Financial Health of "Pure Play" Cloud Vendors

Posted on June 6, 2011 by Sam Conforti

 

I was contacted by Hunter Richards of Software Advice. He alerted me to an article by Dan Fornes, Software Advice Founder & CEO, entitled: Q1 2011 Cloud Apps Financial Results Roundup. This article they published in their Blog reports on the quarterly financial results of ten publicly traded cloud software vendors, such as Salesforce.com. It contains data on quarterly revenue, operating income, customer count, market cap, and a host of other measurements. It provides a snapshot of the health of cloud computing as a business model. It’s clear the model is doing very well. The graphics in this report are clear and very informative. There is a short commentary and/or explanation with each graph to help the reader understand the salient points. Here are a few examples of the sort of information available to you:

QUARTLY REVENUE

OPERATING INCOME OR LOSS FOR THE QUARTER

SAAS REVENUE BY APPLICATION

CUSTOMER COUNT

ANNUAL SUBSCRPTION VALUE

MARKET CAPITALIZATION

Software Advice helps buyers find the right software for their business. Similar to the big consulting firms, they research the market identifying the best solutions for each buyer. Software Advice then publishes product profiles, comparisons, best practices guides and other research to their site. Software Advice is 100% free for software buyers. Their revenue comes from software companies after making a good match between a software buyer and that software vendor. So they are motivated to make great matches. 

 

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Gartner: SaaS May Not Be the Panacea for TCO After All

Posted on February 23, 2009 by Sam Conforti

There is an episode in Seinfeld where Jerry and Kramer are having a disagreement on an accounting issue. Kramer claims that the Post Office can just “Write Off” an insurance claim as a loss. Jerry implies that Kramer doesn’t even know what a write off is. When Kramer retorts, “Well do you?”, Jerry confidently states in a tone of honesty “No, I don’t”. That’s when Kramer comes in and seals the deal with the irrefutable line, “Well they do, and they’re the ones writing it off”.

Well, my friends, I am afraid that there is a bit of accounting “know-how” required to fully comprehend the latest opinion from Gartner analyst Robert DeSisto. As Richard Adhikari reports in his article for InternetNews.com entitled Gartner Warns on SaaS’s Hidden Costs, the Total Cost of Ownership (“TCO”) may be great for the first 2 years since SaaS does not require an initial capital outlay for hardware and the licensing model is pay-as-you-go. However the accounting for on-premises applications flips this advantage since the large capital outlay eschewed by SaaS proponents comes into play in later years. You see the larger expense for infrastructure in the non-SaaS model can be capitalized and any self-respecting accountant will tell you that means this “Capitalized Expense” can be depreciated. In essence the depreciation expense becomes a “Write-Off” against revenues. Oh dear, if I have confused you either see Kramer’s explanation above (or) the September 29, 2008 posting in this Blog, SaaS Contracting: Tips Leading to the Decision and What to Include in the Agreement.

Adhikari includes a rebuttal to DeSisto’s capital expense argument from Raju Vegesna. Vegesna comes back with the fact that SaaS pricing includes maintenance, support, and upgrades. Other SaaS proponents tout the ease of implementation and the favorable pricing model. On the flip side, DeSisto cautions that enterprises requiring tight integration with existing systems might not have the quick roll-out as promised. In addition, although the SaaS pricing model is advertised as a pay for the computing resources used, a significant number of SaaS Vendors have opted for other pricing models. In particular, DeSisto points to Salesforce.com whose pricing requires the customer to purchase subscriptions for a period of time regardless of use. 

I think the jury may still be out on this one. What isn’t discussed at length in this article, but is only hinted at, is the fact that the SaaS model should be attractive to the smaller enterprise and/or the start-up, while the larger enterprises might well be served with the traditional on-premises model.

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