Thursday, March 22, 2012 12:06:37 PM
PROVIDED BY MarketWatch - 12:01 AM 03/22/2012
SAN FRANCISCO (MarketWatch) -- Oracle Corp. (ORCL) put out fairly upbeat report this week, but analysts covering the enterprise software giant still worry about the growing threat posed by smaller companies offering software to businesses as a Web-based service.
The trend is known as cloud software, software-as-a-service, or simply SaaS, and has been around for roughly a decade. It essentially allows businesses to pay a subscription usually based on the number of users for access to software used for such tasks as managing payroll and keeping tracking of customers, instead of paying big licensing fees for software installed on their own networks under a client-based business model.
While the cloud model has been growing over the past decade in the small and mid-sized segments of the corporate IT market, analysts say it's begun to win adherents among larger customers that used to rely solely on big vendors such as Oracle (ORCL) and SAP .
"SaaS was considered a great delivery model for the mid-market," said ThinkEquity analyst Brian Schwartz. "Those tend to be lower-priced deals. ... Now the big customers are turning to SaaS."
That shift quickened in the last three years, he added. The reason: the economic meltdown forced even the big corporations to cut back on information technology spending.
"The tipping point was the great recession," Schwartz said. "You had IT departments that had their budgets slashed. But what didn't change was the requirements to manage the IT infrastructure."
In fact, managing an IT network just got tougher with the explosion in Web traffic and in the data that big companies had to deal with. "That was the big inflection for Saas," Schwartz said.
And that inflection is reflected in the way software shares have performed. To be sure, Oracle (ORCL) and SAP have been on a roll of late. Both stocks have more than doubled since hitting their low points in March of 2009.
But shares of Salesforce.com (CRM) and NetSuite (N) have soared much higher, each jumping more than four-fold over the same period. And they're posing a bigger problem for software giants that rely heavily on contracts with large enterprises.
"The hot SaaS companies are going after Oracle (ORCL)," said Cowen analyst Peter Goldmacher in an interview.
Concern about the rising competitive threat of SaaS firms helped weigh on Oracle's (ORCL) shares on Wednesday, despite a relatively upbeat quarterly report the day before that showed an 18% rise in profits.
Goldmacher noted in a report that, while the company showed a resumption in growth of its all-important maintenance revenue line, "in light of big competitive losses to SaaS competitors in CRM and HR, we remain concerned about Oracle's (ORCL) ability to renew Apps maintenance over time."
For example, Salesforce.com (CRM) says it recently won over major Oracle (ORCL) customers, such as Hewlett-Packard (HPQ) , Electronic Arts (EA) , Eli Lilly (LLY) and Xerox (XRX) . The company said it has also scored customer wins against SAP, including deals with Dolby (DLB) and Fujitsu.
Oracle (ORCL) and SAP have tried to fight back. One way has been to gobble up SaaS companies, a buying spree that seems to have picked up over the past five months. Oracle (ORCL) recently signed deals to buy RightNow , which offers customer relations applications, and Taleo (TLEO) , which helps business recruit and keep track of job applicants. SAP has bought SuccessFactors , another human resources application firm.
Goldmacher argues that these moves are "primarily defensive" and are essentially a way of "trying to get the message out that they have SaaS too."
But so far, he added, the message "rings hollow." One reason is that the traditional software companies like Oracle (ORCL) and SAP face serious hurdles. One of them is rooted in the lingering uncertainty in the economy. ThinkEquity's Schwartz says that has led to corporate customers having a "low tolerance for a long payback period."
"Back in the olden days, Oracle (ORCL) or SAP could go to a customer and basically show them that they're going to get massive ROI [return on investment] from deploying their solution," he said. "You may not get the ROI for three, four, five years from now -- but you're going to get it. There's just no tolerance for that anymore."
With software-as-a-service firms, a customer has more flexibility and in many cases, they can see an return on their investment faster. Then there's also the cultural factor, especially when it comes to sales operations, Schwartz said.
Sales people for Oracle (ORCL) or SAP typically get paid a huge commission from landing long-term contracts, and they can usually make large sums of money with one or two deals in a year, Schwartz said.
"What you do is you're hunting for the big elephant, the big deal," he said. "You land the big deal and then you're off to hunt the next big deal. You got a customer locked in."
One the other hand, salespeople for SaaS companies like Salesforce.com (CRM) must go for volume. And because customers can more easily shift to other vendors, they must also work harder to maintain those relationships.
"To be a SaaS company, you have to be born to serve your customer," Schwartz said. "Customer service is just crucial. You need to maintain rates."
John Wookey, executive vice president for Salesforce.com's (CRM) social applications, echoed this point, saying, "Every year, you want [customers] to say, 'I like using it.'"
Wookey also used hunting to illustrate the difference, saying that with software-as-a-service, "You move from a hunter mentality to a farming mentality. There's still hunting involved, but you are building long relationships."
Still, there are areas in which Oracle (ORCL) and SAP are seen having an advantage against the smaller software-as-a-service firms. Oracle (ORCL) Chief Executive Larry Ellison highlighted the issue of security as he touted the company's new cloud computing initiative on Tuesday during the company's earnings call.
"Salesforce.com (CRM) does not offer this kind of security in their cloud," he said. "This is a key advantage for us going forward."
