For a long time the traditional financial vendors dismissed the cloud upstarts as little more than amateur providers that caused no challenge to their own market share – in their mind “real” businesses would still use the rock solid on-premise applications that they had been for the past decade or so.
If anyone wants some proof points that the cloud is making some serious dents in this happy little belief, just look at some recent results and the pace of growth for some of the cloud financial companies.
Mid-market player Intacct has had a great run of growth, in the fiscal year to June 30, Intacct saw 38% bookings growth year-on-year. And for those who suggest that the cloud kills the channel (and I myself have been a bit dubious about the channel angle for awhile), Intacct channel partners added 50% more customer accounts in the past year that the year prior. And as for existing customers, they seem pretty happy, existing customers added users in record numbers compared to previous years.
NetSuite, in its inexorable move up the food chain to ever larger customers, has had an awesome second quarter in which they saw $101M in total sales. This is a 35% increase year-on-year and 10% increase on a quarterly basis. NetSuite too is enjoying channel success with a rise of 70% across all partners – helped of course by big name channel partners like McGladreys and Baker Tilly. Deferred revenue grew by 39% while the average selling price, a good indicator of the size of customer and breadth of solutions, grew by 20%
2013 saw Xero cement its position as the disruptor in the SMB space, the company saw 102% increasing revenue sold directly and through a channel of some 6000 accounting practices worldwide. They boast of close to 200000 customers and interestingly in a market that previously was very split geographically, the company is enjoying triple digit growth in Australasia, the UK and the US.
Clearly it isn’t a like-for-like comparison to look at the growth rates (or lack thereof) of the incumbent players. They already have scale in their respective markets and, while it makes excellent copy for an upstart to make comments such as those made by an ever-opportunistic Zach Nelson, CEO of NetSuite:
In Q2, SAP actually reported software revenues down 7% year-over-year, while NetSuite reported recurring subscription and support revenue growing by [insert impressive statistics here]
While these direct comparisons aren’t particularly relevant from a financial metrics perspective, they are when it comes to a broad industry trend perspective. With a declining market opportunity, the incumbents opportunities lie within M&A rather than traditional sales-led growth. This is one of the key reasons that I expect an ever increasing level of M&A activity in this space in particular goring forwards. This is especially so given the one stumbling block in all these results.
Profits. what profits?
In the last quarter NetSuite made a GAAP loss of $20.4M. For the fiscal year, Xero’s loss was just shy of $15M. These are significant figures based on the relatively low revenues of these companies and point to a massive investment in growth – Xero CEO Rod Drury has been very vocal explaining to the markets how the company is happy to forego short term profit for customer growth. That said profitability is a long time coming in the SaaS space generally, even Salesforce, the oldest and largest of the SaaS players, is a loss making company – in part because of it’s hefty M&A appetite and generous stock-based compensation approach but also because of this focus on growth.
And that focus on growth is delivering results for all these companies, which more and more brings them to the attention of the incumbent players who, armed with significant war chests, will be running their acquisition rulers over the companies. I’ve long assumed that Oracle will eventually acquire NetSuite. Intacct, as a private company, is less well known but it wouldn’t be a huge surprise to see Sage or even Intuit acquire them and Xero is no doubt being watched very closely by potential suitors.
No matter who buys whom, the fact of the matter is that in the financial software marketplace, these new generation of vendors are growing very fast, and in a very positive position going forwards.
Disclosure – most of the vendors mentioned inthis article have, at one time or another, been consulting clients to Diversity Limited. Full disclosure statement here.