Wall Street seems to be getting to grips with the Cloud. Last week NetSuite produced a $7.7 million net loss for its latest quarter, but saw its share price shoot up in the hours after the announcement as investors took cheer from the results. What boosted confidence was a 21% increase in revenue to $53.4 million and a 30% leap in billings to to $61.8 million.
It was all good news for CEO Zach Nelson, who reckons that the first quarter contained a number of high points for the firm:
“We tend to experience a slowdown in Q1. Early in quarter it became clear this was not an ordinary Q1. In fact I was walking the halls and asked one of our sales people how q1 was going? He replied that it didn't feel like Q1, it felt like Q5, there was so much business out there. Sales managers usually sandbag their CEO on sales forecasts, so I knew we were in for something good. ”
Nelson says NetSuite clocked up 273 new customers in Q1 as customers looked to reduce deployments of “legacy applications such as SAP” and completely remove “pre-Web applications like Microsoft Dynamics Great Plains”. Instead, customers are looking to Two Tier ERP as an alternative, he argues:
“Having sunk tens of thousands of dollars into legacy architectures such as SAP, CIOs are loathe to throw out that sunk cost. But those same CIOs recognise that to invest more in them is to throw good money after bad. They are looking for more agile technologies to support the needs of their subsidiaries. Two tier ERP means investment in legacy SAP is maintained or reduced, while new investment goes into new technologies such as NetSuite. This is an important driver for us now and in the future. ”
It's all part of a wider trend, argues Nelson:
“We have reached this tipping point in ERP. Some of the simpler applications moved to the Cloud more quickly, things like sales force automation or HR. What you're now seeing is companies moving their more complex operations to the Cloud and large companies are looking at this. Companies are looking at their internal operations and seeing how archaic these systems are that they are running their core mission critical applications on and saying 'there has to be a better way'. What I see with the larger companies is that they are looking at their mid tier ERP systems mess – and it is a mess. They'll have some PeopleSoft and some SAP, hundreds of systems around the globe and they are trying to consolidate those. When they're talking about consolidating at the top tier, they are talking about going from AIX to Unix. Why do it? It's the same horror show. As they become aware they could have NetSuite instead we will see that accelerate as well. ”
Nelson also notes that the ageing nature of much installed ERP is playing in his favour:
“ A number of ageing platforms are at end of life. They're going to fall out of support. So companies are version-locked on an end of life product. It will cost them more to move to the next version of that product and less to move to NetSuite. Version-locked, end of life ERP systems are another driver of our business. There are a lot of those out there. NetSuite is their opportunity to consolidate on the future. ”
He cites research firm Gartner's latest ranking of leading ERP firms as proof that the market is changing in NetSuite's direction, especially as private equity firms buy up existing ERP firms with a view to tapping them for their maintenance and support revenues.
“The Top Ten list – excluding NetSuite – reads like a 'who's who' of dead software architectures – Sage, Deltec, Microsoft, Lawson. Just when the likes of Lawson and Epicor are desperate for innovation, they are going to be viewed as ATMs for private equity financiers. The trend of private equity firms buying dying software firms will only serve as another ERP tipping point such as those we have benefited from over the last few quarters. ”
Of course the ERP competition comes in for a bashing with Nelson citing the financial management sector as a proof point:
“The UK market for financial management systems actually contracted in 2010. NetSuite gobbled up market share. Our 60% growth rate in the UK was more than 4 times faster than SAP and sharply contrasted with the 'in the red' market share measurement for Sage, Unit4 and Microsoft. ”
Specifically, Microsoft comes under fire for an alleged lack of innovation when it comes to Cloud ERP:
“At Microsoft's recent Convergence conference, CEO Steve Ballmer jumped in the 'Way Back Machine', set the dial for 1999 and announced a Cloud ERP strategy that would make any other software executive blush. His strategy is based on hosting his ancient client server applications. This approach failed a decade ago and Microsoft is hoping its customers and resellers won't remember that. But customers have grown too educated and smart to fall for the same failed approach twice. While Microsoft has ERP as part of its 'all in for the Cloud' strategy, it could be more accurately labelled “not at all in'. ”
As for SAP's ramped up push on Busines ByDesign, Nelson makes an unflattering comparison:
“Business ByDesign is the David Hasselhoff of software – it must be big in Germany, but we just don't see it that much in the US. I know SAP is talking about it a lot. In the deals where we do see them, the functionality is still very nascent,very weak. It's still a 1.0 product. Even SAP has announced they have all these features that they still have to bring out. As far as I can see we're going to be competing with replacing existing SAP and I don't think we're going to see a ton of Business ByDesign. ”
