The Big Picture: Dichotomy In Revenue Growth for Q2 CY Quarterly Revenues

As many main app vendors continue to lower guidance on earnings, this calendar year Q2 public company quarterly earnings analysis shows that larger vendors and specialty vendors such as SAP, Oracle, Lawson, and Deltek gain ground in license revenue growth while growth for the mid-market players now comes from maintenance and services. SaaS vendors all appear to be growing subscription revenue at breakneck paces with Concur (76%), SFDC (50%), SAP (45%), and NetSuite (43%), leading the charge in year over year quarterly revenue growth.

As mentioned in past conversations, the leading indicator for long term growth is new software license sales which drive recurring revenue for vendors with perpetual license models. The trailing number is maintenance revenues which track retention. In the SaaS world this would be subscription revenue. Renewals represent retention.

Here's the break down of year over year quarterly new license sales numbers/recurring revenues:

Enterprise Software Vendors with Perpetual License Revenues (YoY)

• CDC Software - License down 20% to $14.8M / Maintenance up 26% to $26.8M / Services up 12% to $27M
  
• Deltek - License up 18% to $22.1M / Maintenance up 11.3% to $28.3M / Services up 12.9% to $22.3M
  
• Epicor Software - License down 3% to$24.3M /Maintenance up 23% to $48.7M / Services up 21% to $41M
• IFS - License down 27% to SKr 111M ($17.2M) /Maintenance flat at SKr 165M ($25.7M) / Services revenue up 9.5% to SKr 324M ($94.2M)
  
• Lawson Software - License up 3% to $41.7M/ Maintenance up 14.4% to $88.9M / Services up 8% to $102.4M
  
• Oracle (Apps) - License up 36% to $989M / Maintenance up 17.7% to $1.044B / Services up 16.8% to $957M
  
• QAD - License down 23 % to $11.4M / Maintenance up 8% to $34.5M / Services up 34% to $23.6M
  
• SAP - License up 25% to 898€ / Maintenance up 22% to $1.151B / Services up 21% to 2.06B€

Enterprise Software Vendors with Subscription Revenues (YoY)

• Concur - Subscriptions up 76% to $53M
• NetSuite - Up 43% to $36.6M
• Oracle (On Demand) - Subscriptions up 28.5% to $194M
  
• Right Now - Subscriptions up 25% to $24.5M
• SAP - Subscriptions up 45% to $64M
  
• SalesForce.com - Subscriptions up 50% to $240M
  

The bottom line
Growth for most vendors continues to be driven by maintenance and services revenues. The impact on customers will be a continued squeeze to increase maintenance fees and an increase in the number of service offerings delivered by the vendor. Users should begin their long term account planning and right set expectations. One place to start is to align your business drivers with a long term apps strategy.

Your turn.
Are you seeing a push by your vendor's sales person to up the size of the maintenance contract? Are you seeing more value added offerings in services? Is it getting more difficult to reduce the overall cost of operating your apps? Look forward to hearing from you! Feel free to post your comments here or send me an email at rwang0@gmail.com .

(The personal contents in this blog do not reflect the opinions, ideas, thoughts, points of view, and any other potential attribution of my current, past, or future employers.)
Copyrighted 2008 by R Wang. All rights reserved

Food For Thought: Can You Have It All - Faster, Better, Cheaper?

Return of the FBC Mantra
With pending economic uncertainty in sight, almost every conversation in the past 2 months has referred back to the mantra of Faster, Better, and Cheaper (FBC). Maybe it's part of living here in the heart of high tech companies where product life cycles are as a short as the next haute couture dress on a Paris runway model. But we're hearing it more and more across all industries. Is this a new client based reality or just another step towards the price-based commoditization whirlpool? Let's take a look at the components:

• Faster. Can you get this to market faster? Can you reduce the time it takes to sell the product? Will you be able to collect money more quickly? Can you respond to a safety issue more quickly?
  
• Better. In the eyes of a customer, is this a significant improvement? Are the trade offs we make worth the effort. Will this compel someone to select our offering?
  
• Cheaper. Can we do this for less? Can we do this with less people? Are there regulatory or compliance issues that prevent us from reducing cost? Do we have to hire so many people? Do we have to hire so many good people?
  

