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.
Financial analysts are in a small funk because Oracle’s earnings were not as spectacular as they’d have liked. Actually, the revenue numbers were fine; they beat the street estimates of $9.57 billion for the just completed Q2 2018 with revenues of $9.63 billion. The cause of the consternation was a relatively weak cloud growth rate of “only” 44 percent after posting 51 percent growth in the prior quarter. That’s a downward trend and thus the consternation. What explains this?
Let’s focus on human nature. Financial analysts look for eye-pleasing graphics and numbers that tell wonderful stories of increase. But the reality is always more complicated. Orders don’t ship, customer CTOs get cold feet, CEOs find new bright and shiny objects to pursue. Stuff happens. As a result, often a vendor’s numbers don’t’ look as impressive as we’d like.
One specific area of concern for Oracle has been the speed at which the market is adopting its IaaS and PaaS (infrastructure and platform) product lines. The SaaS line seems to be good. Oracle sold $1.1 billion of SaaS in Q2 making it one of the biggest SaaS companies on the planet. But it’s still struggling with infrastructure and platform which combined brought in “only” $396 million in the quarter.
The SaaS business seems to be new deals won the old fashion way. But it takes more effort to grow the other two because much of the increase is logically expected to come from Oracle’s customer base. Analysts are expecting existing customers to swarm in to the new offerings but they seem to be taking their time. The maxim, if it ain’t broke, don’t fix it comes to mind.
Most enterprises have a huge investment in hardware and software, which they are naturally reluctant to discard. So while Oracle’s offer to let them migrate their existing licenses to the cloud in a program called BYOL or bring your own license, that offer is not sweet enough for many businesses with gear they’re still writing off.
At this rate it will take more than the efficiencies from better infrastructure to motivate many businesses to move, hence the disappointing numbers. But to be a bit more realistic, customers are moving to the cloud—$396 million is far from nothing. But it’s going to take more time than the optimists thought to get the migration moving at a faster clip.
At this point there are many things Oracle can do. First, it should count and publish the numbers of businesses coming to their infrastructure. This will likely represent customers gaining a toehold in the cloud. They’ll bring one application or department to the cloud as an experiment and Oracle should pay attention to this because it’s one sure method of growth.
Even if the revenue numbers are small the absolute number of businesses going to the cloud, even if only partially, will strongly suggest future acceleration. For all we know such information is already embedded in the $396 million Oracle already reported. Second, Oracle can sell platform. They do this already but perhaps some effort more squarely aimed at the small developer groups that just need a sandbox. That’s where early growth often comes from. Those groups are often oriented to Microsoft products running on AWS so the strategy works well in two directions. Lastly, when all else fails, the financial analysts could always try being a bit more patient.
My 2 bits
Moving to the cloud is an arduous event for any company. It calls for managers to tinker with the secret sauce, something they loathe. So it’s no surprise to me that moving is a slow process and that despite having all of the bells and whistles ready to go, Oracle is still in early market hurry up and wait mode. It can’t be helped—no vendor can expect to sell anything until it produces the whole product. Oracle CEO Mark Hurd is famous for saying they’ve built a skyscraper but couldn’t start renting units until the building was finished. That’s the time when financial backers begin asking about revenues.
But it takes more time than we care to admit to make a cloud. Oracle is showing some promising signs of early adoption but the situation still calls for patience.
Patience? What’s that?
FinancialForce continues to impress having just announced a 60 percent jump in subscription revenues year over year. The largest cloud based ERP vendor on the Salesforce platform also just announced hiring industry veteran Joe Fuca as president of worldwide field operations. Finally, it signed its 1,000th customer in the last quarter. Let’s unpack this.
The great thing about being a subscription company is renewals. Once you have a customer and assuming you do everything right, they should renew, which translates into having a much easier time reaching revenue goals. For subscription companies to grow, they need to attract more business but they don’t have to start the year at zero, there’s revenue in contracts or in the bank that hasn’t been officially counted yet so the revenue challenge is in how to generate the incremental number and not, as conventional companies do, everything starting at zero.
But take nothing away from FinancialForce. They still need to make customers happy and keep them engaged. In a way, the sales effort is never over, it’s shouldered by the whole company that’s a key lesson every subscription company needs to embrace. So good for them with both the revenue growth and with landing their 1,000th customer.
