Changewave Research: B2B Software Industry on Pace to Recovery

ChangeWave Research: B2B Software Industry – On Pace to Recovery

ChangeWave Research Report: B2B Software Industry – On Pace to Recovery

Abstract In our recent “B2B Fighting Back” report, we presented Alliance findings showing a developing recovery for the B2B Software industry. “There is now strong evidence of a reversal in the making,” we reported. But there were still a number of issues to be answered, including who stood to win and who stood to lose. During the week of July 16-21, we went back to our B2B Alliance members to review progress within the industry and to take a closer look at the prospects for industry leaders as well as mid-tier companies. A total of 65 B2B industry members participated. Key Findings Modest Recovery for B2B Software Industry is on Pace. Despite certain tempering factors, the B2B sector has clearly entered a period of modest recovery characterized by moderate levels of growth.  By an impressive 6-to-1 margin (51% to 8%), B2B industry respondents see an increase in overall business revenues for the 3rd Quarter.  However, price pressures will continue. One-in-three (32%) respondents expect software prices to fall over the next 12 months; only 9% see prices increasing. And more than half (54%) see a shift occurring from “per seat” to “flat” pricing.  Security Software (45%) is seen as the best performing sub-segment for 2003, followed by Web Services (32%). The worst performing sub-segment – CRM.  SAP (28%) maintained its position as top choice for the biggest winner over the next 6 months. However, BEA Systems came in a strong second, jumping from 10% in our May survey to 17% currently – leapfrogging IBM and Microsoft.  Which mid-tier companies will pick up market share over the next 6 months? BEA Systems (Net +43) was the number one choice of respondents, holding a very substantial lead over the rest of the pack. TIBCO Software (Net +11) came in second. On the down side, Commerce One (Net -23) was chosen as the company most likely to lose market share over the next 6 months.  A majority of respondents affirmed that the Oracle/PeopleSoft tug of war will cause industry uncertainty, customer confusion and delayed customer decisions. Bottom Line: While an impressive majority of respondents see revenues increasing in the 3rd Quarter, there are still tempering factors (e.g., price pressures, a shift to flat pricing, longer upgrade cycles) that are diminishing the probability of a robust rebound in the sector this year. However, a modest rebound is clearly underway.

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Table of Contents

Summary of Key Findings...... 3

The Findings...... 5

Overall B2B Business Revenues and Pricing Pressures...... 5

B2B Software Sub-Segments...... 6

B2B Software Winners...... 7

Notable Shifts in the Industry...... 9

The Health of Microsoft and the Linux Threat...... 11

Impact of the Oracle/PeopleSoft Tug of War...... 12

ChangeWave Research Methodology...... 16

About ChangeWave Research...... 17

I. Summary of Key Findings

Optimism Over 3Q B2B Winners Modest Recovery B2B  SAP & BEAS: SAP for B2B Software Industry (28%) & BEAS (17%) Industry Sales were voted biggest is on winners over next 6  By a 6-to-1 margin Pace months, based on (51%-8%) respondents sales and momentum  While an impressive see revenues up in Q3  Security Software: majority of respondents But there are Certain 45% see it as the see Q3 revenues Tempering Factors best-performing sub- increasing, there are segment for 2003, still tempering factors  32% believe price followed by Web (e.g., price pressures, pressures will continue Services (32%) a shift to flat pricing, over next 12 months  MSFT: 57% expect longer upgrade cycles)  54% see a shift MSFT to outperform that are diminishing the occurring from “per the industry, but 72% probability of a robust seat” to “flat pricing” believe Linux will rebound for the sector  55% say longer have a negative this year. However, a upgrade cycles are impact on sales modest rebound is here to stay clearly underway.

Overview

In our recent “B2B Fighting Back” report, we presented Alliance findings showing a developing recovery for the B2B Software industry. “There is now strong evidence of a reversal in the making,” we reported. But there were still a number of issues to be answered, including who stands to win and who stands to lose. During the week of July 16-21, we went back to our B2B Alliance members to review progress within the industry and to take a closer look at the prospects for industry leaders as well as several mid-tier companies. A total of 65 B2B industry members participated.

