There’s a confusing dynamic happening in the software industry caused by the inexorable shift to the cloud. Even before you can get into the analysis you need to identify which cloud(s) you’re thinking about (infrastructure, apps, platform). Also, once you’ve done that you need to decide if you’re partial to technology or financial analysis. It should be no surprise that either approach alone gives only half the picture, so you really need to engage on both fronts.
A big topic right now centers on whether vendors are growing their revenues fast enough to claim leadership positions in the cloud. If not, what happens to those not growing fast enough to satisfy the finance guys. Oracle is a case in point and the company has been subject to a lot of financial analysis that finds the company lacking. How you evaluate revenues, especially in comparison to peers helps you figure out the price of a share of stock. But it’s very hard to get to an apples-to-apples comparison.
As one recent post on Seeking Alpha declared, “Oracle’s ability to adapt to the decline of the on-premises software business and the rise of cloud/SaaS remains in question.” To which I say maybe because the analysis is only partly revenue related. Of equal importance is the changing revenue model—taking in incremental revenue rather than a big license fee.
Moving to the cloud changes the business model, not just the product and too often I see financial analysts applying old financial models to new technology and business models and it doesn’t work well.
For most companies the easiest customer to re-sell or up sell is one you’ve sold to before but migrating your installed base to the cloud is anything but easy if you sold them legacy solutions. The effort is more akin to selling for the first time. No decision which can be frustrating in any sales situation is just as prevalent in an installed base as it is in the general market even for an incumbent vendor.
So in the horserace that some financial analysts insist on handicapping, a pure cloud vendor will usually look better than a legacy vendor moving there. But on top of all that, when your analysis is based on revenue growth you can get spurious results. Even if a legacy vendor induces an existing customer or a group of them to convert, the revenue impact is likely to be a short-term reduction because we recognize cloud revenue over time, not all at once.
We are unarguably in a transition-state so we see a mixed industry. But if you go down the road a few years to a time when the major conversion from legacy to cloud is over, the whole industry will look more uniform and comparisons will be easier.
But it will also be a more fragmented market than we have now. Software vendors will have many complex relationships between themselves and infrastructure vendors and it will be far from unusual for Brand A software to be running on Brand B infrastructure even though both brands might offer both software and infrastructure.
All of this suggests to me that the real plain of competition will have to change. It will change because the vendor communities want to avoid the zero-sum rut that markets invariably head towards in a commoditization push that leaves the survivors competing for pennies when they once competed for millions.
That’s why I see the industry morphing into a utility where a small oligopoly controls most aspects of the market, usually under some form of regulation. A utility won’t care much about infrastructure, for instance, because it will all be the same from the perspective that it adheres to standards.
The electric utility industry is a fitting example. Electric devices are agnostic over how power is generated or whether it comes from next door or a thousand miles away though some customers might prefer greener or cheaper solutions. But vendors in the supply chain take responsibility for adhering to and maintaining standards so that the product is uniform.
It’s doubtful at this stage if any of the enterprise software vendors will stub a toe getting to the cloud. Each has a unique path to travel that’s based on history and legacy constraints. At this point, rather than comparing vendors in what is a very disparate market, it might be wise to look more at year-over-year comparisons and similar measures that track a vendor’s progress against the goal. Revenues and revenue growth will, of course, always be important but the handwringing that goes into quarterly analysis and that emanates primarily from looking at a still emerging market and seeing a long established one, obscures reality and benefits no one.
The end of the second quarter ended the first wave of vendor customer events. Still to come are Salesforce Dreamforce and Oracle OpenWorld—and others—in the fall but mercifully, we have the summer to digest all the information absorbed this spring and re-synch with our native time zones. Here are some things I learned during show season but as you read this know that no person goes to all the events and other people like Paul Greenberg, Esteban Kolsky, and Brent Leary are well worth reading on the subject. So are Jon Reed and Phil Wainwright.
CRM is big, big, big. Still.
CRM doesn’t appear to be slowing down. As an industry it’s rated at about $35 billion in revenues up three-fold over where it was at the beginning of the century when I was a tenderfoot. One reason for the growth is the constant diversification led in no small part by Salesforce’s innovative culture. Big vendors like SAP have rededicated to CRM and I wish them well though I have a nagging feeling that’s an uphill path. Still many enterprise vendors seem to have entered CRM as a defensive move to secure their legacy customers. That’s not a recipe for sustained excellence. But what do I know? I’m just an analyst.
Salesforce isn’t going to bail out your business plan
Some vendors got into the market on Salesforce’s coattails without realizing they still have to perform. You can be in the AppExchange and flounder if you’re waiting for a Salesforce sales rep to call you up with a deal. Also, Salesforce isn’t likely to buy your business. They might buy a lot of companies but there are even more to choose from.
The next wave might involve formation of an Information utility
I’d say we’re in the latter half of this wave, a time of automation, consolidation, efficiency, and effectiveness, in other words commoditization is happening. That’s what the digital disruption is about in my humble opinion. Right around the corner is formation of an information utility which is already ongoing and gaining altitude. No one calls it that but major vendors are building cloud data centers galore—Microsoft even sank one off the coast of Denmark as an experiment in cooling to save money. At any rate the big guys need to get together to set utility standards for APIs, metadata, and interoperability in much the same fashion others did about 50 years ago to breathe life into the relational database and SQL. This will necessarily add to commoditization but it will also open new areas for competition.
