New Bond model strains margins

Recruitment/HR software player Bond International’s thinly-veiled profit warning in its interim results announcement highlights the especially tough plight for small vendors in the current spending downturn. Unfortunately, Bond has been hit by a bit of a ‘double whammy’, having been caught in the transition from the traditional ‘upfront licence fee + maintenance’ revenue model to a monthly rental/ASP model just when new licence sales are drying up. Indeed, chairman Martin Baldwin signalled “the first signs of caution from our prospects in both Europe and the USA” – which comprise over 95% of Bond’s business (around £30m last year) – hardly surprising when corporates are laying off staff rather than recruiting them.

Martin Baldwin’s observations on the change in business model demonstrate the quandary that software firms face with this transition, i.e. “greatly beneficial in the mid- to long-term … for earnings visibility and margins … but an adverse effect on margins in the short term”. Catch 22. But I think the salient point he also makes is that ASP software delivery (i.e. SaaS) makes the product more affordable for small and medium sized companies, whereas Bond’s larger customers – such as Michael Page and Adecco – seem to be sticking to traditional ‘on premise’ software. And isn’t it just as well for Bond that Adecco’s pitch for Michael Page came to naught (for now, at least) else that could have been another major licence sale to fall foul of industry consolidation.

I must also add that the chairman’s closing comment, expressing “confidence” about Bond’s 2009 prospects, reminds us of the similar statements so many companies made at the last downturn. Unfortunately that confidence was tragically misplaced.