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Cloud has silver lining for software

Investors can expect to hear more about cloud computing - or the delivery of software services over the internet - in 2011. Indeed, it will remain a key theme within the software and IT services sphere for the foreseeable future. The key aspect of this is that the could is about providing more for less, with flexibility as an added bonus.

In fact, according to a study by Edison Investment Research, sales from US-listed software-as-a-service (SaaS) pure-play companies - who are central to the cloud model - are expected to be $4.2bn (£2.7bn) in 2010. Those estimates call for 18 per cent annual growth over the next two years, compared with around 7 per cent for the rest of the software sector. SaaS business models generally rely on subscriptions, rather than one-off licence sales, so it is possible that these figures underestimate the extent to which SaaS businesses are winning share.

That said, cloud-based strategies at many UK software and services companies are still evolving. Accounting software giant Sage, for example, is only now starting to include the cloud as as part of strategy going forward, having resisted a shift away from its traditional upfront licensing model for several years.

But applications, both for business and consumers, are increasingly being designed to store data in the cloud, and to enable users to move seamlessly between devices. Data will therefore, increasingly be held in the cloud and devices will connect to it. Of course, such hosted and cloud-based services require data storage, and lots of its, so expect more good news from international suppliers such as Interxion and US groups Equinix and Rackspace, or the UK's pan-European operator Telecity. Key metrics here include occupancy capacity, robust pricing and high connectivity access.

Another key theme is that of specialisation - and last year, the best-performing software sector shares were in companies focused on supplying niche software to specialised markets and industries. That includes, Aveva, which is focused on computer-aided design for engineering markets, and SDL, for language translation - their shares rose 45 per cent and 38 per cent respectively in 2010. More generalist IT services companies, particularly those with high exposure to the austerity-hit public sector, could continue to struggle.

Merger & acquisition (M&A) activity looks set to pick-up in 2011, after a growing number of deals in the US, where plenty of technology companies are sitting on big cash reserves. Intel, for instance, has been busy, with its $7.7bn deal for security software company, McAfee, plus its $1.4bn buy of Infineon's mobile-chip unit. Meanwhile, EMC cut a $2.25bn deal for data-storage technology company, Isilon Systems. There was also the exciting cage fight last year between Hewlett-Packard and Dell over data storage technology company, 3Par, which pushed the price tag up from Dell's original $1.15bn offer to Hewlett-Packard's final $2.4bn acquisition price.

As Richard Holway of technology research firm, TechMarketView, put it: "I do see 2011 as being a year of continued, indeed increased, M&A activity. I see many of the 'just below the top tier' players - starting with [New York-listed] CSC – being likely consolidation or 'take private' candidates."

"It's really not hard to predict this," he adds. "After all, SITS (software and information technology services) is following exactly the same path as the automobile sector when it hit its deflationary period. That sector went from 3,000-plus independent players globally to half a dozen global mega companies in 20-30 years. We are already 10 years into IT's deflationary period, and I see the same end result. It will be very interesting to see how the Indians play that game."

COMPANYPRICE (p)MARKET CAP (£m)PE RATIOYIELD (%)1 YEAR PRICE CHANGE (%)LAST IC VIEW
AUTONOMY CORP.1,5593,78227.50.01.3
AVEVA GROUP1,6731,13732.51.060.4
COMPUTACENTER43066215.02.738.8
FIDESSA GROUP1,52655219.92.023.4
INVENSYS3582,90222.51.014.1
LOGICA1352,15510.81.210.8
MICRO FOCUS INTL.39781716.02.6-20.5
MISYS3351,28325.50.051.5
SAGE GROUP2853,75914.82.723.6
SDL61347820.00.038.1
TELECITY GROUP43085223.20.06.3

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