Market based reality shows it's tough to achieve all three: One could argue that it's been next to impossible to support all three for all industries. For example, in the March 2000, NASA FBC Spear Report, a former NASA engineer stated that "the faster, better, cheaper" approach that pushed agency engineers and scientists to crank out more frequent, low-cost, and stripped down missions was a failure. In learning from the aftermath - we are seeing that top technology trends in the enterprise software industry do not normally support all three either. Two out of three seems to dominate current trends. For example:

• SaaS. Faster - rapid deployment, real-time upgrades, 99.99% uptime and reliability. Better - more dynamic UI, newer functionality, configured not customized. Cheaper - this remains to be seen. Today ROI studies over a 10 year period show that SaaS is cheaper for companies with less than 1000 employees. Once over 1000 employees, we see SaaS costs comparable to on-premise. This becomes more of a life style thing.
  
• Third party maintenance providers. Faster - this is debatable in terms of responding to regulatory updates, vendor changes, etc. Better - users often find that vendors like Rimini Street optimize the instance when they bring over the product. Cheaper - up to 1/2 the cost of maintenance price can be reduced which frees up money to invest in all the other projects that have been neglected for some time.
  

Your turn.
You've heard my view. Got an example where all 3 work? Or do you think this is all a fallacy? Maybe it's true that, "You can only have 2 - Faster, Better, Cheaper" in enterprise software? Looking forward to your comments!

(The personal contents in this blog do not reflect the opinions, ideas, thoughts, points of view, and any other potential attribution of my current, past, or future employers. All NDA's have been honored.)
Copyrighted 2008 by R Wang. All rights reserved.

Trends: Economic Stimulus Bill of 2008 May Mitigate Recessionary Effects in the SMB Software Market

On February 13th, 2008, President Bush signed the Economic Stimulus Act of 2008 (H.R. 5140) and in it were 2 provisions that directly impact SMB's:

• "Bonus deprecation". Enables companies with investments in tangible property, computer software, computer equipment, and even improvements to lease property to accelerate their depreciation from a normal 5 year scale to the first 50% being depreciated the first year. However, the asset must be put into use in 2008.
• "179 deduction increase". The level of these 179 deductions used to be limited to a $500,000 annual purchase of productive capital with a $125,000 deduction limit. they've raised this now to a $800,000 annual qualifying equipment purchase (not including buildings, but including capital equipment like computer equipment and software) of up to $250,000.

The bottom line
SMB's such as sole proprietorships, partnerships, and corporations will truly benefit from this opportunity to both invest and deduct in computer software and hardware. In fact, several large software companies have already sent out targeted SMB campaigns reminding businesses of these incentives. The trick is to have the software deployed by 2008, so businesses will want to make sure they start their implementations early Q4 (October 2008). Vendors who haven't targeted companies yet with this campaign should jump into the act soon!

(The personal contents in this blog do not reflect the opinions, ideas, thoughts, points of view, and any other potential attribution of my current, past, or future employers.)
Copyrighted 2008 by R Wang. All rights reserved

Trends: Enterprise Apps in 2008

ENTERPRISE APPS BUDGETS REMAIN RECESSION PROOF
A potential global financial crisis precipitated by the mortgage melt down, globalization pressures, ongoing middle east conflict, and tumultuous political conditions raise concerns about the world economy. Despite such market pessimism, most end users expect 2008 enterprise software budgets to continue to increase in high single to low double digit rates Some key factors behind this growth include:

• Increasing dependence of business strategy on technology. Gone are the days where a business leader could develop a new service or product offering without incurring IT interdependencies. With time to market concerns, requests for agility, and globalization pressures, business leaders expect rapid deployment and responsiveness from future systems. The result - a push to upgrade applications, seek alternative deployment options like SaaS and hosting, and shift last mile solutions to best of breed industry specific providers.
• Continued shift to business process focus. As enterprises move away from functional fiefdoms in geographic silos, new business models require process focused support across distributed environments. Current systems no longer meet these requirements and lack the ability to capture business intelligence by process let alone "play well" with other systems.
  
• Decreased competitive differentiation in the ownership of enterprise apps. Now that everyone has industry best practices via their ERP system, best practices no longer provide significnt competitive advantage. In fact, most enterprises show negative ROI in their apps deployments. Market pressures push leading enterprises to seek vertically oriented and last-mile solutions that support open standards and work in the spirit of SOA.
  