The survey focused on six areas:

 Overall Business Revenues and Pricing Pressures  B2B Software Sub-Segments  B2B Software Winners  Notable Shifts in the Industry  The Health of Microsoft and the Linux Threat  Impact of the Oracle/PeopleSoft Tug of War

Among the key findings:

 B2B Revenue Rising for 3Q. By an impressive 6-to-1 margin (51% to 8%), industry respondents see an increase in overall business revenues for the 3rd Quarter. Another 38% of respondents see no change in revenues from the previous quarter.  Pricing Pressures. One in three (32%) of our respondents expect B2B software prices to fall over the next 12 months, while only 9% see prices increasing. Another 52% see prices staying the same.  B2B Software Sub-Segments - Winners and Losers. Respondents chose Security Software (45%) as the best performing sub-segment for 2003, followed by Web Services (32%). The worst performing sub-segment was CRM.  Who has the Momentum? When asked which B2B company will be the biggest winner over the next 6 months, SAP (28%) maintained its position as the top choice of our industry respondents. However, BEA Systems came in a strong second, jumping from 10% in our May survey to 17% in the current one, and leapfrogging IBM and Microsoft in the process.  Most Likely to Pick Up Market Share? When we asked respondents which mid-tier companies would pick up market share over the next 6 months, we found BEA Systems (Net +43) holding a very substantial lead over the rest of the pack. TIBCO Software (Net +11) was a distant second. On the down side, respondents chose Commerce One (Net -23) as the B2B company most likely to lose market share over the next 6 months.  Increased Bias Toward Enterprise-Wide Efforts. By a 52% to 32% margin, respondents are seeing indications of a shift in overall IT spending towards the enterprise, supporting the findings of recent Alliance B2B surveys.  “Flat” Pricing on the Rise. More than half (54%) of industry respondents see a shift occurring in the B2B marketplace from “per seat” to “flat” pricing.  Longer Corporate Upgrade Cycle – Here to Stay. The majority of respondents (55%) believe that the stretching out of the corporate upgrade cycle is a permanent one. Only 15% believe major B2B companies will be able to curb this shift.  Microsoft Still the One to Beat. Fifty-seven percent (57%) of respondents expect Microsoft to outperform the industry in the second half of 2003 – given improving general business conditions. Another 32% believe Microsoft will not be able to outperform the sector.  Microsoft’s Enterprising Ways. By better than a 2-to-1 margin (63% to 26%), respondents believe Microsoft will continue to take market share in operating systems and related markets during the second half of 2003.  But The Linux Threat is Real. Nearly three-quarters (72%) of respondents believe that Linux will have a “significant” or “marginal” impact on Microsoft sales over the next 12 months. This is a substantial number, and confirms other recent Alliance findings on Linux and Microsoft.  Oracle/PeopleSoft Tussle Causing Confusion. A majority of respondents affirmed that the Oracle/PeopleSoft tug of war will cause industry uncertainty, customer confusion and delayed customer decisions.

II. The Findings

A. Overall B2B Business Revenues and Pricing Pressures

1. With regard to the B2B Software and Services sector, do you think you'll see an increase in overall business revenues, a decrease, or will overall business revenues remain the same for the 3rd Quarter (July-Sep) 2003 vs. the previous quarter?

Current Previous Survey Survey July 2003 May 2003 Increase in Overall B2B Revenue for Q3 51% 24% Decrease in Overall B2B Revenue for Q3 8% 12% Remain the Same 38% 59% Don't Know 3% 5%

B2B Revenue on Upswing in Q3. By an impressive 6-to-1 margin (51% to 8%), industry respondents see an increase in overall business revenues for the 3rd Quarter. Another 38% see no change from the previous quarter. In comparison to our May 2003 B2B survey, these are exceptionally positive results – the net change score (% increase minus % decrease) jumped from +12 to +43.

2. What about B2B vendor pricing over the next 12 months? Do you believe that B2B software prices will rise, fall, or stay the same over the next 12 months?

