How hard will Y2K hit software makers?

Crystal balls are out to predict whether Year 2000 anxiety will prove as crippling for some software vendors in the second half of the year as it did in the first.

Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
Kim Girard
3 min read
Crystal balls are out to predict whether Year 2000 anxiety will prove as crippling for some software vendors in the second half of the year as it did in the first.

Oracle's shining financial results--announced yesterday and strengthened by strong database software sales--buoyed the company's stock, but left some Wall Street analysts unconvinced that other enterprise software makers will fare as well.

"While we find Oracle's results encouraging for big software companies, the lack of predictability in Oracle's business over the past couple of years makes it hard for us to turn to them for a bellwether of any sort," said Joe Farley, analyst at Donaldson Lufkin & Jenrette.

At issue is whether the expected software slump due to Y2K fixes will prove as dire as predicted. Many software makers have warned of shortfalls as software buyers divert money to patching their existing computer systems in order to handle the turn of the millennium.

Farley called the Year 2000 problem--glitches that occur when computers aren't able to handle the date change--"this year's Asia."

"It's a convenient prebuilt excuse for bad management decisions, poor plans, and miserable execution," he said, arguing that companies such as BMC Software, Compuware, and Microsoft are consistently making their numbers because they planned for a slowdown and lowered expectations in their business plans. "This was never going to be an easy year," he said.

Robert Austrian, analyst at NationsBanc Montgomery Securities, said Oracle's results don't put the market in the clear.

"Every survey we've done shows IT spending is at risk in the second calendar half," he said. "We're always slightly more positive when results come in well but we continue to worry."

To be sure, preparations for the Year 2000 problem have forced many companies to change their buying habits and put off planned computer projects, driving enterprise software sales down.

Other companies made large corporate software investments in 1997 and 1998 in anticipation of the Year 2000 chaos. Some are waiting until the second half of this year to spend, said Jim Shepherd, analyst at Boston-based research firm AMR Research, noting that much of the panic over the Year 2000 has subsided and employees assigned to those projects are now freed up to work on other projects.

"I think we'll see an improvement and to some extent Oracle is a reflection of that," he said. Shepherd noted that supply chain software vendor i2 Technologies and front office software maker Siebel Systems are among the few enterprise software firms that have thrived despite a downturn that hit the enterprise resource planning (ERP) software market.

The ERP market, which has historically grown at a 33 percent rate, grew just 20 percent in the first half of 1999. With the market partly saturated and corporate attention turning to spending on software systems that manage sales, marketing, and services functions, the ERP market cannot be expected to sustain banner year growth, analysts said.

Software firms including SAP, Peoplesoft, and Baan have reported lower-than-expected earnings and declining license sales, and have pointed the finger at Y2K-related issues for the slowdown.

Austrian noted that Oracle has fared better overall than its ERP peers. That's due, in part, to the fact that database software sales are less vulnerable to the Year 2000 problem. Many companies invested in ERP software last year specifically to upgrade, leading to a spike in sales and an inevitable slowdown this year, analysts said.

"A couple of things are very clear about ERP," said Robert Kugel, analyst at FAC Equities, First Albany. "Even if things don't turn out to be a total disaster, 1999 isn't going to turn out as a banner year for this market."