Are SaaS products starting to hurt On-Premise vendor revenues?
Thursday, NetSuite announced its fourth quarter earnings. In recent weeks, we’ve seen Oracle and SAP do likewise. What we all should be watching are:
– signs that traditional on-premise ERP revenues are softening or declining
– signs that SaaS (software as a service) ERP providers are gaining
– customer defections from on-premise to SaaS
Here’s what I’ve observed.
– Three things caught my attention re: NetSuite. First, total revenue for the year and for Q4 were up. Annual revenue was up 9% (approx. $167 million) and Q4 revenues were at a record $43 million. Second, the company posted increased sales in spite of the downward sales trend of some on-premise vendors. Third, they announced that RedBuilt, a SAP R/3 user, has dropped SAP to run on NetSuite’s application software.
– SAP’s 2009 numbers are interesting, to say the least. Software revenues are down 27% year over year. These are down about 1 billion Euros. Support revenue, the largest source of SAP revenue, is up about 11% (or approx. 500 million Euros). Subscription revenues, the kind one gets from SaaS or leased applications were also up but on small base. These were up 16% (approx. 48 million Euros). See slide seven of this SAP earnings presentation for more.
– Oracle’s numbers fall somewhere in between. Oracle breaks out new sales from in-fill sales. The former revenue numbers are down while the latter are up (see graphic below – data provided by Oracle).
On-premise vendors may see some growth in sales but shouldn’t we ask why? SAP admits that sales of Business Object products are doing very well today. Oracle’s in-fill sales are doing alright, too. Does this mean that real revenue growth is coming from cross-selling acquired products or that existing customers only need a couple of add-on products?
The affect of acquisitions is something that makes ERP market forecasts tough. Oracle, SAP and even NetSuite have made acquisitions. Oracle is far and away the leader in the sheer number of deals done (e.g., Sun MicroSystems, Hyperion, IRI, Datalogix, PeopleSoft and many more). SAP has made fewer, usually smaller, deals. NetSuite has acquired both OpenAir and QuickArrow.
Real growth of the core ERP applications (e.g., Accounting, HR) does appear to be in decline for the on-premise vendors and replacement SaaS revenues in these firms do not appear to be making up the slack. Yes, SAP saw new product sales increase in its last quarter but maybe all of the prior sales declines may not be solely the fault of the economy.
In research I’ve been doing the last few weeks, I’ve spoken with CIOs and key executives at many large firms. These people are buying SaaS applications from firms like Workday and Salesforce.com . They’re not buying on-premise products. One executive told me how he even had a license for an on-premise application from SAP but Workday’s SaaS application had a far less expensive five-year TCO. SaaS vendors need more complete offerings to really hurt the on-premise providers but they are using their platform technologies to create all new apps quite quickly.
This market appears to be moving and we’ll need to watch more earnings results and sales announcements to see the trends unfold.
Brian, there is a flaw in your analysis because it makes an abritrary division between the class of enterprise software suppliers as if some only provide the on-premise means of delivering functionality and others provide only the (misnamed in this context) on-demand method. You also imply that NetSuite has no professional services revenue.
Look at the image of the Oracle quarterlfy statement reproduced in your article, fifth line down. About half of that almost billion dollar a year “OnDemand” revenue stream for Oracle is the same sort of “on demand” revenue stream as about 80% of NetSuite’s total revenue stream (see the respective companies’ 10-K filings for descriptions). And Oracle is already twice the size of NetSuite
It’s trivial to Oracle at this point from a financial reporting point of view (and it kind of works against Larry Ellison’s bashing of cloud compuiting for Oracle PR folks to highlight it) but Oracle is already playing both sides of the street. As are Microsoft, Intuit, SAP and most of the other enterprise software market leaders (I can’t think of any that is not but I say “most of” to save myself from going through the list and checking them all). And of course Larry Ellison himself is craftily playing both sides of the street since he is the supermajority owner of N.
Secondaly, you are comparing apples to oranges by highlighting SAP’s 27% decline in licence revenue in 2009 with Netsuite’s 9% gain in total revenue. The comparable SAP figure to most NetSuite revenue is the minus 3% delfation in what you call SAP software and maintenance revenue. The two companies growth/defltation rates within the margin of error after Netsuite’s increase is normalized (reduced) for its acquisitions’ revenue in previous years and its professional services revenue is deducted.
I have no doubt with your conclusion that SaaS delivery is becoming more popular but it is not happening at the expense of the leading software suppliers.
Dennis
I have a couple questions as well (and I am a consultant for a competing on-premise software package but also a big proponent of SaaS – so my thoughts are not entirely un-biased).
A. On the earnings call Zach Nelson spoke of ending the year with the same number of customers as they started with. The explanation is (without any statistics) that Netsuite is moving upstream and replacing the low end (<$10,000 annual fee) with "better" customers.
This has me somewhat concerned as there's a FAR more limited pool of "better" customers who fit into the Netsuite niche of Wholesale Distribution, Software Companies and professional services (which I believe were the primary markets discussed). At some point this market both gets crowded and more competitive (I think Intacct – another SaaS player is also big into the services/revenue recognition niche).
B. How much of revenue growth is simply sales to earlier trial purchasers of Netsuite? I have not idea if this number is material but I believe they spoke of it on the call again without any type of statistics.
C. I enjoyed hearing that a company with admitted 80% direct sales "for as long as the CEO can remember" has the best channel program.
Overall as I read the earnings call I was struck by the thought that this could have been any of the the other software companies (Microsoft, Oracle) delivering their earnings. It didn't seem to be that exciting in terms of growth or future prospects.
I don’t agree with this strategy of deserting small enterprises. Had the product been intuitive, flexible and scalable, I see no issue in supporting the SMEs. When players like SAP and Oracle are trying to get into the SME space, it is surprising that NetSuite is abandoning the initial adopters. As a medium enterprise, I would be concerned. What will prevent them from abandoning the medium enterprise and going after large enterprises few years down the road?
We at iBE (ibe-erp.com) are developing a product that would be intuitive, flexible and scalable so that we don’t have to give up on part of our customer base.