Prices will Rise 9% Prices will Fall 32% Prices will Stay the Same 52% Don't Know 6%

Pricing Pressures. One-in-three (32%) of our respondents expect B2B software prices to fall over the next 12 months, while only 9% see prices increasing. Another 52% believe no change will occur.

B. B2B Software Sub-Segments

1. Which one or two of the following B2B sub-segments do you think will perform best in 2003? (Choose No More Than Two)

Current Previous B2B Sub-segment Survey Survey July 2003 May 2003 Security Software 45% 37% Web Services 32% 29% Enterprise Systems 20% 20% CRM 15% 15% Data Management 15% 15% Supply Chain Management 15% 8% Database Management 14% 17% Application Development Tools/Platforms 9% 10% Vertical Software 6% 14% Don't Know 8% 5%

Security Software Maintains Top Spot. Respondents chose Security Software (45%) as the best performing B2B sub-segment for 2003, with Web Services (32%) again taking the runner-up spot. Notably, the Vertical Software sub-segment showed the biggest drop since our May survey (falling from 14% to 6%).

2. On the down side, which one or two of the following B2B sub-segments do you think will perform the worst in 2003? (Choose No More Than Two) Current Previous B2B Sub-segment Survey Survey July 2003 May 2003 CRM 32% 32% Enterprise Systems 29% 36% Supply Chain Management 26% 14% Database Management 23% 24% Vertical Software 15% 14% Application Development Tools/Platforms 12% 19% Web Services 6% 3% Security Software 2% 2% Data Management 0% 10% Don't Know 14% 14% CRM – A Big Loser, Again. After showing signs of improvement in our 3Q IT Spending Survey (June 2003), the CRM sub-segment once again is showing weakness. One-in- three respondents (32%) picked it as the worst performing B2B sub-segment for 2003.

Net Difference Score – Current Survey Perform Perform Net B2B Sub-segment Best in Worst in Difference 2003 2003 July 2003 Security Software 45% 2% +43 Web Services 32% 6% +26 Data Management 15% 0% +15 Application Development Tools/Platforms 9% 12% -3 Database Management 14% 23% -9 Vertical Software 6% 15% -9 Enterprise Systems 20% 29% -9 Supply Chain Management 15% 26% -11 CRM 15% 32% -17

Net Difference Score Comparison: Current Survey vs. May Survey

Net Net Difference Difference B2B Sub-segment Current Previous Survey Survey July 2003 May 2003 Security Software +43 +35 Web Services +26 +26 Data Management +15 +5 Application Development Tools/Platforms -3 -9 Database Management -9 -7 Vertical Software -9 0 Enterprise Systems -9 -16 Supply Chain Management -11 -6 CRM -17 -17

C. B2B Software Winners

1. Measured by sales and momentum, which B2B company do you think will be the biggest winner over the next six months?

Current Previous Survey Survey July 2003 May 2003 SAP 28% 34% BEA Systems 17% 10% IBM 13% 21% Oracle 11% 7% Microsoft 9% 14%

SAP Still Leads; BEA Systems Showing Momentum. When asked which B2B company will be the biggest winner over the next 6 months, SAP (28%) remained the top choice of our industry respondents. However, BEA Systems came in a strong second, jumping from 10% in our May survey to 17% in the current one, and leapfrogging IBM and Microsoft in the process.

2. Let's focus on the 2nd and 3rd tier. Based on your own knowledge and what you are seeing in the industry, which of the following B2B vendors are most likely to pick up market share over the next six months? (Choose All That Apply)

BEA Systems (BEAS) 49% Ariba (ARBA) 15% TIBCO Software (TIBX) 14% Hyperion Solutions (HYSL) 12% Agile Software (AGIL) 11% JDA Software (JDAS) 9% Manugistics Group (MANU) 9% Manhattan Associates (MANH) 8% Vignette (VIGN) 8% Broadvision (BVSN) 6% Commerce One (CMRC) 6% Freemarkets (FMKT) 5% Progress Software (PRGS) 3%

3. And which of the following B2B vendors are most likely to lose market share over the next six months? (Choose All That Apply)

