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Vanin Aegea
Vanin Aegea
Articles (218)  | Author's Website |

Catering to Customers in the Software Industry

October 09, 2013 | About:

Innovation and friendliness are two stewards that software developers value highly in order to retain and attract customers. Applications that are easy to navigate and to use have proved to be highly valued by users. Some companies were able to meet the challenge and deliver tailor made products, among them are: Sap Aktiengesellschaft (NYSE:SAP) and Adobe Systems (NASDAQ:ADBE). But, does catering to customer preferences generate profits?

Developing Cloud Customers

Headquartered in Germany, and with regional offices around the globe, SAP is a leading software solutions developer. The firm also provides consulting, training, and other services for the wide range of products offered. The latest product introductions have been very well received in the Americas, the most important market to the firm. Also, SuccessFactors and Ariba have provided the company with one of the best cloud portfolios in the industry.

On the upside, the open ecosystem strategy continues to fare well for the company. Innovation has been one of the stewards behind the strategy, allowing partners to develop additional customer value. The strategy has the consequence of sharing innovation responsibilities, allowing the firm to draw feedback from small to big companies that are in constant dialogue with customers. In turn, positive results measured by growth have been observed among the companies five segments: analytics, cloud, mobile and database, and technology.

SAP also implemented a specific strategy for market expansion. The approach is systematic and implies selecting a region, then a market, and finally an industry. By default, there can be great differences between markets in the same region. The company identifies those that are growing the fastest, and then directs investments through its go-to-market coverage model to effectively sell industry-specific solutions.

SAP is financiallymoderate because cash has dwindled amid recent acquisitions, and stands close to debt levels.Currently trading at 21.1times its earnings, the stock packs a 55% discount to the industry average. I share the positive sentiment demonstrated by Frank Sands, Jim Simons, Steven Cohen and Chris Davis’ latest position increments. I value the emphasis placed on customer needs, and the company’s partnerships for product development.

Subscribing Cloud Customers

With a base in Mountain View, Calif., and branches across the U.S., Europe and Asia, Adobe provides graphic design, publishing and imaging software. Last quarter results have been good overall, and management made public its encouraging forward revenue guidance. Nonetheless, analysts continue to question the firm’s decision to move to a subscription-based service. They argue that revenues will be affected in the short term, aggravated by slow recovery at end markets and high exposure to the European market.

In addition to switching to a subscription-based service, Adobe has also entered the cloud business decisively. According to the company, the new business model allows for more pricing options and flexibility to users. Even the Creative Solutions platform, the most important product when it comes to revenues, has been switched to the cloud-subscriptions based model. Amid revenue shortcomings in the short term, positive long-term outlook is based on predictable revenues. And the cloud based system is expected to be a positive catalyst for overall performance.

To counter competition and ease the loss of market share in the web design segment, Adobe has revamped investment on HTML 5. Updates have been done to the company’s products to ease interaction with HMTL 5, and an additional set of tools have been developed. The digital market place is however, a new ground to the firm. A series of acquisitions, being Omniture the latest, continues to tell the interest paid by the firm to this growing segment.

Adobe’s finances are strong. Trading at 58.1 times its earnings, the stock carries a 23% premium to the industry average. The largest gurus holding a position in the company, Dodge & Cox, have not modified his positions through 2013. His standstill however, does not align with my optimism. The company has made simple tweaks to a business model that is bound to deliver profits.

Clouding Is Not Enough

I like both companies because they pay attention to what the clients’ needs are, and make a profit with a tailor made service. I do not mean to say the companies will develop a product for each client, but serving to industry wide preferences is a very positive point in my balance. I understand that SAP goes a step further by developing partners and increase feedback, and prefer it for a prospective investment.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanin Aegea
A fundamental analyst at Lone Tree Analytics

Visit Vanin Aegea's Website

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