenses) was $610 million, a decrease of 1 percent compared with the third quarter last year.  New model annualized recurring revenue (ARR) was $414 million, an increase of 88 percent compared with the same period last year.  Total ARR was $1.5 billion, an increase of 11 percent compared with the third quarter last year as reported.

Aveva recorded revenues of $110.7 million for the second quarter, ending in September 2016.  This is a 9.2 percent decline from the revenues achieved during the same period last year.  Recurring license fees, which include annual fees and rental license fees, declined by 8.6 percent to $84 million.  Initial license fees (ILF) declined by 10.6 percent to $15 million.  This decline reflects difficult market conditions in oil & gas and shipbuilding sectors.  Services revenues declined by 12.2 percent to $11 million.  The decline was mainly attributed to the declining value of the British pound compared with the US dollar (GBP declined by 15.3 percent compared with Q2 2016).  During the quarter, Aveva launched a commercial product, AVEVA NET Connect, and signed partnerships with Capgemini and Amazon Web Services.

On July 13, 2016, ClickSoftware announced the completion of its acquisition by Francisco Partners, a leading global private equity firm that specializes in investments in technology companies.  With the completion of the transaction, ClickSoftware is now a privately held company.  Thus, ARC does not include ClickSoftware results in this quarterly report.

Dassault Systèmes achieved total revenue of $820.3 million for the quarter, representing a 9.1 percent year-over-year growth rate.  Software-related revenue (new and recurring licenses and maintenance) increased by 9.3 percent to $722 million.  Services revenues increased by 7.9 percent to $98.6 million.  By product line in euros, CATIA revenues increased by 7.4 percent, ENOVIA increased by 10.5 percent, and SOLIDWORKS increased by 12.7 percent.  Geographically, revenues from the Americas increased by 3.4 percent, Europe by 3.9 percent, and Asia by 25.9 percent in reporting currency.  The company’s strong revenue results from industry diversification and positive contributions by all product lines.  The euro rate was nearly stable by around 0.3 percent with respect to the dollar.

Descartes reported revenues of $51.5 million for the quarter ending in October 2016.  This represents 8.6 percent growth over the same period in the prior year.  Services revenues of $49.4 million represent an 8.6 percent year-over-year increase.  Quarterly revenues from the US increased from $25.1 million to $26.7 million, EMEA from $17.2 million to $19.3 million, and Canada from $3.1 to $3.4 million, while APAC remained at $2.1 million.

On July 19, 2016, EMC shareholders approved the merger agreement among Denali Holding Inc., Dell Inc., Universal Acquisition Co., and EMC.  The merger transaction closed on September 7, 2016, and the EMC’s common shares were delisted from the New York Stock Exchange.  Thus, ARC does not include EMC revenues in this quarterly report.

Hexagon’s Industrial Enterprise Solutions (IES) division consists of the manufacturing- and engineering-focused businesses, Hexagon Metrology and Intergraph PP&M.  The division focuses on engineering software for creating and leveraging information critical for planning, constructing, and operating plants and process facilities, as well as for CAD (computer-aided design) and CAM (computer-aided manufacturing) software and metrology systems.  The division reported $434.1 million in revenue for the quarter.  This represents an increase of 5.2 percent year over year.  In reporting currency (euro), the company increased its revenues by 5 percent.  Geographically, 39 percent of revenues came from the Americas, 43 percent from EMEA, and 18 percent from Asia.  Hexagon acquired Multivista, provider of visual cloud-based construction documentation solutions, in August 2016.

IBM’s Software segment reported revenue of $4.2 billion in external sales for the quarter.  This represents a decline of 17.5 percent over the same period last year.  Under the company’s new segment reporting structure, total software no longer exists as a segment.  Instead, the company’s software revenue is included within the technology services & cloud platforms, cognitive solutions, and systems segments.  Given the current focus on IBM’s software revenue performance, the company will continue to report total software revenue performance throughout 2016.  It consists of solutions software, which increased by 0.4 percent.  Integration software, which is a part of technology services & cloud platforms, increased by 2.4 percent to $8.7 million.  Operating systems software, part of the systems business, declined by 7.9 percent to $412 million. 