Commerce One (CMRC) 29% Ariba (ARBA) 20% Broadvision (BVSN) 17% Manugistics Group (MANU) 14% Vignette (VIGN) 12% Manhattan Associates (MANH) 11% Progress Software (PRGS) 9% Freemarkets (FMKT) 9% BEA Systems (BEAS) 6% JDA Software (JDAS) 6% Hyperion Solutions (HYSL) 5% TIBCO Software (TIBX) 3% Agile Software (AGIL) 3%

Net Score Difference

Pick Up Lose Market Market Net B2B vendors Share in Share in Difference the Next 6 the Next 6 Months Months BEA Systems (BEAS) 49% 6% +43 TIBCO Software (TIBX) 14% 3% +11 Agile Software (AGIL) 11% 3% +8 Hyperion Solutions (HYSL) 12% 5% +7 JDA Software (JDAS) 9% 6% +3 Manhattan Associates (MANH) 8% 11% -3 Vignette (VIGN) 8% 12% -4 Freemarkets (FMKT) 5% 9% -4 Ariba (ARBA) 15% 20% -5 Manugistics Group (MANU) 9% 14% -5 Progress Software (PRGS) 3% 9% -6 Broadvision (BVSN) 6% 17% -9 Commerce One (CMRC) 6% 29% -23

Market Share Gainers – BEA Systems Comes in Strong. When we asked respondents which mid-tier companies would pick up market share over the next 6 months, we found BEA Systems (Net +43) holding a very substantial lead over the rest of the pack. TIBCO Software (Net +11) was a distant second.

Biggest Market Share Loser – Commerce One. According to our industry respondents, Commerce One (29%) is the B2B company most likely to lose market share over the next 6 months.

D. Notable Shifts in the Industry

1. Results from recent Alliance B2B surveys seem to show some renewed interest in "the enterprise" - i.e., larger, more company wide projects that involve or effect the entire enterprise. Are you personally seeing indications of a shift in overall IT spending towards the enterprise?

Yes 52% No 32% Don't Know 15%

Increased Bias Toward Enterprise-wide Efforts. By a 52% to 32% margin, respondents are seeing indications of a shift in overall IT spending towards the enterprise, supporting the findings of recent Alliance B2B surveys.

2. Some analysts see a shift by B2B companies away from "per seat" pricing to "flat" pricing for entire installations. Do you agree or disagree that pricing patterns are shifting from "per seat" to "flat" pricing in 2003?

Agree - Pricing Patterns are Shifting to Flat Pricing 54% Disagree - Pricing Patterns are Not Shifting to Flat Pricing 29% Don't Know 15%

“Flat” Pricing on the Rise. More than half (54%) of industry respondents see a shift occurring in the B2B marketplace from “per seat” to “flat” pricing.

2A. Will the big name B2B companies be able to stem the erosion in "per seat" licensing sales, or is the shift to flat pricing permanent?

Big Name B2B Companies will Stem the Erosion of "Per Seat" Licensing Sales 14% Shift to Flat Pricing is Permanent 57% Don't Know 17% No Answer 11%

Among members who believe pricing patterns are shifting to flat pricing, 57% believe the shift is permanent. Alternately, only 14% think the big name B2B companies will be able to stem the erosion in “per seat” licensing sales.

3. A parallel trend to the shift from "per seat" licensing is the stretching out of the corporate upgrade cycle. Can the big name B2B companies stem the continued stretching out of the upgrade cycle, or is the shift in the upgrade cycle a permanent one?

Big Name B2B Companies will Stem the Continued Stretching Out of the Upgrade Cycle 15% The Shift in the Upgrade Cycle is a Permanent One 55% Don't Know 26% No Answer 3%

Longer Corporate Upgrade Cycle – Here to Stay. The majority of respondents (55%) believe that the stretching out of the corporate upgrade cycle is a permanent one. Only 15% believe major B2B companies will be able to curb this shift.

