The third-quarter 2010 earnings results from many leading applications vendors pointed to a moderate recovery under way in the horizontal and vertical software market.

Similar to the recession that was felt unevenly across different regions, not every application vendor is expected to be able to take full advantage of the recovery.

In summary, apps vendors attributed their respectable results to pent-up demand for their mission-critical solutions that saw renewed buyer interest with easing economic concerns. Software As A Service, which has benefited from the move toward Cloud Computing, continued to post double-digit growth rates during the quarter.

Even though some of the 3Q10 gains were the result of acquisitions that dominated the agenda of many vendors for the past year, the net increase also had to do with customers in some cases returning in droves and reversing the retrenchment in unison that became routine a year ago.

For their latest three-month period, early indications suggested that suite vendors such as Microsoft, Oracle, and SAP fared well in their license sales because of the strengths of their extensive product portfolios, global operations, and channel ecosystems, not to mention incremental revenue contributions from their recent acquisitions.

Microsoft saw a 4% increase in sales of its Microsoft Dynamics product offerings during the third quarter of 2010, compared with a 6% decline in the same period last year. That suggested a turnaround for the ERP and CRM applications unit within the Microsoft Business Division, which saw a 13.5% rise in sales for 3Q10 on the strengths of the latest Microsoft Office 2010 release.

The latest pickup in the sales of Microsoft ERP and CRM applications came on the heels of its growing OEM sales, which leveraged a growing number of ISV partners to add industry-specific functionality to products such as Microsoft Dynamics AX for different verticals.

In the case of Oracle, it showed 10.1% in applications license sales for the quarter ended August 30, 2010. It added revenues from its recent acquisitions of Market2Lead and Convergin, helping the vendor boost sales in CRM and communications vertical.

Oracle also added $169 million in license sales from its recent acquisitions of Sun, Golden Gate and Silver Creek, resulting in an estimated 48% jump in Middleware license sales for the quarter. Deducting the revenues from the newly acquired products, Oracle’s Middleware license revenues would not have gone up as much.

Similarly SAP’s license sales shot up 25% for its third quarter of 2010 largely due to its recent acquisition of Sybase. Without the addition from Sybase, SAP’s license sales rose by an estimated 14% during the three-month period.

Best of breed apps vendors such as Athenahealth in healthcare revenue cycle management, Rightnow in customer relationship management, Ultimate Software in human capital management all posted above average growth rates during the third quarter because of growing acceptance of their Software As A Service offerings.

For Product Lifecycle Management vendors such as Dassault and PTC that experienced sharp drops in their license sales in 3Q09 because of drastic cuts in global manufacturing activities, the latest period saw significant reinvestments by their aerospace, automotive and CPG customers to not just replenish their inventory, but also ramp up product introduction through new technology initiatives to leapfrog competition and meet end user demand.

For the 43 publicly-traded applications vendors that have reported their latest results, their applications-related revenues totaled $25 billion in the third quarter of 2010, up 10% from $22.5 billion a year ago.

The 43 vendors include everyone ranging from Advent Software for its accounting apps for institutional investors to Tyler Technologies for its government vertical applications.

Their 3Q10 license sales vaulted 11% to reach $8.2 billion, compared with $7.4 billion in 3Q09. Their 3Q10 maintenance revenues climbed 9% to $9.8 billion from $9 billion in the year-earlier period. Services revenues rose 9% to reach $4.7 billion.

The most noteworthy uptick had to do with their subscription revenues, which soared 23% to hit $870.6 million in 3Q10, up from $707.8 million in 3Q09.

The steep rise of subscription revenues was a reflection that Software As A Service has grown to be a major recurring revenue stream with lasting impact and disruptive potential that could alter the competitive landscape.

Nowhere is that more apparent than in the healthcare apps market where incumbent vendors such as McKesson are defending themselves against upstarts such as Athenahealth, which has helped usher in a new way of automating medical billing and electronic medical records with the use of the Software As A Service delivery model.

In 3Q10 McKesson’s technology division had a 2.8% drop in software sales, compared with a 33% jump in software subscription at Athenahealth.

Similar trends have swept through verticals such as government and banking and financial services where subscription revenues have outpaced traditional license sales by a wide margin. At government specialist Tyler, its 3Q10 license sales shrank 9%, while its subscription revenues spiked 33%. Similarly SS&C in banking managed to post 1.7% rise in license sales, while its subscription revenues jumped 29%.

That prompted vendors to put much of their R&D resources on their SaaS products. Since 2008 Tyler has been investing heavily in SaaS-based financial accounting, HR and payroll applications for the government market with the help of millions of dollars of development subsidies from Microsoft.

Going forward, a number of trends will emerge for the fourth quarter 2010 signaling a major turnaround for the apps market in 2011 and beyond.

License sales, excluding the effects of acquisitions, will continue to make a modest recovery in the range of 4% to 6% in 4Q10 and through the first half of 2011 as high-growth markets such as healthcare will provide much of the incremental sales, offsetting the sluggish performance of verticals such as government, manufacturing and retail.

Maintenance revenues will remain under pressure as companies are being converted to SaaS contracts, while license sales show little sign of achieving double-digit organic growth.

Subscription revenues from Software As A Service will become the primary engine of growth for a large number of applications vendors, supplanting their license sales in 2011. For example, Aspen Technology, which sells supply chain management applications to the energy vertical, posted $9.6 million in subscription revenues in its first quarter of fiscal 2011, surpassing its license sales of $9.3 million for the first time in its history as it continued to convert its software license customers to subscription-based accounts under multi-year contracts.

Western Europe will likely to be a laggard for the next six to nine months, while emerging markets from Asia to Latin America will post better than average growth rates. Acquisitions among vendors in emerging markets could offer a glimpse into the next applications powerhouses in the developing countries.

Most apps vendors will have to deliver products designed to meet a new era of governance, compliance and risk management requirements put forth by their customers. In hedge fund accounting, for example, the new mantra is daily accounting vs. monthly accounting. In healthcare, it’s the need to win approval from Certification Commission for Health Information Technology in order to differentiate one’s applications and achieve a first-mover advantage in the race for government stimulus dollars, which will start flowing in December 2010.

Do share your outlook for 4Q2010 and beyond by emailing me at apang@appsruntheworld.com and follow me on Twitter @appsruntheworld for real-time assessment of vendor performance in different segments of the apps market.

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