Recently, ERP technology providers have rushed to take advantage of today’s buyer preferences for adoption of more cloud-based applications that can surgically be inserted to support specific business processes. They effect of that strategy has come home to roost for the major players.
This week, SAP AG reported a 23 percent increase in third-quarter profits but the winds of currency and buyer preferences impacted the growth of software license revenues. Total revenues climbed a mere 2 percent to slightly over €4 billion, compared with a 14 percent growth rate a year earlier. According to business media reports, revenues for the company’s core software licensing businesses actually decreased by 5 percent overall, including 13 percent in the Americas and 9 percent in the Asia regions. License sales in the EMEA region increased by 8 percent. Cloud subscription revenues more than doubled in the quarter to €191 million and claims to have 33 million cloud subscribers. Looking toward its final quarter, SAP executives forecasted an overall 10 percent excluding currency fluctuations. That would imply an aggressive sales effort in the very important upcoming final fiscal quarter.
In mid-September, rival Oracle also reported a mere 2 percent increase its fiscal first quarter revenues, continuing its trend of two challenging quarters of revenue growth. Oracle does not breakout its revenues for cloud based application and indicated that revenue from the combination of new application software licenses and cloud subscriptions grew 5 percent in the quarter. First quarter profits rose to approximately $2.2 billion, compared with just over $2 billion a year earlier. Looking forward to the remainder of the fiscal year, Oracle indicated that combined software application and cloud subscription revenues growth would range from a negative 4 percent to a gain of 6 percent in constant currency, a rather wide range.
ERP vendors have a special challenge, they have to convince customers that their current cloud computing offerings have a more compelling value proposition that those of existing best-of-breed cloud-based vendors. Recent cloud-focused acquisitions have had a slower record of integration with existing applications with elongated timetables, and that probably accounts for why buyers are shopping the field.
The other more subtle challenges is that ERP vendors have built a legacy of staffing and overhead directed at supporting traditional direct sales of applications while cloud-based sales are more developed by longer-term relationship selling.