E. The Health of Microsoft and the Linux Threat

1. Microsoft sales have always been somewhat dependent on general business conditions due to the range of its product line and the ubiquity of its desktop products. Do you believe Microsoft will outperform the industry in the second half of 2003 if general business conditions continue to improve?

Yes 57% No 32% Don't Know 9%

Microsoft Still the One to Beat. Fifty-seven percent (57%) of respondents expect Microsoft to outperform the industry in the second half of 2003 – given improving general business conditions. Another 32% believe Microsoft will not be able to outperform the sector.

2. Do you believe Microsoft Enterprise products will continue to take market share in operating systems and related markets during the second half of 2003?

Yes 63% No 26% Don't Know 9% No Answer 2%

Microsoft’s Enterprising Ways. By better than a 2-to-1 margin (63% to 26%), respondents believe Microsoft will continue to take market share in operating systems and related markets during the second half of 2003.

3. Over the past year, Microsoft has made changes in the core licensing terms of its products. The most recent change reduced the cost of their server products, and many analysts saw this as a move to counter the growing threat of Linux. Based on what you see and hear from customers and other users of B2B software, do you believe that Linux will have a material impact on Microsoft sales over the next 12 months?

Yes, It Will Have a Significant Impact 18% Yes, It Will Have a Marginal Impact 54% No, It Will Not Have any Impact 22% Don't Know 5% No Answer 2%

The Linux Threat is Real. Nearly three-quarters (72%) of respondents believe that Linux will have a “significant” or “marginal” impact on Microsoft sales over the next 12 months. This is a substantial number, and confirms other recent Alliance findings on Linux and Microsoft (see 8/7/03 edition, Alliance News & Info Newsletter).

F. Impact of the Oracle/PeopleSoft Tug of War

1. Finally, what will be the impact of the Oracle/PeopleSoft tug of war on the B2B industry and its customers? Also, what other B2B companies are next in line for consolidation?

When asked about the effect of the Oracle/PeopleSoft tussle, a majority of respondents affirmed it will cause industry uncertainty, customer confusion and delayed customer decisions. Some believe the tug of war will spur additional mergers – resulting in fewer competitors and less choices for customers. Moreover, when asked which other B2B companies are next in line for consolidation, Siebel received the most votes with BEA Systems coming in second.

Sample of Alliance Member Responses

(A) It Will Have an Impact

 BMY0803 writes, "SAP will benefit from client confusion related to any Oracle/ PeopleSoft tug of war."

 RE7492 writes, "There is going to be a general slowdown in the upgrade cycles for all of the PSFT/JDEC customers, until the situation is resolved. I believe that the most viable ERP company that could be acquired would be SSA Global Technologies, they have recently acquired Bain and CA applications, are privately held and will be the 4th largest ERP vendor if Oracle takes over PSFT.”

 CHA2247 writes, "Consolidation is needed and required in the B2B space to reduce capacity. Good for vendors, tough for customers until all settles down. Next in line for consolidation? i2 Technologies. Peregrine."

 AIT8949 writes, "Causing people to stall decisions around HR and CRM investments. Next likely target is SEBL."

 ALO1356 writes, "It will impact the industry as a whole due to uncertainty, no winners so far."

 HOW7595 writes, "Big impact. BEAS will be next by IBM.”

 MIK0074 writes, "Oracle writes crap application software. PeopleSoft writes crap application software. However, the market for their applications is big companies who buy on brand. Small companies cannot get a foothold absent a "revolution" of some sort. There isn't room in the Enterprise Systems area for all of SAP, Oracle, PeopleSoft and JD Edwards - hence the PeopleSoft/JD Edwards merger. Oracle is likely to win the takeover battle - eventually, if not right away. The overall impact will be improvement of the enterprise offerings by slow accretion. The segment will not offer hyper-growth and the stocks should not be valued as growth stocks."

 SOL0029 writes, "Reduced customer service and more pricing power in the hands of the bigger, more acquisitive players."

 HSA6772 writes, "If Oracle takes over PeopleSoft, customers will be deprived of quality products such as general ledger from PeopleSoft. Next likely target? Hyperion is a possible acquisition by Oracle."

