THE WEEK IN REVIEW
Earnings reports galore; tone generally still cautious.
Software had a choppy week of trading with the movement in stocks driven for
the most in part by earnings releases. The Goldman Sachs Software Index
(GSO) finished the week up 5 pts or 2.7% to 189. The broader markets
finished the week up fractionally as well with the Nasdaq up 0.4% and the
Dow closed up 0.7%. Due to the shortened workweek, there was a plethora of
earnings announcements each night.

In general the results were slightly ahead of published estimates. With a
few exceptions (which we will get to) the tone of the conference calls was
upbeat but still somewhat cautious on the near term outlook. The March
quarter is still hazy as far as the demand environment, but we get the sense
that most companies were able to build a small amount of backlog heading
into the quarter. Guidance was generally left the same as most companies
expect the normal seasonality to occur. Most of our models are calling for
flat to down sequential growth for March still.

There were a few companies that had exceptional December quarters and raised
guidance for the March quarter and the year. The two notable companies is
this regard were SEBL and MERQ, both on the GS Recommended List. Both
companies were very bullish on their conference calls and believe that
software spending is beginning to get back to more normalized levels. MERQ
is an important datapoint for the rest of software since they are the
leading tester of packaged applications. They stated that they saw demand
come in to test applications for SAP, PSFT, SEBL and ORCL. SAP and PSFT also
reported strong quarters this week but were more conservative on their
respective economic outlooks. ORCL is hosting its Analyst Meeting in Redwood
Shores on Wednesday January 30, so we should get an update on their
application business at that time.

KEY DISCUSSION POINTS
1) Thoughts on competition and supply chain in general
There has been a lot of discussion and controversy surrounding market share
and competitive wins regarding the supply chain market and the three major
vendors (ITWO, MANU and SAP). The best gauge we have for looking at market
share is license revenue comparisons for the last few quarters.

Comparing ITWO and MANU's (we'll get to SAP later) license revenues for the
last four quarters, it would seem as if ITWO had lost share in June but has
taken a small amount of share from MANU (ITWO's share has gone from 70% to
77%) since. However, to give MANU credit they have not had the effect of
December in their reported results and we are projecting license revenues to
be up 15% in February while we believe that ITWO's license revenues will be
down 5%. If our estimates become reality then ITWO would be back to 70%
share with MANU at 30%.

What this exercise basically showed us is that neither company is taking
share from one another in the overall supply chain space in the last year.
In fact we believe that there is less overlap between the companies in the
marketplace than most investors believe. ITWO still is discrete
manufacturing focused, but has won deals in MANU's backyard of CPG of late.
On the flip side, MANU has better vertical diversification with a focus on
transportation management and has won deals of late in high tech. What we do
believe is that when demand for supply chain software returns both companies
should rebound. However, given its vertical focus, we would argue that ITWO
has more upside potential if high tech and industrial rebound more quickly
than other vertical areas.

SAP, unlike the two other vendors breaks out supply chain revenues by
customer intent. Given that they can sell a bundled suite of ERP, SCM (what
they call APO) and CRM solutions it is very difficult to tell what is
actually being used for supply chain. Our checks with the SI community
reveal that most of what SAP is selling as SCM is some basic demand and
material planning solutions. Also, we have not been able to find many
instances where SAP has beaten either ITWO or MANU head-to-head. Bottom line
is, despite SAP's claims earlier in the week, they are not dominating the
supply chain market.

2) Updated Fundamental Scorecard for the Supplier Relationship Mgt market
Now that we have had a chance to digest the earnings of all the SRM
companies under coverage, we have put together a scorecard to help investors
differentiate the companies by four main areas: Financial Performance,
Product Positioning, Organizational Strength and Industry Dynamics. Here are
a few high level thoughts on the sector in general.

	*Cost structures are improving - all the vendors with the exception
of CMRC did a good job of taking major steps at re-aligning their cost
structures. While S&M as a percentage of license revenues remains very high
compared to historical levels the companies were able to lower this ratio
dramatically in the quarter.

	*Balance sheets also improved - in general DSOs were down from
September due to better linearity (due to in part spillover) and a healthier
demand environment. Deferred revenues for the most part stabilized if not
ticked up and cash burn rates have slowed.

	*New products are important for 2002 growth - all the vendors are
hoping that new products will be able to spark growth in the next 4 quarters
both with new customers and with the current installed base. Innovation is
important and the companies have been more reluctant to cut R&D than other
areas of the firm.

