Optimism Returns to Software Sector

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Cloud computing, corporate upgrade cycles and general optimism about the overall economy will drive increased sales, profits and employment in the software industry this year, according to a survey released this week by venture capital firm Sand Hill Group.

The survey, which queried more than 100 CEOs and CIOs at a variety of enterprise software companies across multiple sectors, found that 44 percent of respondents expect overall software sales to increase between 5 percent and 9 percent in total dollars this year, while another 23 percent are projecting a jump of between 10 percent and 14 percent.

Cloud computing, Software-as-a-Service (SaaS) and enterprise-wide upgrades of PCs, mobile devices and applications, most notably Windows 7-driven projects, will usher in a new wave of spending as the IT industry pulls itself out of a three-year decline.

“During the economic slowdown there were a lot of improvement projects that were put off and now there are a lot of outdated or inefficient solutions in enterprises,” one software CEO said in the survey. “Cleaning up those projects to improve efficiencies will be a priority now that there is some level of recovery happening.”

Forty-two percent of software executives said their companies’ business has already returned to pre-recession levels, with another 7 percent projecting a return to those levels by the middle of the year. Another 22 percent expect to be in that position by the close of 2010 and 20 percent said their sales and profits will be back to normal at some point in 2011.

The survey results dovetail with projections made earlier this year by independent IT industry research firms and corroborated by mostly stellar earnings reportsfrom tech leaders in the first quarter of this year.

Software executives said that because the buying decision makers at many companies are tending to skew younger and thus more comfortable with off-site software and service providers, cloud and SaaS applications will continue to drive growth through the rest of 2010.

IDC earlier this year predicted that cloud-based IT spending will almost triple in the next three years, surging from roughly $17 billion in 2009 to more than $45 billion in 2013.

“[Executives] believe the cloud, SaaS and on-demand models will dominate software spending decisions in the coming year,” the report said. “At the same time, these models are causing dramatic changes to software firms’ pricing models, sales approach and other operational aspects.”

This improved outlook and appreciation for new software delivery models and revenue streams will also spark a much-needed increase in new hires, executives said.

Sixty-eight percent of those surveyed said they expect to increase their headcount “slightly” during 2010, while another 23 percent said they were poised for a “significant increase” in new employees. Seven percent said their workforce will likely remain unchanged from 2009 levels, while only 1 percent expect to “significantly decrease” staff.

Finally, 25 percent said they expect net profits to improve between 5 percent and 9 percent this year, and another 21 percent project earnings to surge between 10 percent and 19 percent. A full 20 percent anticipate that profits will surge at least 20 percent this year and 15 percent are looking for at least a 1 percent to 5 percent boost to their bottom lines.

“I think that enterprise software firms will shift focus over the next 12 months to smaller, more repeatable deals instead of the large deals with high price tags,” one executive said. “Smaller, repeatable deals are where more of the recovery will be happening.”

The survey, which was sponsored by the online accounting service Intacct, solicited comments and forecasts from executives from a variety of software sectors including applications, infrastructure and industry-specific applications providers, with the majority of respondents (67 percent) representing companies with 99 or fewer employees.

Larry Barrett is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.