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Software as a Service -


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  • 1. Software as a Service - You can’t ignore it! November 2009
  • 2. SaaS – You can’t ignore it! Market developments Business models Investors/valuation You November 2009 2
  • 3. It doesn’t affect us!............Does it? The licence model is currently under threat Free software SaaS But SaaS revenues are only $8bn* in a global enterprise software market of $220bn………….. Forecast to reach $16bn by 2013 30% of vendors worldwide* are transitioning, or have transitioned to SaaS 40% or more in the planning stage * Source: Gartner November 2009 3
  • 4. Customers like SaaS: it’s cheaper & better No contract Rapid deployment Cumulative Cost to the Customer £’000 500 400 300 Licence model SaaS model 200 100 0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 More regular Better service updates November 2009 4
  • 5. But users have some concerns too Advantages Concerns Data security Lower cost Support Availability Rapid deployment Vendor financials No contract Integration More regular updates Customisation Better service Performance SMEs LMEs November 2009 5
  • 6. So it’s emerging in specific areas The $220bn Worldwide Enterprise Software Market Information Management IT users Business Horizontal apps ERP Applications Vertical apps Infrastructure Security IT staff Software Small Large Customer Size November 2009 6
  • 7. It’s US driven so far, and in smaller clients Revenue by Geography Revenue by Customer Segment 14% 26% 1-99 N America 81% EMEA 100-999 Other 1000-2499 2500+ 34% Source: IDC 2008 November 2009 7
  • 8. Usage is concentrated but growing fast Worldwide SaaS Revenue $m Sector 9000 Digital Content Creation 8035 8000 +22% Other 7000 6591 Office Suites 6000 5000 SCM 4000 ERP 3000 CRM 2000 1000 Content, Communications and Collaboration 0 2008 2009 Source: Gartner November 2009 8
  • 9. US start-ups first attacked the horizontal apps Company Revenue ($m) Founded Business 1077 1999 CRM, SA, PaaS Blackboard 312 1997 Education Concur 216 1993 Travel & Expenses Kenexa 204 2000 Talent management Ultimate 179 1996 Talent management Taleo 168 1999 Talent management Netsuite 153 2004 ERP, CRM, e-commerce Rightnow Technologies 140 1997 CRM SuccessFactors 112 2001 Performance management DemandTec 75 1999 CDM 43 1999 Talent management Total 2677 Not global scale companies (yet!) 10 years to this point November 2009 9
  • 10. The UK reflects the global picture UK: £6bn market Information Customer analytics £1bn Management Content management Business Horizontal apps: Vertical apps: Applications HR, ERP, CRM FS, Mfg, Retail, Telco £2bn Security Infrastructure Operating systems Software £3bn Database App development tools Systems management November 2009 10
  • 11. In the UK, large and small are trying SaaS Examples only Information Autonomy, Alterian, GB Group, SmartFocus Management Horizontal apps: Business F&A CODA, Gresham Applications CRM Sage HR ACS, Bond, Workplace, Stepstone SC Kewill, Wesupply Others Microgen, SDL, IDOX, Atex, BIW Vertical apps: Infrastructure FS Misys, Fidessa, StatPro, FFastFill Software Manufacturing Aveva Retail Prologic Hospitality Fourth November 2009 11
  • 12. 15% in UK by 2015? SaaS Market Development Total Market SaaS Market SaaS Share Global $220bn $8.0bn 3.6% doubling by 2013 US market $95bn $6.5bn 6.8% EMEA ? $1.1bn ? UK $10bn $300-400m? 3-4% 7% by 2011 15% by 2015? November 2009 12
  • 13. Greater US penetration into UK is likely Segment US Competition Today Future Customer analytics Content management Horizontal apps: Salesforce US based HR, ERP, CRM Vertical apps: Not big enough? FS, Mfg, Retail, Telco Local Security Operating systems Database App development tools Systems management November 2009 13
  • 14. SaaS presents future opportunities Here to stay - no type bust Market will be driven by new players who identify new business opportunities not just replicating licence functionality Will develop from simple stand-alone apps to fully integrated systems US based competition will increase Licence model will survive in large, complex environments – at least for some time November 2009 14
  • 15. SaaS – You can’t ignore it! Market developments Business models Investors/valuation You November 2009 15
  • 16. SaaS is just more daring Feature Old School SaaS Delivery “Product” “Service” Sales Limited contact Regular interaction Pricing One-off Continuous Features packaging Revenue stream Lumpy, but guaranteed Smooth, but may disappear High fixed Discounting tempting Costs more variable cost/low marginal cost High if successful Low so far Profitability November 2009 16
  • 17. It’s a new P&L challenge Revenues Smoother, but lower and less certain Growth dependent on new drivers Reduction in consulting fees Costs Decreases R&D, only maintaining one version Increases Hosting facility (new skills, hardware depreciation) Higher customer service levels (high cost of service interruption) Sales cost higher % of sales initially November 2009 17
  • 18. Revenue: smoother but lower and less certain 180 160 Traditional licence pricing model 140 120 •Licence may be term or perpetual 100 M ain te na n c e •Lumpy cash flow heavily weighted up- 80 Im p le m e n ta tion L ic e n c e /u p g rad e front 60 40 •Total 460 20 0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y 10 50 40 SaaS basis 30 Hosting fee •Growing revenue stream Maintenance •No guarantees 20 User licence fees •Lower total 335 10 0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 November 2009 18