THE WEEK IN REVIEW
Earnings reports galore; tone generally still cautious.
Software had a choppy week of trading with the movement in stocks driven for
the most in part by earnings releases. The Goldman Sachs Software Index
(GSO) finished the week up 5 pts or 2.7% to 189. The broader markets
finished the week up fractionally as well with the Nasdaq up 0.4% and the
Dow closed up 0.7%. Due to the shortened workweek, there was a plethora of
earnings announcements each night.

In general the results were slightly ahead of published estimates. With a
few exceptions (which we will get to) the tone of the conference calls was
upbeat but still somewhat cautious on the near term outlook. The March
quarter is still hazy as far as the demand environment, but we get the sense
that most companies were able to build a small amount of backlog heading
into the quarter. Guidance was generally left the same as most companies
expect the normal seasonality to occur. Most of our models are calling for
flat to down sequential growth for March still.

There were a few companies that had exceptional December quarters and raised
guidance for the March quarter and the year. The two notable companies is
this regard were SEBL and MERQ, both on the GS Recommended List. Both
companies were very bullish on their conference calls and believe that
software spending is beginning to get back to more normalized levels. MERQ
is an important datapoint for the rest of software since they are the
leading tester of packaged applications. They stated that they saw demand
come in to test applications for SAP, PSFT, SEBL and ORCL. SAP and PSFT also
reported strong quarters this week but were more conservative on their
respective economic outlooks. ORCL is hosting its Analyst Meeting in Redwood
Shores on Wednesday January 30, so we should get an update on their
application business at that time.

KEY DISCUSSION POINTS
1) Thoughts on competition and supply chain in general
There has been a lot of discussion and controversy surrounding market share
and competitive wins regarding the supply chain market and the three major
vendors (ITWO, MANU and SAP). The best gauge we have for looking at market
share is license revenue comparisons for the last few quarters.

Comparing ITWO and MANU's (we'll get to SAP later) license revenues for the
last four quarters, it would seem as if ITWO had lost share in June but has
taken a small amount of share from MANU (ITWO's share has gone from 70% to
77%) since. However, to give MANU credit they have not had the effect of
December in their reported results and we are projecting license revenues to
be up 15% in February while we believe that ITWO's license revenues will be
down 5%. If our estimates become reality then ITWO would be back to 70%
share with MANU at 30%.

What this exercise basically showed us is that neither company is taking
share from one another in the overall supply chain space in the last year.
In fact we believe that there is less overlap between the companies in the
marketplace than most investors believe. ITWO still is discrete
manufacturing focused, but has won deals in MANU's backyard of CPG of late.
On the flip side, MANU has better vertical diversification with a focus on
transportation management and has won deals of late in high tech. What we do
believe is that when demand for supply chain software returns both companies
should rebound. However, given its vertical focus, we would argue that ITWO
has more upside potential if high tech and industrial rebound more quickly
than other vertical areas.

SAP, unlike the two other vendors breaks out supply chain revenues by
customer intent. Given that they can sell a bundled suite of ERP, SCM (what
they call APO) and CRM solutions it is very difficult to tell what is
actually being used for supply chain. Our checks with the SI community
reveal that most of what SAP is selling as SCM is some basic demand and
material planning solutions. Also, we have not been able to find many
instances where SAP has beaten either ITWO or MANU head-to-head. Bottom line
is, despite SAP's claims earlier in the week, they are not dominating the
supply chain market.

2) Updated Fundamental Scorecard for the Supplier Relationship Mgt market
Now that we have had a chance to digest the earnings of all the SRM
companies under coverage, we have put together a scorecard to help investors
differentiate the companies by four main areas: Financial Performance,
Product Positioning, Organizational Strength and Industry Dynamics. Here are
a few high level thoughts on the sector in general.

	*Cost structures are improving - all the vendors with the exception
of CMRC did a good job of taking major steps at re-aligning their cost
structures. While S&M as a percentage of license revenues remains very high
compared to historical levels the companies were able to lower this ratio
dramatically in the quarter.

	*Balance sheets also improved - in general DSOs were down from
September due to better linearity (due to in part spillover) and a healthier
demand environment. Deferred revenues for the most part stabilized if not
ticked up and cash burn rates have slowed.

	*New products are important for 2002 growth - all the vendors are
hoping that new products will be able to spark growth in the next 4 quarters
both with new customers and with the current installed base. Innovation is
important and the companies have been more reluctant to cut R&D than other
areas of the firm.

 <<weeklyJan2802.pdf>>


 - weeklyJan2802.pdf