These facts put into high relief, the maturation and broad acceptability of software as a service and cloud computing in general. It’s here, it works, there’s abundant proof. It only took 15 years to get here! With subscriptions in general and subscription ERP specifically performing well we can expect a continued rolling conversion of many on-premise ERP systems. Unlike the Manhattan project at the end of the last century when every company had to convert to four digit dates, this conversion is happening in a statelier manner. If you sell conventional ERP on-premise, you could be lulled into believing everything is fine but if you allow yourself that indulgence your frog will likely boil.
So long story short, FinancialForce’s news is on track. The combination of Fuca’s hiring and the company’s momentum should mean we can expect the 2000th customer announcement much faster than the first thousand.
Last point, FinancialForce executives tell me they’re dropping the dot com from their name. Not that long ago it seemed like every company was a dot com with a cocktail napkin business plan. Most didn’t last and the ones with real plans and discipline had much better outcomes. They’re just about all gone at this point and the successful ones like FinancialForce are scrapping the dot com relic of that boom era in favor of a cleaner and leaner aspect. This reminds me of when Apple dropped computer from its name. FinancialForce will have its growing pains but it will be a fun company to watch as cloud computing keeps getting bigger.
Or is it just the corporations who will lose out?
Nice job by Phil Wainwright over at ZDNet today. In “Cloud computing: do you have a clue?” he exposes much of the fear, uncertainty and doubt still percolating throughout the IT vendor community over the threat of cloud computing to their franchises.
That’s right, I said, “threat”. The old order is unprepared for what happens next and for a decade has been fighting a rear guard battle to stifle cloud and its predecessors. There’s less money in cloud for the vendors. There’s less hardware to buy and less consulting to get just to see al those pretty green lights glowing in your data center so it must be bad. And if you read the article, you’ll see all those points designed to scare people like co-mingling data.
To his credit Wainwright makes short work of most of this FUD at one point saying that co-mingling data is about as dangerous as sending your mail through the same post office as your competitors.
So good on you Phil. You said what needed to be said. And the corporations you write about? Is it any wonder people have such low opinions of corporations today?
Back in 2004 I wrote a white paper titled “The New Garage” which forecasted the evolution of Cloud Computing. The ideas in the paper were derived from basic economics. I thought that the cost of software, maintenance and service were so out of line that it was only a matter of time before the paradigm shifted and a new one — Cloud Computing — took its place. I am not responsible for the name and I don’t even think I offered one.
The concept of a new garage is that innovation had gotten away from innovators and entrepreneurs typically spent a lot of time raising money rather than building products. To raise money, these people often had to give away a significant chunk of their idea which resulted in a disincentive, in my mind. Better, I thought, if entrepreneurs could go back to the garage to build whatever new gizmo they could.
To do all that entrepreneurs would need vastly less expensive infrastructures from servers and real estate to systems that ran their businesses. Software and services delivered from the Cloud would enable that, I thought, and the result would be increased innovation not only here but around the world. It looks like it’s working.
One of the less well known parts of The New Garage is the idea that when the need for SI services goes down as it inevitably has done, services companies would need new ways to deploy their people. My thought was that this would mean more hands on help running the business using the software available on the Web rather than so much work installing operating systems, databases and all the rest.
With that in mind I was happy to see a press release this week from Market2Lead a Cloud-based marketing automation company based in Santa Clara, CA. The company launched marketing operations services, an offering that will among other things run campaigns for newsletters, manage invitations and registrations for seminars and events and the like.
To be sure this is not the high level strategy work, it’s more grunt work execution but it comes at a very good time. Corporate marketing departments may be somewhat depleted by the recession and before hiring people they may elect to take on a service provider like Market2Lead in an arrangement that provides a known service for a quantified cost.
I expect the idea will catch on and with it comes a down side. Companies might be a bit more reluctant to hire marketing people in the future even in a good economy and perhaps that means more people working for themselves as consultants, often in situations that may not provide benefits like health insurance or vacations. Of course that also means an opportunity for entrepreneurs who might see a chance to build an agency. That’s where we get into unknown unknowns — the consequences you can’t predict which are the ultimate drivers of economic activity.
Good luck with all of that.