Data Sheet—Monday, October 20, 2014

Get ready for an unsettling start to the workweek, Data Sheet readers. SAP just cut its full-year earnings outlook, and IBM disclosed lower revenue and income for its third quarter. Still, it did manage to find someone to pay $1.5 billion for its chip manufacturing unit. Plus, Satya Nadella addresses speculation about a Microsoft breakup. It’s not part of his plan.

Mixed bag of financial news from IBM, SAP. Last week, the two companies trumpeted an important strategic relationship that will boost their mutual prospects in cloud computing. This morning, both issued financial reports some investors might find it tough to swallow—and that point to the tough transition legacy enterprise tech companies face.

First, despite reporting a 15% increase in third-quarter profits, SAP is reducing its full year forecast—in large part because of its push to become a leader in software as a service (SaaS). Revenue for those subscriptions is spread out over time, so it needs to adjust its accounting practices. The good news is SAP CEO Bill McDermott expects higher 2014 revenue from its cloud business than originally anticipated: "We are raising our cloud revenue outlook due to strong than expected, organic cloud performance." Plus, it'll get a big boost when it closely the $8.3 billion Concur acquisition.

IBM, meanwhile, logged net income of just $3.5 billion from continuing operations, off 17% from a year ago. Revenue was $22.4 billion, off 4%. IBM CEO Ginni Rometty noted: "We are disappointed in our performance. We saw a marked slowdown in September in client buying behavior, and our results point to the unprecedented pace of change in our industry. While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas—cloud, data and analytics, security and mobile—where we continue to shift our business."

The good news is that IBM has reached a $1.5 billion deal with Global Foundries to take its money-losing semiconductor division off its hands. It was originally looking for $2 billion to get rid of the operation.

Microsoft CEO: No consumer spinoff. With breakups at Hewlett-Packard and eBay looming, Satya Nadella says the software company has no plans to do the same. "One of the things that's really been key to our success—the way, even, our footprint in the enterprise grew—is because of what I term as dual-use. People using Windows and Office for their personal use, and taking it to work," Nadella told CNBC in his first television interview since becoming CEO. "In fact, I want us to shine, and want to be the best in class around people who are dual users, who want to use things which are our tools, our platforms for their home as well as work, and it crosses over."

White House nominates former Google lawyer as patent chief. With a backlog of more than 600,000 applications, the U.S. Patent and Trademark Office desperately needs leadership. Not only does lawyer Michelle Lee have industry experience, she has two degrees in computer science from MIT and Stanford. Gigaom

STATS & SPECS

SAP walks into wearables. It is teaming up with video eyeglass company Vuzix on two applications: one for supporting warehouse processes such as hands-free barcode scanning, and the other for helping field service technicians view 3-D models of repair or maintenance processes. Vuzix has been around since 1997; it holds 48 patents for wearable displays and "augmented reality" technology. eWeek

Phone hacks take toll. More cybercriminals are attacking Internet telephone services, which they hijack to make calls that rack up thousands of dollars in fraudulent charges. Most major telecommunications companies have fraud systems that detect suspicious activity before this happens, but not so with smaller regional carriers. The victims are usually small businesses, but the bill is big: about $4.73 billion globally in 2013. New York Times

Cybercrime costs considered. On average, it takes 170 days for businesses to notice an attack on their network or servers—and about 31 days to resolve the situation, according to the Ponemon Institute's annual report on cybercrime. It takes even longer—up to two months—to clean up after malware planted by a malicious insider. Ars Technica

STARTUPS & DISRUPTORS

Smarter fraud detection. Goldman Sachs and Credit Suisse NEXT Investors are leading a $24 million Series C financing round for cognitive computing pioneer Digital Reasoning. The company cut its teeth with work for the U.S. intelligence community but its technology supports applications ranging from fraud detection, risk management, and compliance to customer and supply chain intelligence.

No more passwords? Even those sensitive to cyber security can be prone to forgetting random text strings necessary for logging into SaaS applications. (Guilty as charged!) Edinburgh-based Peekabu Studios is working on technology that would let you use an image to gain access, instead. Right now, it just a skunkworks project but what an appealing idea. TechCrunch

FAQ

More enterprise startups talk up vertical market expertise

Have you noticed lately how much Oracle loves boasting about its extensive array of industry-specific software applications? It wants to be all things to all businesses.

It's not the only established enterprise software company to adopt this stance. Last week, competitor Infor introduced not one but two editions of its enterprise resource planning (ERP) software: one focused on fashion industry players such as apparel makers, accessories designers and textile companies; and another catering to food and beverage manufacturers.

Those are just the latest in a long list for Info, and you can find similar claims on the web sites for all the other usual suspects selling supply chain, customer relationship management and ERP software.

All that attention helps build credibility for the growing number of smaller enterprise startups that are thinking smaller to go big, at least when it comes to their potential customer set. Sure, that focus is somewhat a matter of survival if you have limited sales resources. But is also reflects the far deeper influence of line-of-business executives—and not strictly the information technology team—in buying decisions.

Data management startup Peaxy, for example, touts its expertise in helping oil-and-gas exploration companies make sense out of engineering drawings and schematics, prospecting simulations, and telemetry data generated by equipment in the field. Eventually, the San Jose, Calif., company will also focus on additional industrial research and development activities.

"We need to start treating information of this nature as an asset," says Peaxy CEO Manuel Terranova. "Companies won't do this unless they're being led by the business side, and these teams have a completely different set of requirements than what the storage industry has traditionally catered to."

Which industries are attracting the most attention? Healthcare is one highly visible beneficiary. Through the first three quarter of 2014, analytics technologies specifically meant for digital health applications garnered at least $381 million in financing, while telemedicine companies pulled in $172 million.

Activant Capital Group in Greenwich, Conn., prioritizes several verticals. Its $200 million portfolio includes WellAware, which sells software for managing oil-and-gas operations (former Vice President Dick Cheney is on the board); RetailNext, focused on analytics for brick-and-mortar stores; and Mitratech, for automating legal and compliance processes. The firm is about to announce an interest in Recommind, which sells analytics technology that monitors employee communications for potential compliance issues, says founder and partner Steve Sarracino.

"Big data is not about the data, it's about how you use it," he says. "Software either drives revenue or cuts costs. The companies that are going to win need to have a really good understanding of the software they sell."

ONE MORE THING

Microsoft testing real-time translation for Skype calls. Why should a silly thing like language get in the way of an important business conversation? The software company is combining technology from its text-translation service with artificial intelligence to create an add-on that translates voice conversations on the fly. Right now, it converts English to German. Google is working on similar features for Android mobile devices.