2008 End User Trends
As tectonic shifts continue to impact the software industry, expect the following 10 trends:

• Vendor consolidation will continue. Nothing remains more certain than the increasing pace of acquisitions. While there may not be the same flurry of mega deals in terms of size, expect the Big 4 vendors (i.e. Microsoft, IBM, Oracle, and SAP) to bulk up on areas where they are weak and continue to dominate commoditized infrastructure areas such as middleware, hosting services, office productivity, and content and information management. Expect most other acquisitions to be focused on value added solutions that extend vertical footprints. Weak markets will lead to a drop in valuations among competitors leaving vendors without a good cash flow (e.g. maintenance streams) to acquire competitors on the cheap.
• Buying decisions will continue shift from IT led to business led. While IT teams will still lead most vendor selection efforts, expect business users to play a prominent role in collaborating on requirements and expectations. A growing number business users will eventually lead these initiatives with heavy IT support in validating dependencies and overall constraints.
  
• Business drivers for new investment will align with efficiency and compliance drivers. During economic upturns, the business driver for projects tend to focus on top line growth and strategic investments. Given the pending downturn and increasing regulatory pressure, expect projects to focus on operational efficiency and compliance. Expect commoditized processes to be BPO'd, varying instances to be consolidated, and standardization on middleware platforms such as BEA Weblogic, IBM WebSphere, Microsoft .NET, Oracle Fusion Middleware, and SAP NetWeaver. Expect CFO's to invest in compliance, analytics, and master data management. Expect collaboration projects among stakeholders such as suppliers, customers, and partners to fall under the efficiency camp.
  
• Partner ecosystems will allow best of breed solutions to reemerge. As enterprises march towards vendor standardization for commoditized technologies, expect business uses to seek best of breed or custom solutions for vertical expertise, mission critical business apps, and other last mile solutions. Standardization onto middleware platforms, and SOA based integrations will allow best of breed capabilities to thrive. Users should not expect one vendor to deliver all last mile solutions. Instead expect to focus on the quality of partner solutions and the level of certification rigor.
• Deployment options will expand. Expect vendors to adopt variants of Multi-tenant SaaS, multi-instance software virtualization, and onDemand hosting. Rapid deployment, subscription pricing, and total cost parity will drive vendors to roll out new products architected and priced to compete with SaaS. Hybrid deployments will become more common as new entrants, traditional vendors, and system integrators introduce new software solutions for SaaS and SaaS-like models.
  
• Master data management will shift from a luxury to a necessity. Business drivers such as compliance and efficiency require consistent and accurate master data around financial accounts, customers, suppliers, partners, products, locations, and employees. Process improvements and SOA initiatives will not succeed without a master data management strategy.
• User experience will matter even more. Requirements continue to emphasize ease of use, intuitive experiences, streamlined flow, and easy access to information. Expect better role based paradigms to emerge from traditional vendors as they compete with SaaS and SaaS like upstarts.
  
• Custom apps and app development will reemerge as a key skill set. Powerful new platforms (e.g. middleware tool sets, SaaS development environments, and applistructures) will allow end users to build last mile solutions on top of existing middleware platforms that are supported with each upgrade. SOA architectures will provide the reusable web service components. BPM tools will deliver the both process flexibility and agility necessary to support future requirements.
  
• Software pricing models will bifurcate by market segment. SMB users will continue to seek user based pricing models such as concurrent user and SaaS. Enterprises will seek user based models but be forced by vendors to look at metric based on enterprise agreements in the spirit of "value based" pricing. The real question - value for whom?
• Third party maintenance will gain traction and force vendors to improve value. The notion of a perpetual license remains an oxymoron. Most software buyers an no longer buy software and not expect to pay a continued annuity stream to the vendor. Despite competitive pressures from the largest vendors to stymie third party maintenance vendors, expect growing interest among the largest users to seek alternatives or more value from existing maintenance.

The bottom line for end users.
TRENDS HIGHLIGHT THE NEED FOR A LONG TERM APPS STRATEGY
Apps strategists, CIO's, architects, and IT directors will want to respond to these emerging trends by building a long term apps strategy centered around:

• Aligning project requests to compliance and efficiency drivers.
• Organizing a sustainable governance structure for a 5 to 10 year period
  
• Ensuring a flexible future state business process model
  
• Delivering technology and solutions that meet business drivers and business process flexibility
• Identifying white spaces in the overall technology solution footprint and supplier road map.
  

(The personal contents in this blog do not reflect the opinions, ideas, thoughts, points of view, and any other potential attribution of my current, past, or future employers.)
Copyrighted 2008 by R Wang. All rights reserved