The following article is from Software Equity Group’s 2011 Q3 Software Equity Industry Report. A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx
For those who may be new to our reports, SEG carefully monitors IT spending each quarter as a means of forecasting downstream public software company financial performance and M&A activity. Several of the IT spending analysts we track modified their earlier projections of 5% – 7% growth in global IT spending, but they did not always agree. Example: In early September, Goldman Sachs cut its 2011 IT spending forecast to 5% from 6%, citing lower IT spending in developed markets as a key driver. In late September, Gartner increased its 2011 IT spending forecast to 7.6% from 7.1%, citing currency impacts, rather than any true underlying strength in the global IT spending.
Domestically, Goldman and Gartner are forecasting 3% and 5% IT growth, respectively, for all of 2011. The projected domestic slowdown is largely driven by sluggish U.S. GDP growth, which Goldman determined has a 62% correlation with IT spending growth. Another basis for the spending slowdown: projections of lower S&P 500 operating profits. After operating profit growth of over 20% in 2010, Goldman is projecting S&P 500 operating profits will improve a modest 14% in 2011, and only 6% in 2012.
While 3% – 5% growth in IT spending may conform to what Goldman Sachs characterizes as “normal levels,” the wealth is not being spread evenly among IT providers. A more granular analysis reveals the growth is driven mostly by a relatively few product categories, including cloud computing and mobility, that are receiving a rapidly increasing share of the IT budget. Gartner is forecasting tablet spending will grow at a 52% CAGR from 2010 to 2015, boosted by 206% YoY growth from 2010 to 2011. Goldman Sachs estimates the mobile sector, including tablets, will grow at a CAGR of 75% from 2010 to 2014.
Investments in public cloud computing and SaaS also continue to rapidly outgrow the broader IT market. Gartner forecasts that spending on public cloud computing and SaaS will grow at a five year CAGR of 19.1% and 14.9%, respectively, from 2010 to 2015, while Goldman Sachs forecasts SaaS spending will see a 20.9% CAGR from 2010 to 2014, driving the percent of SaaS applications in the enterprise to 15% by 2014.
The shift in mindset by enterprise CIOs, from rejection to growing acceptance of SaaS deployed solutions, has been clearly noted by large public software companies. Our 2011 buyer survey (published in our 2010 Annual Report and available on our blog) documented a 131% increase in buyers – most larger, public software and IT companies – who declared that in 2011, SaaS deployed solutions were a “very important” requisite for acquisition targets. We’ll poll buyers again in early January, but we expect the trend to continue.
Underscoring the shifting attitude of enterprise CIOs toward SaaS solutions, a recent Forrester study on enterprise spending found 44% of surveyed companies are currently implementing or planning to implement SaaS solutions. Moreover, the scope of SaaS deployed enterprise solutions is widening. A recent Gartner report highlighted eight distinct SaaS product categories with notable and growing enterprise penetration. Collaboration and CRM were the most popular enterprise deployments of SaaS, at 46% and 32% respectively. SaaS deployed ERP applications, which have struggled to gain an enterprise foothold due to their mission critical nature and significant back office application integration requirements, reached 7% market penetration.