Innovators And Influencers 2005

Innovators & Influencers 2005 Catherine Smith, ING's chief operating officer Jay Chaudhry, founder of SecureIT Robert Drost, a senior researcher at Sun Microsystems Jay Chaudhry, founder of SecureIT Thom Dunning, director of the National Center for Supercomputing Applications Corey Booth, leads the IT department of the Securities and Exchange Commission Brendan Eich, chief architect at Mozilla Foundation Jason Maynard, analyst at Merrill Lynch Matthew Calkins, co-founder and CEO of Appian Al Vermeulen, chief technology officer at Amazon.com Stephen Ward, soon-to-be-named CEO of Lenovo Group

Analyzing The Software Ball Game
If the software industry is changing in basic ways, and most agree it is, and business-technology buyers are thinking differently about how they acquire software, which they are, then shouldn't the value of software companies reflect those fundamental shifts?

Merrill Lynch software analyst Jason Maynard mulled that question and came to the conclusion that the conventional metrics used by Wall Street to assess software companies, including year-to-year license growth and earnings per share, were insufficient in light of changing business models in the software industry.

The traditional metrics used to assess software companies are insufficient, Merrill Lynch analyst Maynard says. Photo by Sacha Lecca

Maynard and his colleagues pored over the financial statements of dozens of software companies, including Computer Associates, IBM, Mercury Interactive, Microsoft, and Oracle, and came up with a new matrix for gauging how they perform. The resulting Merrill Lynch On-Demand Index, introduced earlier this year, reflects a vendor's mix of perpetual and subscription licenses and whether those applications are hosted or customer-managed, in addition to more conventional financial measures.

Merrill Lynch produces quarterly reports that show how software companies are tracking on its index, individually and in comparison with each other. Using the index, it's easier to assess how an established software company that still derives much of its revenue from big one-time licenses matches up with, say, Salesforce.com Inc. and its software-as-a-service approach.

The index is intended to help Maynard and his associates offer insightful advice to the mutual-fund companies, hedge-fund managers, and financial advisers that are the brokerage firm's clients. "Our real actionable day job is still trying to figure out what's going to go up, what's going to go down, and trying to help our clients make money," he says.

But the Merrill Lynch On-Demand Index also can help noninvestors follow what Maynard considers a long-term industry trend: the move away from monolithic, multimillion-dollar software contracts and toward more flexible, pay-as-you-use arrangements. So far, the index has edged up slightly, an indication, Maynard says, that the metamorphosis of the software industry is happening gradually.

What's driving this shift? Maynard believes IT buyers have tired of signing megacontracts that too often don't work in their favor. "If you can figure out what the customers are doing, the other stuff falls into place," he says.

Maynard is Merrill Lynch's primary analyst covering BEA Systems, BMC Software, CA, Microsoft, Novell, Oracle, Red Hat, and Siebel Systems, and his recommendations can influence whether investors buy or sell a vendor's stock. He's not shy about sharing his ideas on what companies can do to improve. Says Maynard, "I've been called a pain in the ... ."

There's no need to finish that thought; influence goes by many names.

-- John Foley

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