Business models proliferate and get complex. Being SaaS is now table stakes.
We’ve begun winding down the on-premise business model, though it will likely be with us on the edges for most of the next century. But for practical, enterprise computing the cloud and subscriptions have come into their own. The folks at Zuora are still evaluating the subscription side of the model and its offshoots and will likely have interesting things to tell us down the road. Clearly, subscriptions haven’t taken over the world yet but we’re all trained subscribers at this point and that fact drives CRM. I look for more ideas surfacing to articulate a new model of labor as a service. Whatever we call it the more we engage in the gig economy the more we find we need an organizing principle and I think it will borrow heavily from XaaS.
Social media has jumped the shark
The Facebook revelations of the last quarter from Cambridge Analytica to feeding data to hardware makers put Facebook under a cloud and cause some people to re-evaluate their allegiances. Can social survive or has it been exposed as a show, like “Seinfeld,” about nothing? My instinct is that social has to morph into a data utility sitting on top of the information utility and it has to become regulated to prevent the worst abuses else it falls into irrelevance. Translation: billions of users is not enough, they have to be the right users.
There’s a new book by Jaron Lanier, “Ten Arguments for Deleting Your Social Media Accounts Right Now.” It’s an industry insider calling in an airstrike on his own position. We have to destroy this village in order to save it. But it softens mid-way into something more like we can’t use social until it gets fixed. Fair enough. But most of the social concepts complained about in the book are not typically what CRM vendors engage in. So there’s hope. But we still need to fix social. Pronto.
CRM is maturing
This means there are few, if any, niches left for upstarts with a better mousetrap in any of the traditional stovepipes. Those bases are covered. Nevertheless, new opportunities open all the time. Some are crazy and scary amalgams of AI, machine learning, selling and marketing with a little Tai Chi added for good measure. They won’t all survive but that’s not news. The big players are only getting bigger. Salesforce is well beyond the $10 billion mark and Oracle grows its cloud presence every quarter. The majors have so much money to direct at R&D and marketing that a new company can’t expect to go head to head.
The middle office might be a thing
I learned this at Apttus’ event. Though I think the name needs work the idea is sound. It lines up with the coming information utility. More importantly it acknowledges the reality that back office data drives some front office processes and vice versa, too. The middle office comes on strong in the IoT and semi-automated world of eCommerce which is only growing.
Chicago is a thing
Chicago used to be the city tech users flocked to for conferences but then San Francisco cornered the market. The tide is turning though. Chicago has a few months of spectacular weather, but year-round it has great food, friendly people, a can-do spirit, and art and architectural gems. I went to two conferences at the McCormick Center this quarter. They were well attended and the McCormick is plush and spacious. Give it to Chicago, they know how to do architecture. So I look for more conferences to migrate to the middle of the country, to places like Chicago, Dallas, and New Orleans. It’s a shorter flight and these cities have more real-life amenities than say, Las Vegas. Don’t look for Dreamforce or OpenWorld to move but each company is now using Chicago for smaller events.
Despite the money spent on shows, some CRM vendors seem to be pulling back on marketing, which is a mistake. The vendors I see who are doing well have a balance of shows, automated outreach, and in your face marketing for good reason. Others rely too much on top of funnel marketing and don’t get the conversions they want. People buy from people and there are too many warm leads for salespeople to chase right now. They can’t spend their time upgrading the leads because their primary job is closing deals. So more live marketing might be in order; chatbots are fine but talking to real marketing people, doing webinars etc. haven’t gone out of fashion.
In its first financial reporting since becoming a public company, Zuora posted some impressive numbers including,
The subscription billing company’s year-over-year subscription revenues grew 39 percent and total revenue grew an amazing 60 percent.
Customers with greater than $100,000 annual contract value (ACV) grew to 441.
Total quarterly revenue was $51.7 million, giving it a run rate that should exceed $200 million in its first year as a public company.
Also, non-GAAP loss from operations was $18.6 million which is a lot of money as a percentage of revenues.
Reading further you discover the company has over $200 million in the bank, mostly from the IPO. Net/net this young company is growing well and it has cash on hand to lift it to profitability. Spending on operations if it includes selling and marketing would seem tolerable since it’s going into growth and the results indicate the strategy is working.
If you’re an optimist and you own the stock it’s likely that you bought on the promise of the As-A-Service economy aka the “Subscription Economy” that the company touts. If memory serves, Salesforce went public with similar numbers and word is that they’re doing okay, so there’s a case for being optimistic.
The key question is whether the company in question represents a new category with great growth prospects or if it’s a me-too. Today a me-too might be an analytics company or a new CRM company, we already have too many of them. But subscription billing, while still a crowded market, has a lot of potential. More traditional companies are launching products as services and finding they need help with the books.
