Salesforce.com has tipped over into the billion dollar a year ranks, while NetSuite has been claiming its first venture into profitability. So are the Software as a Service firms really as recession-proof as their evangelists would claim? Warren Wilson of research house Ovum is impressed by the performance of both firms.
“NetSuite's results suggest that a grim economy may favour the SaaS model, with its rapid, low-cost adoption, over on-premise software, with its high license fees and long deployments,” he notes.
“Only a handful of vendors has ventured into SaaS ERP, and so far none has achieved profitability. If NetSuite can post consistent profits, it could be the first to demonstrate that SaaS is viable not just for CRM but for mission-critical ERP, the system of record at the core of the business. That would be a strong indication that customers are growing comfortable with both the reliability and the security of SaaS - two persistent criticisms of this delivery model.
“Moreover, a consistently profitable NetSuite would place more pressure on vendors of conventional ERP solutions to offer on-demand versions of their own. So far SaaS solutions have generated profit margins much lower than those of traditional packaged software. If that remains true, ERP vendors that have long relied on high-margin, on-premise solutions may not be able to compete with pure-play SaaS vendors without significantly reducing prices and cannibalising their own core markets.”
Meanwhile Salesforce.com's stellar results compare very favourably with on premise rivals. “Oracle and Microsoft posted declines in net income in their most recent quarters - Oracle down 1% to $1.3 billion, Microsoft down 11% to $4.17 billion. SAP's quarterly net income was up 13% to €850 million, but down 2% for the full year, to €1.9 billion,” says Wilson.
“Of course, the reason these vendors have stuck with on-premise solutions is that they're much more profitable than SaaS. If they embrace Salesforce.com's business model, they might also be stuck with its profit margins - 4% net income in the year just passed, compared to the 20-30% margins they're used to. So, while they tiptoe cautiously toward SaaS, Salesforce.com has established both a sizable head start and much more market momentum.”
So SaaS is recession-proof? Not quite. “Given the depth and breadth of the current economic turmoil, there was no way Salesforce.com could get off scot-free,” says Wilson. “It closed a number of large deals in the final quarter, but the deteriorating economy caused some to be downsized and others to be delayed. The result was that fourth-quarter revenues, although up 34% from the year before, grew only 5% from the third quarter.
“Furthermore, as conditions continue to deteriorate, the company says it will hire more slowly in the current quarter (after having added the equivalent of 950 full-time positions last year) and expects customer attrition will rise. So far attrition is still below 1% a month, but it did tick upward slightly in the fourth quarter, and further increases are entirely possible.
“Salesforce.com's profit margins still won't approach the levels that on-premise vendors have racked up for years. However, they would further validate the SaaS model and put even more pressure on the on-premise vendors to pursue their own SaaS solutions more aggressively, despite the risk to their own earnings.”
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