 DON3052 writes, "I think in the end there will be a handful of companies, Microsoft, SAP, Oracle, and IBM. The remaining companies will be targets of the ones mentioned above. IBM has already purchased Crossworlds; it will continue to look for adequate targets. BEA Systems has a tough road ahead and could very well be the next target. As IBM enhances the capabilities of its products, TIBCO and others will have a tough road to climb."

 SMU3129 writes, "May force others into merger. Siebel, ITWO Software."

 DBE7749 writes, "Impact: confusion, hesitation. Next in line: TIBCO?"

 WGM7513 writes, "It hurts since Oracle has a strong love/hate relationship with its client base. However, it turns out they will still need to add application development tools, so some of the second tier under WebMethods are candidates for acquisition."

 EWI0296 writes, "It will spur more consolidation. BVSN, Siebel and Manugistics may be candidates."  SHR6405 writes, "Less competition- fewer choices for customers. Most any company with low (< $5) stock price is a candidate for merger/acquisition."

 VCH7799 writes, "Oracle is using its market cap to buy capabilities it is lagging in, or can't lead the market with. The successful execution of this strategy depends upon market caps remaining elevated - which I don't think is realistic. I think that M&A activity in general will begin to wane once the current "son of bubble" pops, and equity prices - especially those that are absurdly overvalued in speculative sectors -resume their death march."

 LOR5995 writes, "If the PFST/JDE deal completes, I don't see Larry Ellison going through with it. A year from now everyone will be on to something else. However, if the Oracle/PSFT deal DOES happen, there will be a lot of disruption for current PSFT clients, and, over time, will spur a new round of Enterprise App purchasing."

 SAV8382 writes, "It can only hurt Oracle and help smaller niche companies with more focused, higher return solutions."

 JSK3535 writes, "I am not sure Oracle and PeopleSoft will have a positive impact on customers due to the size of this consolidation; it will be a challenge integrating large corporate structure and culture along with product lines. Other B2B companies should watch this space to determine if merger happens and if it is successful before jumping."

 RGU7938 writes, "It is a sign of the maturity/saturation of the market. There is not enough market left and too few success stories. SAP will profit temporarily but is too big to acquire another significant competitor."

(B) Little to No Impact

 FCO6831 writes, "Not much, except the industry might get one provider with a better integrated product.”

 SMI5868 writes, "None that I can see."

 JIM7025 writes, "The effect will be slight and short term. This business, above all, deals with change and merger mania as facts of life. Most important is that the period of uncertainty, which we are in now, will provide an opportunity for small players with good products to gain some market share. If you can identify a few small companies competing in this business that have a more advanced product solution, they may be sleepers for a quick gain in market share and their own share price."

 GAT7548 writes, "The Oracle/PeopleSoft situation is simply giving PeopleSoft and JD Edwards customers one more reason (in addition to the economic concerns) to be extremely cautious about starting any new projects."

 KVD9114 writes, "None. The client is looking at internal B2B projects within the enterprise applications they have today. Hence, what are the SAP's, Oracle's, Baan's of the world got to offer? I would be surprised if there will be any significant consolidation in the future. Either the companies make it or they don't.”

(C) Other

 SCO8848 writes, "1. QAD and Mapics are two very solid middle tier ERP vendors that may either merge or be acquired by tier one vendors like SAP/PSFT/ORCL."

 RWS5636 writes, "With consolidation, I would look at Vignette. The ’Content Management’ functionality that Vignette's product provides is starting to be included with the big Application Servers. I would not be surprised if one of the second tier App Server companies (Macromedia?) absorbed Vignette to incorporate Vignette's CM into their App Server. "

Summary and Analysis

On the Comeback Trail. In our recent “B2B Fighting Back” report, we saw a developing recovery occurring in the B2B Software industry. Our findings showed “…a definite improvement in the overall demand for B2B software for 2nd half 2003, but we remain concerned about … a lukewarm business environment and tight IT budgets.”

