On-Premises ERP Versus Cloud Computing: Too Late for the Sky?
Friday, August 28, 2009
Early last week, I spent a morning reviewing SEC filings and Seeking Alpha transcripts for the most recent earnings calls from Epicor, QAD, and NetSuite. I wanted to see how well the two on-premises vendors were doing relative to the ERP-in the-Cloud company. A quick note: Most readers think of vendors like NetSuite as a software-as-a-service (SaaS) or on-demand provider, but I’m going to use the cloud nomenclature, since the term is rapidly replacing the other descriptions in vendor presentations.
While it’s not entirely fair to compare the three firms, since NetSuite doesn’t sell manufacturing applications (but it does have manufacturers as customers), there are some very interesting observations.
Epicor: 125 new customers
For the second quarter ending June 30, 2009, Epicor reported total revenue of $100.4M, down 21.5% over the year-earlier period. License revenue fell 28% to $17.5M. While maintenance slipped 2.8%, it still represented 47% of revenue in the quarter. The company reported non-GAAP net income of $6.7M.
Epicor added 125 new customers to its base of nearly 21,000 companies in manufacturing, distribution, retail, hospitality, and services. Although the company has a cloud product for retail, it hasn’t released a cloud version of Epicor 9 yet.
QAD: Six new cloud customers, with “20 live customers by year end”
For the second quarter ending July 31, 2009, QAD reported total revenue of $61.3M, down 26.2% from 2Q09. License revenue dropped 41.2% to $6.7M. Maintenance and other revenue contributed $32.1M or nearly 53% of total revenue. The company reported a net loss of $1.4M, including stock compensation expense.
Although QAD didn’t provide data on the number of total new customers, it did say it signed six cloud customers in the quarter, including five U.S. companies and an Australian firm that plans to deploy QAD Enterprise in sites in Australia, Brazil, China, the United States, the UK, and Singapore. A QAD executive said the company plans to have “20 live customers by year end.”
QAD is installed at 6,000 sites. It no longer breaks out the customer count.
NetSuite: 270 new customers
It was a different story at NetSuite. For the second quarter ending June 30, 2009, the company reported total revenue of $40.3M, up 10.3% over the year-earlier period. It had a GAAP net loss of nearly $5M for the quarter. Conversely, it had a non-GAAP net income of $687,000.
In the quarter, NetSuite added 270 new customers to its base of 6,000 accounts. This is up from the 240 new accounts added in the first quarter. If you read the company’s 10-Q, which was filed August 10, 2009, you’ll see that new customers accounted for $11.6M in new revenue. This more than offset the $7.9M decrease in revenue from existing customers and other sources. Half of that was because of a $3.9M drop off in professional services. The balance was attributed to customer churn and other factors, such as the reduction of revenue recognized from the company’s Japanese distribution rights agreement. The latter resulted in a net decline of $0.02 in profitability.
In the filing, the company noted “existing customers’ purchases of additional user subscriptions and modules (or ‘upsell’) largely offset the impact of customer churn and decreases in subscription and support revenues (or ‘downsell’) for existing customers.”
Will cloud adoption force public companies into the arms of private equity?
Even though I’ve only presented one quarter’s worth of data, I also looked at the previous quarter and earlier periods too. Since the start of economic downturn last September, on-premises vendors have been harder hit than their cloud brethren. This is especially true for ERP providers.
While the largest enterprises may be the last to replace their financial applications and the bulk of their ERP systems with a cloud offering, it will happen, but only when the largest vendors endorse it, or companies like NetSuite and Workday are viewed as viable replacement products. The economics for buyers are too compelling, which is a theme we’ll explore in future editions of First Thing Monday.
The publicly-traded vendors have more of a challenge, though. Software as a service and cloud represent entirely different business models. Although this is especially true in the shift from large, upfront deals to subscription fees, it also shows up in the company’s business model.
Look at QAD, for example. In its 2009 annual report, the company noted that it had 1,500 employees, including 625 in services and support, with 400 consultants in 23 countries and 15 support centers. It also noted it had 350 developers in R&D centers in the United States, India, China, Ireland, Australia, and Belgium. Some of this comes courtesy of acquisitions, but how many services and support people, trainers, developers, and sites will QAD need if the new business shifts to mostly cloud sales?
Finally, Epicor and QAD are on the top of many private equity firms’ acquisition wish lists, despite the challenges of actually completing a deal.
Wall Street loves cloud companies
In addition to appealing to customers, there are also shareholders to consider. As I write this, NetSuite has the highest market cap of the three at $882.06M. Epicor is valued at $397.54M, while QAD trails at $132.24M. The valuations are based on the closing price on Thursday, August 27.
Since the first trading day of the year, NetSuite’s share price is up 41.4%, Epicor 26.7%, and QAD 4%.
What do you think?
Are the on-premises vendors too late for the sky? If they continue to ignore the trend or move too slowly, will they find themselves running on empty, or pleading to their physicians, “Doctor, my eyes have seen the years and the slow parade of fears”?
As always, I welcome your feedback and ideas—brichardson@amrresearch. Let’s continue the discussion on my blog, The Future of Enterprise Software.
Finally, please take a look at a new research product from AMR Research, Voice of the Customer. We just published the annual outlook on software spending, with some striking findings.