Market headlines have noted the milestone of the S&P 500’s year-to-date (YTD) performance moving into a positive gain with Tuesday’s market gains. That is terrific news but the Business Intelligence & Data Warehouse (BI/DW) Index and On-Demand or SaaS (software as a service) software index have posted approximately 20% YTD gains (as of yesterday’s market close.)

These indexes have been swept up in the general surge of high technology stocks with the NASDAQ up 11.2% YTD and software companies, as represented by the iShares S&P North American Technology-Software Index Fund, are up 16.3% YTD. However, both the business intelligence and on-demand software indexes have outpaced these high tech benchmarks.

Business Intelligence (BI) is not a luxury

Business intelligence (BI) firms (this includes data warehousing (DW), data integration and performance management categories) are performing better than the overall market because their products and services continue to be in demand in tough economic times. The recession and IT spending cuts are reducing BI firms’ growth rates, but companies still need to monitor, measure and manage their businesses.

In good times BI is oriented towards expanding business by obtaining new customers or expanding what a customer buys. In tough times, orientation shifts towards operational efficiencies and cost cutting with BI being one of the enablers of those actions. IT budget reductions do impact new projects in almost every category of software, but BI has moved from being a “nice to have” to a critical enabler of many business initiatives within corporations today.

Business intelligence has become mainstream in Fortune 500 companies and is “crossing the chasm” in the small-to-medium size businesses (SMB). Many of these potential BI customers are faring better than their larger brethren. This provides an expanding market during tough times for BI vendors.

From an investor perspective, the index is dominated by software firms that generally have no debt, generate strong cash flows and receive steady maintenance income. This separates them from many industries that are impacted by the financial implications of the credit crunch. BI vendors’ customers may be impacted by these financial issues, which will reduce spending but it does not directly impacted the business operations of the BI firms themselves.

The Laggards

All BI firms are not fairing as well as others. The groups that are at the bottom of the performance rankings are: industry research firms and high tech titans.

The industry research firms, Gartner (IT) and Forrester (FORR), performed well (relatively speaking) last year as investors felt their business shielded them from the recession and IT spending cuts. This year though as these firms continually reduced their IT spending forecasts the reality set that their business was indeed correlated to their customers’ IT spending plans. If IT customers are postponing or cancelling major projects advisory consulting seems to be a nice-to-have. The research firms are also hit with some IT vendors are reining in their marketing spending. Finally, IT conferences are seeing a drop-off in attendance and vendor sponsorship further crimping revenue and prospect lead generation.

There are two groups of high tech titans that are also at the bottom of the performance rankings year-to-date: consumer-centric and enterprise application vendors.
HP (HPQ) and Microsoft (MSFT) are feeling investor concerns about retrained consumer and enterprise business spending. PC-related hardware and software related sales including printers sales are tempering growth at both firms with both using cost-cutting to maintain profits. Reductions or delays in business spending on server and storage sales are an additional overhang for HPQ.

SAP and Oracle (ORCL) both have solid maintenance revenue and professional services income streams but enterprise application growth is linked with the “big deal” that is at best delayed and often postponed (cancelled) until next year. Oracle does have the database side of its business that is not as dependent on the large enterprise deal. 

What’s Next

The question is does the bull market or bear market bounce continue or take a breather? We are entering into a traditionally slower part of the calendar year for major purchases so major upside surprises are not likely to be prevalent until later in the year. The stocks may continue to trade on momentum or general market sentiment but fundamentals do not yet justify a major move from these levels.