It takes time to make a cloud
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?
The happy ending of a dot com
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.
Salesforce at 15
Fifteen is an interesting anniversary. We tend to think about major anniversaries in ten-year increments with the five-year internode acting more as a gut check. Fifteen is close enough to the creation that all of the relevant parties are still around and most are still in place. But it’s also far enough in the rearview mirror to provide the perspective needed to make judgments. Salesforce.com is fifteen and celebrating it.
Salesforce was not alone in its niche fifteen years ago and if you recall the time you know that “dot com” was the watchword of the time. The Internet was still a novel innovation and companies were trying to figure it out as a business tool in equal measure with trying to get straight how to move their sunset manufacturing to ultra low wage places like China and, well, China. Maybe India too.
My story in relation to Salesforce picks up only fourteen years ago because, fifteen years ago there was nothing much except a business plan and a lot of code to write. It would take a year for the company to bring a product out. By happy accident, I joined the analyst firm Aberdeen Group fourteen years ago with a mission to cover SFA. My instincts have always drawn me to disruptive innovation and I had a notion that I was going to cover hosted deployment models that focused on SFA. How lucky was that?
I was just getting settled into my job when Salesforce representatives came to Boston to brief the analyst community as part of the company’s rollout. Having come from a technology sales and marketing background and having directed the development of an in-house SFA system in a prior life, I got it right away, especially the part about subscriptions and being able to access customer data from anywhere that I could get an Internet connection. I was an immediate fan.
But it’s important to understand that Salesforce was not the only game in town. There were lots of hosted services offering an SFA product, though today they have all either disappeared or been rolled up into larger companies. Only Salesforce remains as an independent first mover and it has become a force in the CRM industry largely because of the vision of a core group that includes co-founder and technology guru, Parker Harris and, of course, CEO, Marc Benioff.
Today Salesforce looks like a no-brainer but fifteen years ago it was anything but. It was going up against some Goliaths with a stripped down product in a market where its only innovation was not the product itself but its delivery and business models. If it or any other SaaS company was going to survive it would have to steal market share from Goliath. Not a pretty picture but the stuff of corporate lore and mythology.
It is my firm belief that absent Benioff’s genius for promotion and an iron willed determination to sculpt the future of enterprise computing, Salesforce today would be just more road kill on the (metaphorical) side of Route 101.
But Benioff and a team of believers pulled it off. He made storing data in the cloud not scary but sexy. He took on the dominant player in CRM at the time, Siebel Systems, much earlier than I thought practical, with a campaign that featured a little kid writing at a blackboard, “I will not let Siebel take my lunch money.” It was a brilliant summation of everything Salesforce and Benioff wanted to achieve at the time. Benioff wanted to deliver an order of magnitude improvement in enterprise software’s dismal cost curve while also making CRM an easy installation that even small and medium businesses could accomplish.
In the process, Salesforce became the primary industry promoter of the subscription model and started a whole economic model that resonates throughout the culture today. No they weren’t the only ones doing subscriptions, far from it, but Salesforce and Benioff made subscriptions hip and sexy and sexiness drove success.
Salesforce has undergone more self-reinvention than I can count over the last fifteen years. Actually I can count it. The company seems to reinvent itself every 2 to 3 years, a torrid pace but one that has brought it to a leadership position in numerous Gartner Magic Quadrants, and the verge of the Fortune 500.
If the company has an Achilles Heel it is the tendency that all rapidly growing companies have of reverting to the mean, becoming average. In other words how do you keep “La Revolution” going without becoming a self-parody or the Fidel of tech? Here Salesforce has had incredible luck not only with its serial reinventions, but have you noticed that the company’s reinventions have all involved building products that it needs internally that also happen to be what the market needs too?
Salesforce’s early customers were emerging companies like itself so they needed high quality systems that didn’t cost a lot but that would enable them to compete with the big boys. As the successful ones grew they needed better ways to communicate and collaborate internally to prevent the stasis and sclerosis that organizations with large populations and rigid processes inevitably acquire.
Salesforce delivered Chatter, its collaboration tool and workflow to automate as many internal processes as possible. It embraced the social wave with a bear hug that has enabled it to effectively communicate with customers and prospects and it has shown its customers how to use these tools to streamline their operations too.
The company has also paid close attention to IT and application development. Understanding the disruption that mobility is causing, it has moved to provide development, maintenance, and deployment tools that enable business systems to evolve at rates very close to their underlying business processes. Exactly what it also needs in its continuing evolution.
While the company might not revert to the mean while Benioff and Harris are running things, it’s worth noting that the mean is chasing Salesforce. Every major business software vendor, plus a cadre of innovators spotting niche opportunities, is hot on the trail of Salesforce’s innovations.
Windows is effectively dead as a place to run business apps except for its necessity for supporting browsers where most applications run today. Everyone has a cloud strategy today including all of the nay-sayers of a decade ago who finally gave up being wrong all the time. Everyone is trying to develop an App Store — a term Salesforce coined before Benioff gave it to friend Steve Jobs and Apple — on that, all I can say is that Benioff is not always right. Ditto for the emerging ecosystems of partners with plug and play applications.
The list goes on and as if that weren’t enough, there’s philanthropy to discuss too. Benioff has been one of the earliest and most vocal supporters of the 1:1:1 model of philanthropy that posits donating one per cent each of a company’s equity, people time, and profits to charity. The Salesforce.com Foundation has become a model in Silicon Valley and other companies have emulated it creating a new force in public giving. Benioff is also not shy about his $100 million donation to UCSF Children’s Hospital, which will certainly enrich San Francisco and the Bay Area for a long time into the future.
There’s more but it’s enough for now to say that Salesforce.com has made a significant mark on an industry, a region, and even on the way we think of business today. That’s not bad for a fifteen year-old.
IaaS Market—Who Wants It?
I saw this headline on Yahoo Finance, “Oracle Has Big Plans To Beat Salesforce And Amazon In A $72 Billion Market” and it got me thinking about a lot of things.
First, the market in question is Infrastructure as a Service or IaaS and I didn’t think that Salesforce was actually in the IaaS market. This shows how far we still have to go in cloud computing just to get the terms right and set the playing field.
IaaS is all about computing infrastructure — the servers, memory, disks, operating systems, middleware, databases and maybe applications — that any modern business needs to support its information processing when it chooses not to manage all this by itself. Companies subscribe to IaaS services and it’s like Walmart for conventional IT. You know this.
Second, IaaS is part of a cloud industry that also includes software as a service or SaaS — systems that are centrally managed and subscribed to and PaaS or platform as a service. PaaS is the top of the heap right now, the place you go when you don’t want to manage the gear as in IaaS but still want a robust place to design, develop and manage applications that are embedded into your business processes AND to generate those apps for multiple platforms from a single design.
Interestingly, a PaaS provider probably, but not necessarily, is an IaaS provider by the simple logic that the “P” is software and it has to live somewhere. So this brings us to the headline and article and my issues with it.
Oracle has some very nice server, storage and in-memory gear that it acquired when it bought Sun or built once it had the Sun gurus on board and working with its database mavens. It can very well supply the IaaS market — those organizations that want to run their own IT shows but not operate their own data centers. Great! Amazon is in that business. Google is in that 0business. Oracle is in that business and it is trying to be in the PaaS business with its still-being-delivered Fusion platform. Salesforce is in the PaaS business but not really in the IaaS business except by accident of circumstance noted above.
The article quotes some succulent swipes between Marc Benioff, CEO of Salesforce, and Larry Ellison, CEO of Oracle, and Marc’s former boss. The quotes are old and largely irrelevant but you have to admit, these guys sure know how to grab a headline.