It's been a big week for the software-as-a-service industry: Salesforce.com is establishing itself as a leading cloud-computing provider, NetSuite is planning to take on SAP directly, and SuccessFactors is upping its outlook.
However, underneath the surface lurk more than a few questions marks.
In theory, companies such Salesforce.com and NetSuite should thrive in a downturn. Customers can take what was a capital expense and turn IT into an operational cost.
Forrester Research has argued that company accountants may give cloud computing and software as a service (SaaS) a boost, while Gartner has argued that software 'mega-vendors', such as SAP and Oracle, will have trouble squeezing more revenue out of customers.
But a strange thing is happening on the way to SaaS domination: vendors have been hit with the same IT-spending freeze as their larger rivals.
Exhibit A: NetSuite
NetSuite was widely panned for its fourth-quarter outlook, after it reported a mixed third quarter that fell a penny short of Wall Street estimates.
NetSuite said fourth-quarter total revenue will be between $41m and $42m (£25.7m and £26.3m), well below Wall Street estimates of $45.3m. The earnings outlook was between breaking even and a loss of a penny a share, in line with expectations.
It has been also reported that NetSuite is looking to poach SAP customers, with the differentiator being price. NetSuite chief executive Zach Nelson said: "We expect to put price pressure on our competitors."
However, NetSuite is still seeing slowing demand. Thomas Weisel analyst Tom Roderick summed up the consensus — and very negative — view of NetSuite's results: "Given the relatively high visibility within the company's model, we are somewhat taken aback by the degree of this reduction."
"We ultimately believe that the company's ability to model its forward bookings has grown challenging and that the company is adjusting its outlook to reflect the weakness it encountered towards the end of 3Q 2008. We are also reducing our 4Q 2008 bookings estimate from $49.8m to $42.4m, to reflect what we believe to be an increasingly difficult purchasing environment," said Roderick.
Tom Ernst, an analyst at Deutsche Bank, added that enterprise resource planning systems — SaaS or otherwise — are sensitive to the economy and purchases of them are likely to be delayed.
Exhibit B: Salesforce.com
Salesforce.com on Monday announced plans to host websites and hook up with Amazon Web Services. The message in a keynote from chief executive Marc Benioff was: Salesforce.com is reshaping the cloud. Benioff also announced a development partnership with Facebook.
However, beyond the bluster, there was little ground-breaking news. Salesforce.com's plan to host websites makes sense: the service is very sticky and hosting sites makes it more so. Meanwhile, the hosting service — dubbed Sites — is necessary to get Salesforce.com closer to the end user. As for the Amazon cloud partnership, who isn't partnering with the e-tailer turned computing leader? And the Facebook development plan is nothing new.
Salesforce.com didn't reveal its subscriber metrics. UBS analyst Heather Bellini wasn't impressed: "Management outlined plans to take Force.com to the next step by promoting cloud computing, and partnering with Amazon.com and Facebook to offer tight integration with their core solutions."
"We expect the enhanced capabilities to help strengthen the company's position as a platform provider, but it remains to be seen how much additional revenue and applications the solution will drive. We note that Salesforce.com expects to derive revenues primarily from selling more seats of its core offerings," said Bellini.
That final point is key: Salesforce.com is increasingly going after large enterprise accounts. SAP and Oracle dominate those accounts. In addition, those large accounts are the same ones that are freezing IT spending. In theory, the money should head Salesforce.com's way, but even SaaS is under pressure. The buying cycle is being delayed at best.
The overriding theme is that SaaS isn't immune to a downturn and the providers most tethered to large enterprises may bear the brunt of a recession — yet still grow relative to the big applications companies.
Secret to SaaS success
Perhaps the best-placed SaaS vendors are the ones that aren't trying to uproot entrenched giants. SuccessFactors, an on-demand human resources and performance-management software provider, is one of those companies that has managed to grow, and up its outlook, even amid a spending slowdown.
JMP Securities Patrick Walravens noted that SuccessFactors is "joining the proud few software companies who successfully navigated the disruptions at the end of September".
However, even SuccessFactors is cautious about the future, even though the company recently raised its outlook.
For the SaaS industry it should be the best of times, but individual vendors will still see some rough patches.
