Sunday, June 28, 2009

Maybe Oracle is just bending the truth

In its typical boastful style Oracle took shots at the competition during its latest earnings announcement, claiming to be taking share from SAP. I find myself in the unique position of having to agree with Oracle on this one. They did just have a better license revenue quarter than SAP, but it follows a bunch of gains by SAP. And at the end of the day, when both numbers are double digit negatives, isn't this a silly argument to be having? 

Oracle actually claimed to be taking share from SAP "in every region of the world". I don't have the data in front of me to comment on each region individually. I could get it, but I'm not sure that you care that much. This is more a commentary on the way Oracle is spinning the overall message.

Michael Hickins was very blunt about it, and wrote that Oracle is lying about SAP. This caught the attention of Oracle, no surprise, and led to the following comment from Karen Tillman of Oracle. 


Michael ? Lying? If you look at year-over-year growth rates of Oracle and SAP for the last two quarters, whether in constant currency or in USD, we are outperforming SAP in every region.

And, that doesn't take into account that SAP includes Business Objects sales in their applications numbers. Oracle's apps numbers are purely applications. If you took Business Objects out of SAP's applications number for an apples-to-apples comparison, the difference would be even more dramatic.

The beauty about facts is, they don't lie.

Hickins comes back with a post today and says it's odd that Tillman suggest we back the revenue from Business Objects out of SAP's figures, but didn't suggest we pull Siebel, PeopleSoft, J.D. Edwards, and Hyperion out of Oracle's figures.

By this time I'm pretty curious to look at the spreadsheets I track on these two companies and try to make some sense of this. I've looked at the numbers for the past two quarters. If Oracle isn't lying they at least can be said to be severely bending the truth. If I go back and look at what each company reported two quarters ago (that's the quarter ended 12/31/08 for SAP and 2/28/09 for Oracle) I can't find a single comparable metric where Oracle did better than SAP. That must not have been what Tillman meant when she said "for the last two quarters".

She must have meant Oracle last quarter (ended 5/31/09) and SAP's last quarter (ended 3/31/09) which between the two of them are "the last two quarters" reported by these companies, I guess. Here, I'm going to side with Oracle. Can't imagine siding with Oracle on anything, but on the narrow point about the impact of revenue from Business Objects, I have to. SAP closed that acquisition in mid-January of 2008. That means SAP's 1Q09 includes three full months of BO revenue, which is compared against 2-1/2 months of BO revenue during 1Q08. There is some small inorganic component to SAP's last reported quarter.

The major Oracle acquisitions Hickins lists, Siebel, PeopleSoft, J.D. Edwards, and Hyperion, all closed long enough ago that there is no inorganic boost from them during Oracle's last quarter. They've made a bunch of smaller apps related acquisitions that are providing some inorganic growth, but many of the recent deals have been smaller private companies making it nearly impossible to back them out of Oracle's figures.

But let's look at what Oracle is boasting about here…in its most recent quarter it reported that new license revenue in its apps business was down by 19%. In SAP's last reported quarter it reported Software revenue down 33%. Oracle wins that argument.

Now just a bit broader look…combine license, maintenance, and support revenues. Oracle's apps business is down 9% in its last quarter, compared to SAP being flat over the prior year. Or stick with just license/software revenue, but over a longer time horizon. Over Oracle's last four reported quarters its apps new license revenue is down 16%. SAP's is down 2%.

So Oracle has had one arguably better quarter against a series of losses to SAP. That's Oracle's narrow victory. Maybe they shouldn't jump up and down about it too much. Right now it just looks like an argument about whose ship is sinking a little more slowly.

Wednesday, April 29, 2009

The Broken Promise of Software Maintenance Fees

Maintenance fees have come under fire in recent weeks as vendors like SAP and Oracle look to extract 22% annually from customers while providing a questionable return. The implied promise of maintenance fees is that you pay them each year to the vendor in order to fund the ongoing development and enhancement of the product you rely on. The promise is being broken. Badly.

