Daniel Meron is a Vice President and Security Analyst at RBC Capital Markets (US).

TWST: What do you include in your corporate software coverage?

Mr. Meron: I actually cover a broad range of technology companies that originated in Israel; that's my mandate. I cover several communication software companies like Amdocs (DOX), Comverse, NDS (NNDS), and obviously NICE (NICE) and Verint fall into that bucket, and then also a couple of equipment providers like Alvarion (ALVR) and Ceragon (CRNT), as well as more classic enterprise software companies, specifically BluePhoenix (BPHX) and Fundtech (FNDT), which are strictly just software. It's a combination. The large majority is obviously communication technology driven and then there are a couple of players that are more like your typical enterprise software. Corporate software is a very general term and basically it's any software solution that comes down to the specific enterprise and not into the telecom space, which usually records just a different way of working through that, although there are some solutions, for example, that tie into both verticals.

TWST: What's going on in the enterprise software space from a broad perspective?

Mr. Meron: I'll put a bit of hedge here because my coverage is limited to certain niches within that, so I don't cover the Oracles or Microsofts or BEAs or Symantecs of the world. With that in mind, what I do cover that relates to the enterprise spending cycle is specifically companies like NICE and Verint, selling to the contact centers, Fundtech that sells into the financial vertical with transaction information technology solutions, and then also BluePhoenix that provides software modernization solutions. This is our angle on those. There are other companies that sell various solutions like RADvision (RVSN), but these companies actually have their software solutions embedded onto a box and they sell that equipment into the networking segments of the enterprises. That usually just doesn't fall into that bucket of enterprise software. With that in mind, my sense on the spending cycle right now is that at least in the US there are some initial signs of impact on the decision making or in the projects, and there are some verticals that are feeling the pinch from the economy a little, specifically obviously the financials.

But from the companies that I talk to, from the channel checks that we've been running and discussions that we have with various industry players, at least for the most part, these companies that I cover are pretty much on track with their plans. This is largely due to the fact that number one, they're in segments that are more niches and they tend to be hurt less when things go badly on a macro level, at least in the initial phases of it. Then a lot of the revenue streams for these companies are actually driven outside of the US, anywhere from 30% or 40% on the low end up to 70% or more on the higher end or even higher; it just depends on the company. For the most part, they're not feeling the pinch from the macro level, though there is some anecdotal evidence that there is somewhat of a slower pacing in the US at this point in time.

TWST: Can that continue if the US economy does continue to slow down or are they going to get some backlash?

Mr. Meron: I think that eventually it really depends on the extent of this slowdown. The short answer to that is that if the slowdown in the US is going to be short lived, say a couple of quarters, and then we ramp up from that, I think that a lot of these companies can actually weather this storm with a bit of a pinch, but nothing more than that. If the slowdown is prolonged, I think that even with the secular growth drivers that some of these companies have, they're going to feel the pinch in a big way and also it's going to spread out globally. For example if we take Fundtech, which is a company that has very good visibility, they do serve the financial vertical and you would think that these guys would be the number one firm to suffer because they sell into this vertical, but in actuality their business is just on track. Things are going well for them and the reason is that their growth is driven by the increase in the financial transactions worldwide. This just has to do directly with the revenue streams of a lot of these banks. They can't just pull the plug and say, "You know what? We're not going to spend $10 million with this company that has been automating our transaction services and actually generating revenue indirectly by automating this process and allowing us to be more competitive." This is not what happens. Whatever projects are up and running, whatever customers they already have at hand, they will probably continue with the spending plans that they have at this point.

But farther out, if there is a general meltdown in the economy or another few financial disasters that happen with another bank shutting down or something like that, then some of these firms may start saying they're not going to commit for the next project, and then the growth into 2009 may be hurt because of that. Whatever they have in the pipeline right now, I think that they're going to get through. The backlog covers 80% to 90% of the next 12 months' revenues, so that gives them a lot of visibility. A lot of the deals that they've signed allow them to have a fairly smooth ride into the back half of the year, but as the years or the quarters grow, if the economy is still in dire straits, then that's something that will start to impact the companies that do have the backlog like Fundtech

TWST: Even the companies that are actually producing cost saving benefits will get hurt eventually if things get bad enough?

Mr. Meron: Right, and the same goes for BluePhoenix. This is a company that provides IT modernization, but the longer the slowdown is, the closer you'll get to the doorstep. I've been through the 2000, 2002 down cycle and everybody thought, "No chance that macro will get to us because we're providing ROI." Eventually it got there because ROI is something that is realized over three years time, not next year, and the cash outlay that you have to spend for that particular solution or box or whatever it is, that's out of your pocket right here and now. In this cycle, I think that the fundamentals for the overall tech space are healthier than they were five or six years ago just because of consolidation, more maturity from the companies, etc. Nevertheless, the macro slowdown is something to watch out for. This is not a healthcare or a defense electronics company that you'd see spending regardless of what the economy is doing.

TWST: Looking at the space longer term, where are the growth opportunities? Is it still ROI-driven products that are going to lead the way?

Mr. Meron: I think throughout the last few years that was the case as well and I don't think that this is going to change. These things need to prove their worth and that's not just by slides or major visions or things like that. They have to deal directly with business needs here and now rather than something that will show up five years out. I think everybody who went through the ERP/CRM kind of promises pretty much realized that unless there is something that you can really prove the worth for, people are not going to commit to that. Software as a Service is obviously something that trended to those really picking up. I would actually refer you to my colleague, Rob Breza, who covers a lot of these companies and can provide you a better perspective on many of these trends and broader plays. I cover just a very small subset of these companies.

From my standpoint it's more about providing applications on top of the actual hardware that is already out there, providing more analytics solutions, and providing ways to improve the business operations in one way or the other across the board. But the bottom line is you've got to save money in order for an enterprise to go out and spend to buy your product or at least provide some way of making money.

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