Schwartz also cited another "wild card" that could give the big software companies a lift: the ability to process enormous amounts of data. That trend has led to the heightened interest on such areas as business intelligence and analytics software, which enables businesses to make decisions and map strategy based on rapidly increasing data traffic on their networks.
Software-as-a-service companies, he said, "are not good at data integration." Still, it's a problem they can eventually fix.
Meanwhile, Goldmacher of Cowen said, the software giants face tough choices as their core businesses come under attack from the pure play Saas players.
"The dilemma becomes: do they creatively destroy their business and go after growth opportunities," he said. "Or do they just age and fade into the background. ... I think everything has to be on the table."
Recent SAP News
- Form S-8 - Securities to be offered to employees in employee benefit plans • Edgar (US Regulatory) • 09/12/2024 08:15:46 PM
- SAP Completes Acquisition of WalkMe • GlobeNewswire Inc. • 09/12/2024 01:05:19 PM
- SAP Executives to Participate in Upcoming Investor Event • PR Newswire (US) • 09/04/2024 09:00:00 AM
- Jürgen Müller to Leave SAP Executive Board • PR Newswire (US) • 09/03/2024 07:41:00 AM
- Xerox Selects RISE with SAP to Transform Enterprise Architecture • PR Newswire (US) • 08/07/2024 01:00:00 PM
- Scott Russell and Julia White to Leave SAP Executive Board • PR Newswire (US) • 07/30/2024 07:15:00 AM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 07/24/2024 11:38:16 AM
- SAP Shares Surge 6%, NXP Declines 8% on Lower-than-Expected Profits, and More Earnings Highlights • IH Market News • 07/23/2024 10:02:34 AM
- SAP Announces Q2 2024 Results • PR Newswire (US) • 07/22/2024 08:05:00 PM
- US Index Futures Advanced, Oil Prices Inch Higher • IH Market News • 07/22/2024 10:06:47 AM
- SAP Canada Reflects on its Indigenous Reconciliation Journey • PR Newswire (Canada) • 06/25/2024 12:00:00 PM
- Bain & Company Now Runs SAP S/4HANA Cloud Public Edition in 40 Countries • PR Newswire (US) • 06/18/2024 01:00:00 PM
- SAP Enters into Agreement to Acquire WalkMe, Driving Business Transformation by Enhancing the Customer Experience and Enriching SAP Business AI Offerings • PR Newswire (US) • 06/05/2024 09:00:00 AM
- SAP Infuses Business AI Throughout Its Enterprise Cloud Portfolio and Partners with Cutting-Edge AI Leaders to Bring Out Customers' Best • PR Newswire (US) • 06/04/2024 12:00:00 PM
- AWS and SAP Unlock New Innovation with Generative AI • Business Wire • 05/29/2024 12:00:00 PM
- NEC Leverages RISE with SAP and AI to Build Business AI in Move to the Cloud • PR Newswire (US) • 05/17/2024 02:00:00 AM
- CP Foods Selects SAP Solutions for Cloud Sustainability • PR Newswire (US) • 05/13/2024 06:00:00 AM
- IBM and SAP Plan to Expand Collaboration to Help Clients Become Next-Generation Enterprises with Generative AI • PR Newswire (US) • 05/08/2024 02:00:00 PM
- Apple Loses Market Share in China, GM Surges in Pre-Market Following Upward Revisions for 2024 Projections, and More News • IH Market News • 04/23/2024 11:25:34 AM
- SAP Announces Q1 2024 Results • PR Newswire (US) • 04/22/2024 08:05:00 PM
- SAP Unveils AI-Driven Supply-Chain Innovations to Transform Manufacturing • PR Newswire (Canada) • 04/22/2024 02:30:00 PM
- U.S. Index Futures Surge While Wall Street Eyes Rebound on Earnings Focus, Oil Prices Slip • IH Market News • 04/22/2024 12:09:47 PM
- SAP Unveils AI-Driven Supply-Chain Innovations to Transform Manufacturing • PR Newswire (US) • 04/22/2024 07:00:00 AM
- Deutsche Telekom Chooses RISE with SAP in Cloud Transformation • PR Newswire (US) • 03/21/2024 09:00:00 AM
- SAP and NVIDIA to Accelerate Generative AI Adoption Across Enterprise Applications Powering Global Industries • PR Newswire (US) • 03/18/2024 10:00:00 PM
VHAI - Vocodia Partners with Leading Political Super PACs to Revolutionize Fundraising Efforts • VHAI • Sep 19, 2024 11:48 AM
Dear Cashmere Group Holding Co. AKA Swifty Global Signs Binding Letter of Intent to be Acquired by Signing Day Sports • DRCR • Sep 19, 2024 10:26 AM
HealthLynked Launches Virtual Urgent Care Through Partnership with Lyric Health. • HLYK • Sep 19, 2024 8:00 AM
Element79 Gold Corp. Appoints Kevin Arias as Advisor to the Board of Directors, Strengthening Strategic Leadership • ELMGF • Sep 18, 2024 10:29 AM
Mawson Finland Limited Further Expands the Known Mineralized Zones at Rajapalot: Palokas step-out drills 7 metres @ 9.1 g/t gold & 706 ppm cobalt • MFL • Sep 17, 2024 9:02 AM
PickleJar Announces Integration With OptCulture to Deliver Holistic Fan Experiences at Venue Point of Sale • PKLE • Sep 17, 2024 8:00 AM