There is plenty of anecdotal evidence of this broken promise, like Lawson's admission that maintenance fees are what is making it profitable right now and its assertion that this is ok because customers need the company to remain healthy, even if it is at their own expense. Considerable debate has occurred among bloggers and independent analysts regarding Oracle's ability to provide any innovation as a return on the billions in maintenance it is collecting. SAP announced earnings today and shared that in response to huge (and justifiable) customer outrage it is holding off on its planned maintenance price hike pending an analysis of the ROI customers are to get from the increased fees. Good luck with that.

In light of this I thought some hard numbers would be in order, and being a math geek I figured I could take a stab at providing them. It occurs to me that as leading vendors become more dependent on maintenance revenue, as it makes up a larger and larger percentage of their revenues, R&D spending should be increasing as well, right? They're getting this money to "maintain" the products. If they get more money they should be better able to "maintain" them. I know R&D as a percentage of total revenue is flat-lining or decreasing at these companies. So how about R&D as a percentage of maintenance revenues? I spent the better part of my morning working on this chart.

returnonmaintenance by you.

Does this surprise you? Here's a group of leading vendors who pretty much all are spending only about a quarter of customer maintenance fees back on R&D for the products they are said to be maintaining. Actually, it is probably worse than that. These are technology companies striving to innovate (well, except for Sage) so they'll be happy to tell you about the new stuff they're working on. Really, so after you spend on that new stuff how much less than one quarter of every dollar is going into the product I'm using?

I've never run a multi-million or multi-billion dollar software company, so I guess I don't know exactly how this is supposed to work. I know of course that R&D does not match maintenance revenues. I expect some profit to be taken. Maintenance is a pretty damn profitable business for vendors. Lawson had 83% gross margins on its maintenance business last quarter. I can also see the point that some of those dollars be used to fund acquisitions that fill functional gaps in my product. That's a way of maintaining and enhancing my product...buying the R&D efforts of others vs. spending it yourself. Acquisition binges the likes of which Oracle and Sage have been on, for all kinds of stuff that's unrelated to my product, are another matter.

Speaking of Sage, you may have noticed that the orange line looks a little bit different than the others. It's low all the way across the chart as being dirt cheap on R&D investments appears to be part of that company's mission statement. It's also lower because Sage does not report maintenance as a separate line item. So this is R&D as a percentage of everything that Sage does not classify as product revenue. In that sense you should pay more attention to its trajectory than its position relative to the other lines. The trouble with Sage is that it cannot make up its mind on how to report revenues. The jumps in the line are because Sage has this habit of changing the way it bundles and reports revenues. It is a shell game focused on obscuring an unrelenting decline in new licenses as a revenue source for Sage.

You might think this all leads to an argument in favor of Saas vendors like NetSuite or It's an argument Marc Benioff would like to make, but I'm not quite sold. They don't call it maintenance, but the recurring fees paid to Saas vendors have a support and maintenance element to them, and depending on your configuration and use of the software Saas can be more expensive than traditional on-premise software. Before you exclusively beat up the on-premise vendors for their R&D spend, look at the fraction of revenues that most Saas vendors put back into R&D.

In the case of highly profitable on-premise vendors like Oracle, Sage, or SAP customers ought to complain that too much of their maintenance fees are simply dropping to the vendor's bottom line. In the case of Saas vendors...instead of fattening the bottom line (there's precious little profit being made by these guys yet) you're funding ridiculously high sales and marketing spending. Pick your poison I guess.

Wednesday, January 14, 2009

An article last week on got me thinking about open source ERP again. The article highlighted another open source ERP project called Openbravo. Apparently a couple of months ago the number of downloads of Openbravo passed the 1,000,000 mark. That's how the success of these products is typically noted, but it is pretty much a meaningless statistic.

Compiere was the first of these projects that I remember getting media attention. There is some Oracle DNA at the top of the company and in one story the founder was quoted as saying that he doesn't view other open source ERP projects as competition. His competition is Dynamics. Compiere got a bunch of attention as its download number from SourceForge (a site that tracks open source projects) reached into the hundreds of thousands. Like other open source business solution providers the revenue is in the services side of the business. Based on estimates of total revenue and Compiere's service pricing I estimated that as little as 0.1 % of the downloads equate to actual customers.

