The growth rate of the United States' gross domestic product (GDP) is expected to slow to 3.2 percent in 2001, down drastically from 2000's 5.2 percent growth rate. It's also predicted to be less than the world's average GDP, predicted to be around 3.4 percent in 2001, according to statistics from the Economist Intelligence Unit, which provides analysis and forecasts to companies that operate across national borders.
Not only are most other countries expected to grow at a more rapid clip than the United States, but their software spending growth is also forecast to outpace that of the United States during the next several years.
For example, in the enterprise resource management (ERM) and customer-relationship management (CRM) markets, international growth will outpace U.S. growth rates all the way into 2004, according to numbers from IDC and U.S. Bancorp Piper Jaffray Research. In 2001 alone, the CRM market is expected to grow by 42 percent in Europe, compared with 35 percent in North America. The ERM forecast shows international growth at 12 percent in 2001, compared with North American growth at 11 percent.
Though software companies with a big enough percentage of overseas revenue may thus be able to balance out shrinkage in the United States, many analysts suggest none of the top-tier companies are really safe--it's a small world after all.
A strong international business is "certainly a stabilizing factor from a diversity point of view... for those with strong European and Latin American business, it levels out volatility," said Frost Securities analyst George Chandler, who covers Oracle and a handful of smaller companies.
All the analysts said they take companies' international business into consideration more as the economy falters, but they are not all sure that the global markets won't mimic the United States too closely to provide padding.
There's also the issue of the connection between the two markets. "I don't think international business is substantially more insulated than domestic," said Banc of America Montgomery analyst Bob Austrian. Even if overseas markets do hold up in the event of a U.S. recession, top-tier companies are just too interconnected, he said: "Even companies that get a large percentage of revenue from overseas are highly exposed...because the Global 1000 are relatively synchronized." The Global 1000 consists of the top companies in 22 countries, based on market capitalization. It uses data compiled by Morgan Stanley International.
Analysts could only agree on two companies that were big enough to shrug off the slump: SAP and Oracle. Both have large overseas businesses and solid e-business offerings. Analysts have suggested that e-business software companies are best positioned during the slowdown, since their products are high on the priority lists of the Global 1000.
SAP--a Walldorf, Germany-based software provider to the European continent--is the strongest bet. Analysts are confident the company is still going strong after recent channel checks. Its latest quarter also showed strong year-over-year growth in its EMEA (Europe, the Middle East and Africa) region, which grew by 42 percent, and the Asia-Pacific region, which grew by 38 percent.
"It is difficult to overstate its dominance, particularly within the all-important German market," U.S. Bancorp Piper Jaffray analyst Jon M. Ekoniak wrote in a research note.
Informal channel checks in recent weeks have verified the company is still in good standing, Ekoniak added, and conversations with customers and members of the systems-integration community have made it clear that SAP's customer base is intensely loyal within Europe.
Oracle is another truly global software company, with about half of its revenue generated from outside of the United States and a significant number of employees stationed overseas.
Oracle's overseas business would "cushion or offset whatever happens here," said analyst Jim Mendelson of Wit Soundview. But he added that investors are somewhat nervous about Oracle at the moment. The company, which has its U.S. headquarters in Redwood Shores, Calif., reported a strong second quarter but has been mum on how comfortable it is with projections for its upcoming third-quarter announcement in mid-March.
The company is expected to meet its earnings target of 12 cents a share, First Call's consensus estimate, Ekoniak said in a report. But the economy is a "wild card," he added. "We remain conscious of the impact that a broad economic slowdown in the United States could have on all application vendors, including Oracle," he wrote.
Commerce One of Pleasanton, Calif., is a strong international player. About 55 percent of its total license revenue in the fourth quarter came from abroad, and analysts figure that makes the total percentage of its overseas-generated revenue around 42 percent.
The company is heavily reliant on SAP for most of this money, however. And its recent partnership with the company accounted for more than 30 percent of fourth-quarter revenue, raising some concern among analysts.
Though Ekoniak said companies such as Ariba, i2 Technologies, Siebel Systems, PeopleSoft and others "are also intently focused on the international opportunity and will certainly provide intense competition," other analysts begged to differ.
"International business helps, but it doesn't insulate these companies," said Morgan Stanley analyst Charles Philips.
Most analysts interviewed for this story agreed that the only way a software company will be able to pad itself against a U.S. recession is if it has at least 40 to 50 percent of its business from outside the country.
But even the most diversified of companies are still teetering on the dividing line. Commerce One has 42 percent, BEA Software 41 percent, and i2 36 percent. Ariba has a mere 20 percent of revenue from outside the United States.
It may not even be desirable for smaller companies to have larger overseas operations, Chandler said: "There's a danger they could spread themselves too thin."
But the main issue for most analysts was not how much revenue these companies get from outside the United States, but to what extent Asia and Europe will mimic the American curve.
Follow the leader?
Economic indicators show that while the U.S. market undoubtedly sets the pace overseas, the correlation is not direct.
"I'm treating this as a global issue. I'm not favoring companies with more international exposure," Austrian said.
Statistics suggest that though Europe in particular is prone to copy U.S. behavior, economies will slow at a much less drastic pace globally.
Asian Pacific countries and Latin America are the key areas bringing the average up, both growing their GDP at rates of 3.9 percent in 2001.
Though Western Europe is behind North America, with a GDP growth rate of 3 percent for 2001, it is still predicted to slow less from 2000's rate, meaning that companies will likely see less deceleration in their international business than at home. North America's rate of 3.2 percent is down from a rate of 5.2 percent in 2000, while Western Europe's rate of 3 percent is only down from 3.4 percent in 2000.
"I don't think things will slow as much in Europe and Asia, though over time the global economy is linked," Philips said. "If the U.S. goes into a spending lock-down, there's not much protection."