Modest Recovery for B2B Software Industry is on Pace. The current survey confirms the B2B sector has clearly entered a period of modest recovery characterized by moderate levels of growth. However, we also find the crosscurrents that concerned us previously are still around – and will be for a while.  By an impressive 6-to-1 margin (51% to 8%), B2B industry respondents see an increase in overall business revenues for the 3rd Quarter.

 However, price pressures will continue. One in three (32%) respondents expect software prices to fall over the next 12 months; only 9% see prices increasing. And more than half (54%) see a shift occurring from “per seat” to “flat” pricing.

 Longer upgrade cycles are here to stay – 55% of respondents believe the shift to longer upgrade cycles is permanent.

 Security Software (45%) is seen as the best performing sub-segment for 2003, followed by Web Services (32%). The worst performing sub-segment: CRM.

 SAP (28%) maintained its position as top choice for biggest winner over the next 6 months. However, BEA Systems came in a strong second, jumping from 10% in our May survey to 17% in the current one – leapfrogging IBM and Microsoft.

 Which mid-tier companies will pick up market share over the next 6 months? BEA Systems (Net +43) was the number one choice of respondents, holding a very substantial lead over the rest of the pack. TIBCO Software (Net +11) came in a distant second.

 A majority of respondents affirmed that the Oracle/PeopleSoft tug of war will cause industry uncertainty, customer confusion and delayed customer decisions.

 Fifty-seven percent (57%) of respondents expect Microsoft to outperform the industry in the 2nd half of 2003, however 72% of respondents also believe that Linux will have a “significant” or “marginal” impact on Microsoft sales over the next 12 months.

Bottom Line: While an impressive majority of respondents see revenues increasing in the 3rd Quarter, there are still some tempering factors (e.g., price pressures, a shift to flat pricing, longer upgrade cycles) that are diminishing the probability of a robust rebound in the sector this year. However, a modest rebound is clearly underway.

III. ChangeWave Research Methodology

This report presents the findings of a survey of 65 Alliance B2B Software Industry, members, conducted the week of July 16-21, 2003.

The Alliance’s proprietary research and business intelligence gathering system is based upon the systematic gathering of valuable business and investment information directly over the Internet from accredited members.

ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, interprets and reconciles the information in a cohesive manner and converts the information into valuable quantitative and qualitative reports.

The Alliance has assembled its membership team from senior technology and business executives in leading companies of select industries. Nearly 3 out of every 5 members (58%) have advanced degrees (e.g., Master’s or Ph.D.) and 94% have at least a four- year bachelor’s degree.

The business and investment intelligence provided by the Alliance provides a real-time view of companies, technologies and business trends in key market sectors, along with an in-depth perspective of the macro economy – well in advance of other available sources.

IV. About ChangeWave Research

ChangeWave Research, of Phillips International, Inc. is a market research intelligence network powered by thousands of accredited and organized front-line professionals – the ChangeWave Alliance.

ChangeWave is the alternative to traditional “sell-side” investment research. The company publishes ChangeWave Investing, the investment advisory service for individual investors dedicated to researching and discovering growth stocks that profit from radical change, and Weekly WaveWire, a free e-mail newsletter distributed to nearly 200,000 investors.

ChangeWave has a very unique asset in its 4,000-member Alliance. We have assembled our membership team from a broad cross section of more than 20 vertical markets such as Internet e-commerce, semiconductors, data storage, and biotechnology, along with a wide range of professional disciplines including CIOs, IT managers, executive management, scientists, engineers and sales personnel.

The ChangeWave Alliance is composed of senior technology and business executives in leading companies – credentialed professionals who spend their everyday lives working on the frontline of technological change.

ChangeWave Research Reports provide a real-time view of companies, technologies and business trends in key market sectors along with an in-depth perspective of the macro economy – well in advance of other available sources. ChangeWave surveys its 4,000 Alliance members on a wide range of investment research topics and converts the findings into valuable investment and business intelligence reports. ChangeWave delivers its products and services on the Web at www.ChangeWaveResearch.com

ChangeWave Research does not make any warranties, express or implied, as to results to be obtained from using the information in this report. Investors should obtain individual financial advice based on their own particular circumstances before making any investment decisions based upon information in this report.

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