Openbravo just boasted of passing the 1,000,000 download milestone. Yet from the notes of an attendee at the Oct 2007 Openbravo World Conference (attended by 120 people) there were at that time less than 100 live customers (80% of those in Spain). The download number comes from now and the live customer number from over a year ago, so the ratio may not be exactly 0.01%, but you get the point. Let's say that half of those downloads have come since Oct 2007. That still means the live customer number is just 0.02% of the download number.

Taking this further, if the customer has 20 users, do they download the software 20 times to install on each PC? You get the point, inflated download numbers are indicative of web traffic, not of user adoption. Businesses should take that into account and not be wowed by "1,000,000 downloads!".

I don't think this model is going away, but it's not about to take over the ERP market either. Per the article, Gartner Group predicts that by 2012 more than 90 percent of enterprises worldwide will deploy open source software in one form or another. The vast, vast majority of that will not be in the area of ERP.

And besides, Gartner Group's predictions are only about 71% accurate, and even then only 54% of the time (0.4 probability).

Thursday, January 08, 2009

Does Oracle really price gouge customers more than SAP?

Here's an intriguing and clever (on SAP's part) twist to the ongoing lawsuit between Oracle and SAP. Oracle is claiming its business has been badly damaged by SAP's actions. In asking Oracle to prove it, SAP says show me the money, and is trying to cause Oracle some pain before this all gets resolved. If SAP succeeds with its current action it will give competitors like Dynamics some ammo to use when selling against Oracle.

To recap, in case any of you need it, Oracle is claiming its business has been badly damaged by SAP's TomorrowNow division illegally downloading Oracle materials and then using those materials to offer cut rate support and services to PeopleSoft and J.D. Edwards customers. In fact, Oracle claims to have suffered more than $1 billion in damages from these actions.

Does Oracle really price gouge customers more than SAP, as an SAP executive has claimed? We may find that out over the course of this trial because SAP's latest response is Show me the money. Both parties are responsible for coming up with a proposed settlement amount by next month. SAP says that in order to arrive at a fair amount it needs to understand precisely how much Oracle's business has been damaged. Here's the clever is claiming the only way it can come up with that amount is if Oracle reveals its profit margins on J.D. Edwards and PeopleSoft software and support contracts. SAP is asking the court to force Oracle to do so.

This is finally getting interesting. Oracle is of course refusing to share this information. Maintenance contracts have become the core of Oracle's business model and are what allowed the company to exceed growth expectations last quarter. Most of Oracle's acquisitions in the apps space are motivated by (A) defending the Oracle platform and (B) adding to the recurring maintenance revenue flow. In sharing its exact margins on maintenance and support Oracle would be supplying very useful competitive intelligence to its rivals and giving leverage to customers when negotiating new deals.

Here I thought SAP was just going to meekly take its punishment. The company's previous action in this case was to file a brief that denied many of Oracle's charges, but also acknowledged others. This was a far cry from what went on during Oracle's lawsuit against the government as it fought to acquire PeopleSoft. Among other highlights PeopleSoft's Craig Conway sparred back and forth with Larry Ellison about whether Larry wanted to shoot his dog.

Let me paraphrase that conversation...


Conway to the press: Oracle saying it wants to buy PeopleSoft and J.D. Edwards and then stop all future development on the products is like somebody telling you they want to buy your dog from you so they can take it out back and shoot it.

Ellison to industry analysts: Craigy thought I was going to shoot his dog. I love animals. If Craigy and his dog were standing next to each other and I had one bullet, trust me, it wouldn't be for the dog.

Conway responded shortly thereafter by coming on stage at a PeopleSoft conference along with his dog....both of them in bullet proof vests.

Somewhere along the way Conway also called Ellison a sociopath and referred to Oracle's hostile takeover bid for his company as a diabolical move and "atrociously bad behavior from a company with a history of atrociously bad behavior."

Now that's the kind of entertainment I want out of a high stakes battle between the leaders of the enterprise software world. It's good to see SAP stepping up its game just a bit.

Tuesday, December 16, 2008

At 10% growth is Dynamics gaining or losing share?

When the Dynamics business went from 22% growth in "customer billings" in calendar Q2 down to 10% in calendar Q3 it seemed some analysts were questioning what was going wrong with the business. The simple answer is, it's the economy stupid. At 22% Dynamics outgrew its major competitors (excluding the Saas types like and NetSuite). It turns out at 10% growth Dynamics is still growing fastest and taking share.

