Software profits unpredictable amid trend to rental

Customers resist upfront licence fees

Big changes in the software industry are creating uncertain market conditions.

The reason is that customers increasingly want to rent business software by use rather than pay more expensive upfront licence fees for the whole package.

The result is that revenues are lumpy, profits unpredictable and many analysts are worried.

A couple of companies with significant Ottawa operations are feeling the pain. Autodesk, the design software company, warned that results in the quarter ending in January will be worse than expected: sales of $560 million to $580 million and profit of only 29 cents to 36 cents per share. Analysts were expecting sales of $594 million and profit of 48 cents.

Autodesk will spend $15 million to $20 million on job cuts and consolidating operations starting now and ending next April.

Chief executive Carl Bass wasn’t providing specifics about the restructuring action or how the company expects to deliver a promise of 12 per cent annual revenue growth in coming years.

Bass urged restless analysts to be patient while Autodesk fine-tunes operations to support the new software marketing model.

“We have been through a number of these transformations before.”

Meanwhile, at Adobe Systems, sales of $995 million in the quarter ending in August were well below the $1.1 billion analysts were expecting and profit of 32 cents per share trailed by two cents.

But a hefty jump in software subscriptions of 331,000 — more than 30 per cent ahead of expectations — to 1.03 million subscriptions sent the stock up sharply and led some analysts to predict more good things for a stock that has been on a strong run.

Adobe’s digital marketing products enjoyed strong sales, more than offsetting a decline in the aging LiveCycle business that Adobe inherited in the takeover of Ottawa’s JetForm.

Magor Corp., a small Ottawa technology startup, just had a rough quarter. Sales in the quarter ending in July of $196,537 were

Many traditional giants of the software industry resisted the trend to subscription sales for years. Now they are paying the price as scrappier competitors steal business. Big outfits such as Microsoft and Oracle are now trying to make up for lost time.

Adobe made the move faster than some other big players and is enjoying some of the benefits. But it has another problem: the theft of source code behind some key software and the loss of encrypted credit card information involving 2.9 million customers.

Despite the hacker attacks, Adobe shares have lost only a little momentum in the past week. The stock is up almost 70 per cent since last November.

Autodesk shares have risen 40 per cent since last November. While the trajectory has been lumpy compared with Adobe’s rise, Autodesk stock is still trading above a March.

While many analysts are worried that renting software will generate weaker profits and unpredictable sales, investors clearly are not listening — yet. down 50 per cent from a year earlier as a big expected deal in the $500,000 range was pushed into the future. Its loss surged 28 per cent to $1.67 million. Nonetheless, the company said that many U.S. carriers, including several big ones, are testing its Aerus software, which visually displays desktop, laptop and tablet traffic.

Magor aims to take on Cisco Systems and other players in the video conferencing business.

With cash reserves reduced to $1.175 million, Magor said it has found new backers for $1 million in fresh funding. However, it had to reduce the sale price of the securities from 30 cents to 25 cents a share because of a weak stock price — down sharply from the 59-cent share price when it launched an initial public offering in March. Still, the stock has held up surprisingly well since the disclosure of the weak quarter. The reason could be that with billionaire Terry Matthews as chairman and his Wesley Clover company holding a 30 per cent stake, Magor won’t lack for support in challenging conditions.

The Ottawa operations of Constellation Software are on a new acquisition tear. N. Harris Computer Corp. is spending $3.65 million for Sand Technology, a Montreal outfit whose software process- es huge amounts of data for retail and government customers. Harris traditionally has focused on small software outfits that sell to local government, school boards and utilities but is now broadening its reach.

The shares of Constellation have surged 80 per cent to reach $180 over the past 12 months. The reason is that it keeps profits growing, despite some problem deals, while absorbing as many as seven new companies every quarter.

Calian Technologies has won a $14-million contract to provide elearning services to the defence department. Calian, consulting partners and 30 employees in Atlantic Canada will develop and deliver training courses for the Army Learning Support Centre under the 30-month contract extension.