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Do collapsing commodity prices spell doom for CTRM license sales?

The news throughout 2015 has certainly been grim for commodity producers of all stripes. With the Bloomberg Commodity Index (which tracks a wide ranging basket of commodity prices) falling yesterday to its lowest level since June of 1999, the news is clearly not getting any better as the end of the year approaches. With metals and oil being particularly hard hit, mining firms and oil & gas companies are scrambling to cut costs, suspend stock dividends and write-down assets as they simply try to survive the current price storm. And even though ags have suffered less than the metals and energies this year, more than adequate supplies have prices in grains and other ags at or near 5 year lows.

Though producers are the first to feel the impacts of record low commodity prices, they aren’t alone. With little prospect of good news that might buoy the markets, few traders are looking to expand their activities in a consistently falling market. Sure, there may be opportunities to short positions, but given the complexities of the global markets (where good or bad news can emerge from any one of a thousand sources along the commodities supply chain and create unexpected price movements) and low visibility into the Chinese markets, its difficult for most to justify trying to catch a falling knife at this point. After the losses that many of the largest merchant traders have suffered this year, their appetite for doubling down is pretty much exhausted.

With the turmoil in commodity prices, you might expect that spending on technology in these markets is also suffering…and based on what we are hearing, you would be correct. First a caveat – it can be exceedingly difficult to accurately forecast deal activity in CTRM / ETRM / CM for any given quarter, half-year or even full year. License sales for CTRM software is a low volume affair, with any particular calendar quarter yielding anywhere from 20 to 50 deals, with license value of any particular quarter being ranging from 30 to 60 million dollars, and the value of any individual deal running from below a quarter of a million dollars and up to ten million or more. A single large deal can make or break a vendor’s revenue forecast – as well as have a not insignificant impact on a CTRM market forecast of total license revenue.

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License sales are a lumpy affair as well, as history shows that many deals wait until the 4th quarter to close, making it the most active, the largest in terms of deal counts and values, and most important for vendors trying to make their full year numbers. Given this low volume market, macro trends or market influences can, at times, be difficult to quantify. Nonetheless, it is becoming very apparent that the collapse in commodity prices is having a chilling effect on spending for new CTRM technology.

We’ve spoken about this earlier in the year and we’ve noted it in a few of our blog posts – most vendors are reporting that deals this year have been more difficult to bring to close, with some of those deals simply dying on the vine. Still, through the first half of the year, most vendors (perhaps optimistically) said they had decent sales funnels and did expect the full year to be at least as good as 2014. However, we’ve now endured almost a full year of rapidly declining commodity prices and the impacts are clearly being felt more deeply among those vendors.

Last week, Brady, being a public company, was obligated to inform the investment community that they will miss their full year targets due to a number of their prospective deals dragging out past the end of year. A number of other vendors, who being privately held don’t have the same reporting obligation, have more quietly indicated that they are seeing similar results – simply put, deals are getting increasingly difficult to close. None will say it explicitly, but clearly few expect to show any real growth this year in terms of new customer signings. Obviously some will do better than others and a few that concentrate in the less affected market segments will close enough new business to show year-over-year growth. Still, there is no question that the current market conditions have had a significant impact on deal flow, particularly in the last half of 2015 as potential software buyers re-examine their spending.

While there will be few winners among the CTRM vendors this year, those that have traditionally sold to the utility spaces in Europe and North America will probably fare better than most given that those utilities will benefit from lower natural gas and coal prices. Other potentially healthy markets include refining, petrochems and industrial-scale commodity consumers who see falling feedstock and fuel costs as an opportunity to invest in upgrading their IT infrastructures. However, there are only a few CTRM vendors that make the majority of their living in just any one or two of these promising market segments, and its likely that a large majority of the 80 or so vendors around the globe will see 2015 results fall short of their expectations coming into the year.

All this is not to say that we will see any mass exodus of vendors from this market. While some vendors will seek to cut costs in the near-term in reaction to lower than anticipated year-end results, its unlikely that any that will be forced close-up shop. With a continuing revenue streams from support & maintenance agreements, hosting and services, we don’t see any particular vendor in serious trouble at this point due to the market slow down; though there are one or two that have been on life-support even before the commodity price collapse and they may find it hard to hang-on until market conditions improve.