The London Stock Exchange is littered with business software vendors that have promised much over the years but ended up delivering little. In fact, it is fair to say that London’s only true world-class business software companies are Autonomy and Sage.

By “world-class”, we mean a company that is first and foremost able to compete effectively outside of the UK but also large enough so that it does not look like a pygmy when stood alongside mid-tier US software businesses. (Forget about top-tier firms like Microsoft and Oracle; Autonomy’s and Sage’s market caps still look pygmy-sized when compared to those behemoths!)

One UK firm that has a long way to go before it achieves even Sage’s £2.2bn market cap is Alterian. But this firm, which develops marketing software, has at least managed to make some in-roads into the US business software market, where it achieved 19% organic revenue growth during the first half of its current financial year – bringing US-derived sales to more than a third of its total turnover.

Such a revenue distribution might provoke alarm bells in investors wary of exposure to the US economy, given its current state, but it is also a sign that Alterian is a serious player in its segment of the business software market. Another sign is Alterian’s customer list, which includes blue-chip firms like Avis, Dell, General Motors, HSBC and Vodafone.

Alterian makes software that is used to manage a range of marketing functions and its applications can now be integrated into one overall marketing platform that manages people and processes. Its recently-acquired Web content management system is used to support a variety of projects, from a brand portal for motor manufacturer Bentley to enabling a global rollout of hundreds of Web sites for pharmaceutical company AstraZeneca. Previously-existing applications include a ‘marketing data infrastructure engine’ (for powering marketing databases), analytical software and campaign management tools.

Alterian has got its Web content management capabilities from Mediasurface – a company that Alterian paid £18.1m to buy last summer. The acquisition brought more than 450 Mediasurface customers to Alterian, while Alterian is now using its growing distribution presence in North America to sell the newly-acquired Web content management offerings there, in addition to its existing database and analytics software.

Of course, despite the economic downturn, the US remains a very important market for business software vendors and for makers of marketing software in particular. According to US-based technology market research firm Forrester, online marketing spend in the US is due to increase from under $20bn in 2007 to more than $60bn in 2012, while it is expected to increase in the European Union from just €7bn in 2006 to only €16bn in 2012.

Meanwhile, a recent Forrester survey of direct and database marketers also found that marketers want “a smorgasbord of technologies”. This requirement confirms Alterian’s strategy for boosting its sales by expanding its marketing software offerings to include Web content management.

For example, the Forrester survey found that only around 48% of marketers surveyed already used Web content management (while a further 20%-plus planned to use it!), compared to more than 50% of marketers already using data mining and predictive analytics tools, and more than 60% already using campaign management software.

As well as bringing Mediasurface’s customers to the business, the melding of its software with Alterian’s existing products into one integrated product set has been the key to it winning important new business. For example, the integrated software was soon sold to two marketing agencies – Reading Room and Amaze – while the company announced in January that Jaguar Land Rover was to use its content management software to manage its global Web sites.

Alterian’s first half revenues were £10.3m (H1 2008: £5.3m) while it registered a pre-tax loss of £2.2m during the period (H1 2008: £1.5m). That might look bad, but these losses included £1m of costs associated with the integration of Mediasurface, while the business’s profitability has historically been weighted to the second half. The company also had £5.7m cash (equivalent to 10.5 pence per share) on its balance sheet at the end of September.

More recently, in January, the company announced that its third quarter performance had been in line with its expectations. Revenues for the third quarter and the nine months to December had both doubled compared to the equivalent periods in the previous year.

The company also confirmed that full-year revenues would be weighted to the fourth quarter due to the concentration of receipts under long-term contracts and renewals, and that the outlook for the quarter remained positive.

Alterian is forecast to increase its turnover substantially during the year to 31 March to £30.9m (2008: £19.3m), although around one-third of the company’s revenues should come from its acquisition of Mediasurface. The integration of Mediasurface with the rest of Alterian’s business is expected to produce annualised savings of £2m.

Consequently, adjusted net profits are expected to be £5.5m (2008: £4.0m) during this year and £6.8m in 2010, with earnings per share coming in at 10.3 pence and 12 pence.

With their price-to-earnings rating of 4.9 times falling to 4.2 times, Alterian’s shares look good value if the company does, in fact, achieve what is expected of it. And the fact that more than a fifth of its share price is accounted for by its cash balance should be reassuring to investors wary of debt.

However, prudent investors may want to hold off until the company’s final results come out later this spring as the market currently appears to have it in for Alterian. Despite the company producing good interims in the autumn, its shares have since lost more than 40% of their value!

Alterian is looking more and more like becoming a business software success story, but veteran investors in UK software companies should be forgiven if they are not holding their collective breath. There have been too many disappointments in the past.

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