I've run through the numbers for calendar Q2 and Q3 for a handful of ERP/CRM apps providers and found that when you consider organic growth 10% is a very solid Q3 number. A couple of estimates were necessary, but they are based on sound math. Here's how it looks...


Calendar Q2*

Calendar Q3*



















* some of these companies have fiscal years that don't map exactly to the calendar year. In those cases I've take the most representative fiscal quarter for purposes of this comparison.

Again these are "organic" growth metrics. More accurately, I backcasted the revenues. In other words, I'm comparing SAP's Q3 against the combined revenues of SAP and Business Objects from last year. In the case of Epicor, I'm comparing against the prior year total for Epicor and NSB Retail.

These are also growth figures for total revenues. Since Microsoft no longer breaks out the revenue details for Dynamics and instead provides us only with a growth rate on something called "Dynamics customer billings", it is not possible to do this comparison based on license revenue. "Dynamics customer billings" most accurately equates to total revenue, so that's what we have to compare.

Yes, a drop from 22% to 10% growth is not exactly something to cheer about, but by my math Dynamics is now a $1.2 billion business and outgrowing all of these competitors.

Friday, May 16, 2008

What's wrong with the Sage CRM business?

There seemed to be some good news about Sage's CRM proudcts at the company's recent Insight's conference, and some nice write-ups from the gurus like Denis Pombriant and Paul Greenberg. So how come nobody is buying the products?

Take a look at this:

Now, what are you looking at?

  • This is total annual revenue for Sage's CRM business, both before and after acquisition. By Sage CRM in this case I mean the revenue from all the CRM products (ACT!, SalesLogix, Sage CRM,, not just the individual product that caries that name.

  • Interact Commerce was acquired after the end of its 2000 fiscal year. The blue bars represent the revenue performance of Interact as an independent company. Nice growth of 197% in that last year, on revenue of $107 million.

  • From the close of the acquisition in May of 2001 and through the end of Sage's FY07 (10/1/06 to 9/30/07) it had managed to build a CRM business of 66.4 million British Pounds. Using the exchange rate as of 9/30/07 that translates to about $135 million dollars.

  • Sage's CRM business got a small inorganic revenue bump from a small bit of CRM revenue gained with the acqusition of Accpac in 2004. Even including these revenues this works out to a seven year CAGR of just over 3%.

Wow! What happened?

Friday, February 15, 2008

Customers are running away from NetSuite

Nice quarter announced yesterday by NetSuite.  Fourth quarter revenues increased by 57%, with full year revenues up 62%. It all looked great until I read the customer number. Over the last 5 years this company has lost more customers than it has been able to add.

This is one of those things that just failed to register the first time I saw it. In scanning the company's S-1 filing with the SEC there is a note that the customer base was "over 5,400". That should have caught my eye. It didn't. But today, reading the earnings press release I saw the company added 432 customers during Q4, bringing the customer count to "over 5,600". Interesting. I would not have expected it to be 5,832 as there has to be some churn in this business. But what does it say when your rate of churn is about half of your customer add rate?

This serves to validate the discontentment that is captured in the comments following these two blog posts by Dennis Howlett.

NetSuite nightmares - Sept 27, 2007. Comments
NetSuite nightmares: part deux - Jan 10, 2008. Comments

In light of this dissatisfaction the customer add issues make sense. And by the way, it's much worse than this most recent quarter indicates. Take a look at this press release on the NetSuite website. That's a release from March of 2003 which boasts that the company had surpassed 6,000 customers. Do you mean to tell me that all of the customer adds you could muster over the last 4-3/4 years have not been enough to offset the churn in your existing customer base? That's incredible.

This of course has done nothing to stop NetSuite's CEO Zach Nelson from taking shots at a few competitors during yesterday's earnings call.

On SAP's new Business ByDesign product: "I still don’t think you can buy this product (BBD) - we haven’t seen it because you can’t buy it…I think they’re being a bit disingenuous about completeness.”

Great Plains will do anything to keep us out of a deal.”

“People are running away from Sage.”

Hey Zach, isn't it interesting how much your company resembles Sage on this issue these days?