Mr. Pritchard: I focus on what you'd call infrastructure software, which is the part that's not visible to end-users. The application is generally what the end- user runs their business on, and I cover areas like security or storage software or the operating system and platform software or the management software, the stuff that sort of makes everything run, but isn't visible to the end-user. I cover Microsoft (MSFT), I cover Adobe (ADBE), I cover a couple of things that do have application businesses, but for the most part it's what I described.
TWST: In this tough economic environment, what's been going on in the space from
a business perspective?
Mr. Pritchard: If you look at tech overall, software in general has outperformed
tech. I think the reason is that the revenue model in software has a high degree
of recurring revenue — maintenance and annuity-type revenue, where the customer
has become accustomed to paying for it every year and it's just part of their
operating budget as opposed to big upfront capital purchases that are budgeted
for. If budgets are cut, they're not going to spend money. So software in
general has held up better.
Within software, probably the area that's been tougher is application software.
My colleague Peter Goldmacher covers application software, the area that is end-
user visible, the front-end software — that has been a lot tougher than the back
end, which I cover. So you have companies like Lawson (LWSN), for example, that
reported recently that license revenue was down 20% plus. So in infrastructure,
it hasn't been that bad.
My theory is, the closer you are to the application, the more exposed you are to
people's discretionary budget, and the farther you are from the application, the
more you are like plumbing. In plumbing, you fix the pipe if it breaks, even if
it's in a recession, but you may not replace the fixture that the pipe is on top
of, which is more the application. So software in general is a category that's
held up better. I think the big debate out there is whether software is the next
one to go or whether it is going to be kind of a more permanent place to hide
here for the next few quarters as the market probably will remain pretty
volatile.
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