What these numbers might also show, in my opinion, is how difficult it is to launch a company into the financial space. It’s rather conservative after all as shown by the slower growth of cloud ERP companies compared to cloud front office companies.
So from my seat it looks like Zuora is growing nicely, they’ve got cash and if they ensure their spending drives activities that drive further growth, it’s all good.
Next week, Zuora hosts its customers at its annual Subscribed conference. I will be reporting from the scene and it will be interesting to see what they have to say.
Salesforce’s just announced Q1 FY 2019 results beating analyst estimates and causing the stock to rise 3.9 percent. The company had been advising investors that it expected to grow to $12 billion and in the fiscal year and the Q1 results of $3.01 billion keep it on track. That’s a 25 percent increase year-over-year with first quarter operating cashflow of $1.47 billion up 19 percent.
The company adopted an alphabet soup of new regulations in the quarter including ASC 606 which deals with how subscription companies recognize revenue. From the press release:
Unearned revenue, representing ASC 606 deferred revenue less the cumulative timing differences of recognized revenue from ASC 606 adoption, on the balance sheet as of April 30, 2018 was $6.20 billion, an increase of 25% year-over-year, and 23% in constant currency.
That’s an important measure, before ASC 606 subscription companies had various approaches to recognizing booked revenues that had been held in reserve to pay future subscription fees. This points out the power of the subscription model. In contrast to conventional revenues that start at zero each fiscal year, subscription customers commit to purchases well into the future making it easier for a company to hit its growth targets.
The rise of subscriptions had caused some inconsistencies in revenue booking across the industry and ASC 606 and other regulations will help regularize that process. Look for other companies like Oracle to go through a similar adjustment as their cloud strategy takes hold.
Just in time for spring, there’s new information about job burnout and what to do about it. Seems that roughly six months of northern hemisphere winter can induce feelings of ennui and burnout in many people deprived of adequate sunlight and outdoor activity. But we typically tough it out—the job isn’t really thatbad and any personal life has its ups and downs that you learn to roll with. Right? To be clear there’s a different between job burnout and the sub-clinically depressed feelings many people get during winter but there might be enough overlap to seek a common solution.
Two pieces of information came out this month that illustrate my point. A survey of workers in major tech organizations by Blind gives an interesting picture of job burnout and it’s not pretty. Blind, the app, is for forming anonymous communities in workplaces. The tool and communities make it easy to research important questions without a lot of technology and researchers getting in the way. So the app is a place to interact with likeminded people that’s easy and enlightening. There are more than 50,000 active companies on Blind, enough to support statistically relevant samples and Blind slices and dices the dataset like a sushi chef.
The survey in question shows that at any point in time as many as half or more of a tech company’s workers feel burnt out.
Kredit Karma leads the ranking with more than 70 percent of its employees answering yes to the following question:
Are you currently suffering from burnout?
The only allowed answers were yes or no.
Bringing up the rear is Netflix with 38.89 responding affirmatively. In between are famous names lie Cisco, Oracle, Salesforce, Intuit, Amazon and many more.
What does it mean?
Perhaps we need to just chalk this up to modern living. In the long-ago rickets (vitamin D deficiency) and scurvy (vitamin C) were hazards of living in areas where the sun didn’t always shine and the diet was less than one Michelin star. Maybe burnout is just a modern analog who knows?
But it’s worth recalling that modern living became modern because enterprising people among us decided to do something about the status quo. Today we have better food and vitamins are in hyper-abundance. Case closed.
By the same token there ought to be something we can do about job burnout and similar diseases of modern life and it turns out there might be. The New York Times publishes a newsletter, “Smarter Living,” that just published an article on, wait for it, Burnout. “Your Best Tips for Beating Burnout” by Tim Herrera is a collection of tips from readers about what they do to deal with occasional fits of burned out-ishness.
Deadlines, co-workers, bosses, impossible deadlines all contribute to the pressure cooker feeling that precedes full burnout and Herrera notes that
Herrera might be surprised by the Blind study. This looks like a real problem.
The reader suggestions Herrera published all seem to center on taking a break from work, not taking it home, making friends, and developing hobbies and developing a real outside-of-work existence. None of this is new but the attention it’s getting might be symptomatic of having already passed a breaking point.
“Bowling Alone: The Collapse and Revival of American Community,” by Robert D. Putnam, was published in 2000, well before social media and smartphones. The book chronicles an innocent change in American life around the turn of the century, namely that we once bowled together after work and in leagues but not anymore.
As the review on Amazon notes,
Putnam shows how we have become increasingly disconnected from one another and how social structures—whether they be PTA, church, or political parties—have disintegrated. Until the publication of this groundbreaking work, no one had so deftly diagnosed the harm that these broken bonds have wreaked on our physical and civic health, nor had anyone exalted their fundamental power in creating a society that is happy, healthy, and safe.
Interestingly, very little has been done since publication to alleviate the symptoms either—unless you count the birth and rapid expansion of social media which might have only worsened the problem. Yes, Google, Facebook, and Twitter are on the list too which might only prove they drink their own champagne.
So what to do? Suggestions are out there. They’re in the Times article, books, and online but as they say in the 12-step business, step one is admitting you have a problem.