IFS has not published the third quarter result for 2016.  Thus, ARC does not include IFS in this quarterly report.

Infor reported revenue of $714.1 million for the quarter ending October 31, 2016.  This represents a 7.7 percent growth from the prior year.  Revenues from license fees increased by 29.8 percent, product update and support declined by 1.2 percent, and consulting services and other fees increased by 7.9 percent.  From a regional perspective, revenues from the Americas contributed 63 percent, EMEA 30 percent, and Asia Pacific 7 percent to Infor’s revenues.

Manhattan Associates’ revenues increased by 7 percent year over year to $152.2 million.  Revenues from the Americas increased by 8 percent, EMEA declined by 10 percent, and APAC increased by 31 percent.  Digital commerce and technology modernization programs continue to drive significant long-term growth opportunities for the company.  Management stated that the demand for omni-channel, store, and distribution management solutions continued to increase.  Global license revenues increased by 13.1 percent to $21.6 million.  Services revenues increased by 6 percent to $119.3 million.  Hardware & other revenues increased by 6.5 percent to $11.3 million.  Overall, for the quarter, 45 percent of the license revenue was from new customers.

Oracle’s Software segment recorded $8 billion in revenues for the quarter ending November 30, 2016.  This represents 1.9 percent increase over the same period the previous year.  New software licenses declined by 19.7 percent to $1.3 billion, and cloud software subscriptions and platform service grew by 81.4 percent to $878 million.  Infrastructure-as-a-Service (IaaS) revenues increased by 6.1 percent to $175 million.  From a regional perspective, total software revenues increased by 1.9 percent in the Americas, declined by 2.8 percent in EMEA, and increased by 15.1 percent in Asia Pacific.

PTC reported revenues of $288.2 million for the quarter ending in September 2016.  This represents a decline of 7.8 percent year over year.  Subscription & license revenue declined by 17.3 percent to $82 million.  Support revenue declined by 4.8 percent.  Perpetual licenses had a major decline of 49 percent while professional services slightly raised by 2 percent.  The overall decline in revenue was due to higher subscription mix, which negatively affected near-term reported revenues.  Management noted that customers are adopting the ThingWorx platform for their IoT initiatives.

QAD reported total revenue of $69.6 million for the quarter ending in October 2016.  This represents a marginal increase of 2.3 percent from the same period the previous year.  QAD’s license revenues declined by 32 percent, while subscription revenues grew by 42 percent.  The declines were mainly due to currency translations.  Revenues from professional services were $19 million vs. $18.6 million last year, a marginal increase of 2 percent.  Professional services revenues were slightly increased.  By vertical, high tech and industrial represented 33 percent; automotive 32 percent; consumer products and food & beverage 21 percent; and life sciences 14 percent.  By geography, North America represented 46 percent, EMEA 30 percent, Asia Pacific 17 percent, and Latin America 7 percent of total revenues.

SAP’s quarterly revenue increased by 8.1 percent to nearly $6 billion.  Software licenses and support revenues increased by 4.9 percent to $4.1 billion.  Meanwhile, cloud subscriptions and support revenues increased from $666 million to $858 million.  In reporting currency (euro), the company’s total software, cloud, and services revenues increased by 8.1 percent.  From a regional perspective, revenues in the Americas increased by 6 percent, Asia Pacific Japan (APJ) region by 11 percent, and EMEA by 6 percent.

Conclusion

A combination of negative currency translation effects due to the strengthening dollar and the downward trend in revenues from on-premises software resulted in negative year-over-year revenue development for most enterprise software suppliers in Q3 2016, as presented in this quarterly ARC report.  In contrast, cloud/subscription revenues continue to grow.  This business model change negatively impacts revenue recognition at the outset and requires multiple periods to reach break-even levels.  The recent unfavorable exchange rates will likely have a significant impact on enterprise market revenues for the rest of 2016.  ARC expects the year-over-year negative impact to continue until the comparative exchange rates stabilize.

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Keywords: Enterprise Software, Quarterly Supplier Revenues, Asia Pacific, Europe, Middle East & Africa, Latin America, North America, ARC Advisory Group.