  • 19. It needs new B2C skills in a new value chain Product Mktg & Operations Fulfilment Support dev’t Sales •New •Develop •Contracts •On-line •New (on-line) development? hosting marketing customer capability •Order service •Continuous processing •New pricing development •New partners model •Continuous •Usage service •No big tracking •New sales releases model •A/c •Coordinate receivable •Focus on with M&S smaller •Billing customers •Higher system quality If transitioning, may need to run new model in parallel with old (cost!) November 2009 19
  • 20. Marketing must simplify, and learn Key to success is ease of use and pricing Low-end product as starting point Features can be packaged into Bronze, Silver, Gold Pricing can be based on users, transactions, activity etc. Monitor what customers use and adapt November 2009 20
  • 21. Sales must account manage, as well as sell Revenue Mix New recurring revenue New licences Added modules Consulting Added users Account manage Recurring revenue existing Maintenance customers Churn Licence SaaS November 2009 21
  • 22. …. spare a thought for the CIO More remote from purchase decision Operational expense, not capital Must control integration with existing systems and compliance with data security Increasingly important as SaaS usage expands No more lunches for him November 2009 22
  • 23. SaaS – You can’t ignore it! Market developments Business models Investors/valuation You November 2009 23
  • 24. Larry’s right… US SaaS profits are low “…………the entire on-demand industry has to get better at making money in selling on-demand software.” Larry Ellison June 2008 Op Profit 40% Oracle Microsoft 30% SAP 20% Concur 10% Blackboard 0% 10 100 1000 10000 100000 Revenue $m -10% Ultimate Taleo -20% Netsuite -30% Rightnow DemandTec -40% -50% -60% SuccessFactors -70% Scale will help Kenexa -80% November 2009 24
  • 25. But they’re improving – for most ROS still falls short of the majors 40% Operating Margin 0% Concur 2005 2006 2007 2008 2009 Taleo NetSuite -40% Rightnow Technologies SuccessFactors -80% Blackboard -120% DemandTec Kenexa -160% Ultimate -200% November 2009 25
  • 26. …and US investors reward the growth US Company Valuations 7 Average majors 3.4 16.5% Average SaaS 3.0 47.7% 6 Concur 5 Oracle EV/Sales Blackboard 4 SuccessFactors Microsoft Ultimate NetSuite 3 SAP Taleo DemandTec 2 Rightnow Kenexa 1 0 0% 20% 40% 60% 80% 100% 120% 3 Year CAGR *CAGR 2005/2008 November 2009 26
  • 27. Investors might prefer pure-plays Pure play or start-up Business in transition Likes Dislikes Likes Dislikes • Recurring • Investments to • Rapid growth • High risk revenue achieve transition • Improving • Long term • New customer • No lock-in on economics opportunity maintenance - potential • Defensive in customer loss down economy? • Reduced operational gearing • Operational risks Risky investment Difficult investment unless Potentially high return new revenue identified November 2009 27
  • 28. UK experience suggests investors might be nervous UK Company Valuations EV/Sales 7 Average all 2.7 6 Average SaaS 1.5 5 4 <30% SaaS UK Multiples 3 >30% SaaS lower than US 2 1 0 Revenue (£m) 1 10 100 1000 10000 Note: Companies shown: Alterian, Autonomy, Aveva, Bond, FFastFill, Fidessa, IDOX, Kewill, Microgen, Misys, OneClick, Prologic, Sage, SDL, SmartFocus, StatPro, Stepstone, Workplace November 2009 28
  • 29. SaaS – You can’t ignore it! Market developments Business models Investors/valuation You November 2009 29
  • 30. Why should you get involved? Growth Opportunities Defence Customers are demanding it Find new ways to deliver (eg cost pressures) more value to customers Competitive pressure Reach a new (smaller) customer base Dependence on old legacy revenue November 2009 30
  • 31. Small customer accounts are more vulnerable Low barriers Large to entry Limited significance Vendor Just the to customer size opposite! Less concern about security, Small integration, etc. Small Large Customer account size November 2009 31
  • 32. Bigger vendors have more flexibility Multiple products Large Can pilot SaaS Less impact on financials Vendor size One or few products High risk transition Small Poor economics during transition Small Large Customer account size November 2009 32
  • 33. For example…. Eg Sage (£220)* Eg Misys (£287k)** Large Actual position requires analysis of: -customer base Vendor -number of users size -market Eg HR providers Eg StatPro (£70k)* -and competition by product line Small Small Large * Revenue per customer Customer account size ** FS only November 2009 33
  • 34. How you can win Exploit new product/market opportunities New customer segments (probably smaller) New ways to apply sector knowledge to improve your customer’s business Migrate one or more products to SaaS Product transition opportunities New procedures Minimise parallel operations Search for acquisition to quickly build skills Manage for value Manage financial PR to inform investors Consider going private for access to finance November 2009 34
  • 35. Summary You can’t ignore it US has led market development, but UK is catching up Big changes are needed to the financial and business models Opportunities are there for those able to exploit it Archimedes can help! November 2009 35
  • 36. Archimedes contact details Contacts Oliver Walker M: +44 (0)7710 877 461 E: Jamie Bruce M: +44 (0)7974 254 312 E: Address Archimedes Consulting 46 Pont Street London SW1X 0AD T: +44 (0)20 7591 0092 November 2009 36