Emptoris Grows, Trash Talks Competitors
While I'm hoping to talk to the guys at Emptoris on Monday, I wanted to get out a quick note linking to their recent controversial growth announcement which is raising eyebrows in the vendor community. In the note, Emptoris talks, among other things, about how they are taking customers away from Ariba. My perspective on this is that while there are many sides to a story, some things are best kept for competitive sales situations -- and out of the PR spotlight (because I know full well that CombineNet, Ariba, Procuri, SAP, and others could easily cite victories over Emptoris, but they choose not to in the public press). Without question, stepping this low is bad PR. Emptoris, especially given their overall solution strength, should learn more about how to market in the public domain in a gentlemanly manner (and save the trash talking for when they're in the throws of a deal).
But underlying this trash talking are some very big numbers in the announcement, including a citation noting Emptoris' 83% year over year growth. There's also some big claims about their SaaS installs as well (which I find a little bit hard to believe; basic "hosted" deployments, yes. But true Saas?) One thing I'll point out here is that Emptoris has historically gotten in trouble for sharing / leaking / or otherwise getting less than believable numbers in the hands of at least one analyst firm in the past. Also, private companies like Emptoris are not held to the same standards as public ones when releasing numbers, so take the specifics with a grain of salt.
Regardless, I have no doubt that Emptoris is doing very well in the market (and they almost always are at the top of my shortlist when I recommend vendors to companies). Still, I would hope that they begin to market themselves and act like a leader rather than behaving like a pack of middle schoolers trying to single out and beat up a ninth grader on the play lot. Leaders should act like leaders. As Benjamin Franklin, my favorite American historical figure once said, "Talkers are no Great Doers".
Stay tuned for further analysis on Emptoris soon. I will elaborate further on Emptoris' numbers and growth after I have a chance to speak with them next week
- Jason Busch
But underlying this trash talking are some very big numbers in the announcement, including a citation noting Emptoris' 83% year over year growth. There's also some big claims about their SaaS installs as well (which I find a little bit hard to believe; basic "hosted" deployments, yes. But true Saas?) One thing I'll point out here is that Emptoris has historically gotten in trouble for sharing / leaking / or otherwise getting less than believable numbers in the hands of at least one analyst firm in the past. Also, private companies like Emptoris are not held to the same standards as public ones when releasing numbers, so take the specifics with a grain of salt.
Regardless, I have no doubt that Emptoris is doing very well in the market (and they almost always are at the top of my shortlist when I recommend vendors to companies). Still, I would hope that they begin to market themselves and act like a leader rather than behaving like a pack of middle schoolers trying to single out and beat up a ninth grader on the play lot. Leaders should act like leaders. As Benjamin Franklin, my favorite American historical figure once said, "Talkers are no Great Doers".
Stay tuned for further analysis on Emptoris soon. I will elaborate further on Emptoris' numbers and growth after I have a chance to speak with them next week
- Jason Busch
Very similiar to the your mystery rebuttal to Supply Chain & Demand's E Procurement smackdown piece....Wonder what happened to that post - I certainly enjoyed your confused interpretation of the facts & percentages cited in the Aberdeen research brief.
Mr Hare's comments were spot on, yet you refuse to acknowledge them. And nothing like good facts to get in the way of an emotional argument that allows you to continue your anti-ERP rants, right.
So, who's the trash talker?
1) The "mystery" post goes up on Monday morning
2) I have been a crappy "moderator" of late on getting involved in the comments area. I've been too busy in my "day job", althought this is no excuse. Gary Hare is spot on.
3) You are absolutely right to imply that I write based on who butters my bread. In fact, I told Emptoris' competitors that the wires had to hit my account before this post went up. For everyone reading, I'm hedging my currency bets. Euros, please. Not dollars. Seriously, if you have issues with this, I'd refer you to many previous posts that I've had in the past defending my objective stance in looking at the market. But of course you're entitled to your perspective. However, if you comment any more in a negative tone without wiring those euros, I very well may take down your post ;-)
Focus on the enterprise.
Spock
The conventional wisdom goes that these defections are different from what happens in standard “green field” selling. If a sustained defection trend emerges amongst knowledgeable buyers, then it is a key indicator of the relative strength of the vendors’ product and services. It was interesting that on Ariba’s last earnings call they were asked by one of the financial analysts about this specific trend of customers leaving for Emptoris. Bob did a decent job of deflecting the question, but this is being watched.
Now if Emptoris had highlighted that they were taking away customers from the smaller players like iasta and Procuri, then they would clearly be a bully in the space. But it is funny that they got you so irked by simply picking only on Ariba, who is a vendor that is probably 2 to 3 times Emptoris’ size – they’re big guys, they can take it.
On another topic: It seems that financial obfuscation has become the staple of all of the up-and-coming spend vendors. Like you, I think that Emptoris and Procuri are growing very nicely, and clearly much faster than Ariba. There is no need for them to over reach for the extra hype. For example, when Emptoris says that they grew by 83% overall and then immediately shove in the 185% for the 4th quarter – why give that extra nudge? – just say you grew by 83% for the year, it is very respectable, and keeps it simple. Similarly, in my book, Procuri is exercising hyper-obfuscation with their claim that the “Company Achieves 150% Increase in Incremental Annual Revenue, More than 50% Increases in Revenue Run Rate and Backlog” What this means is that their bookings and revenues grew by over 50% (again, very respectable), and they had 150% growth “in the growth” (that’s what “Increase in Incremental Annual Revenues means”). In other words, if in 2005 Procuri grew from 12M to 15M, and in 2006 from 15M to 22.5M – that’s 50% growth in the last year (50% increase in revenues and 50% increase in SaaS backlog) , and 150% “Increase in Incremental Annual Revenues” (see, the increase from $3M incremental in 2005 to $7.5M incremental in 2006 is 150%). The “growth in the growth” metric is not a standard financial metric, as no one reports this type of stat to investors. There is no need to shoot the moon as we say, you’ll only shoot yourself in the foot. Just stick with the easy to understand facts – 83% revenues growth for Emptoris, 50% revenues growth for Procuri, and move on.
If these two companies are doing as well as they claim, then at some point they’ll get the itch and aspiration to approach the public financial markets. At that point they’ll learn that they need to tone down their hype, and in fact, they will need to be utterly silent for an extended duration leading to a public investor debut. So to me, the real indication of imminent greatness from these guys is when the pseudo quarterly earnings reports simply stop.
Love your blog, Jason, keep it up.
Your point on overhype is worthy of consideration. But your claims are somewhat misinformed. First, public companies do report on growth in new revenues. Heck, Ariba's entire earnings call was focused on incremental revenue growth from net new subscriptions -- obsfuscating (to borrow your word) declining license revenues and the fact that services have been propping up the company as it continues its efforts to transition to a subscription-based licensing model. (Ariba has recently stopped reporting license revenue altogether, so interpreting their level of success in transitioning to On Demand has become even murkier.)
As for your explanation of "incremental" (i.e., new) versus GAAP revenues (which is not the same as run rate, sir) versus backlog (which is not the same as revenues, as you suggest), you've confused matters even worse.
And as for "obsfuscation, I just re-read the Procuri press release. It was very clear on calling out incremental versus GAAP revenues. It was also clear in separating bookings from backlog. This is a level of clarification the Emptoris press release avoids by saying "83% year-over-year sales growth" failing to indicate whether these are just plain bookings or new/incremental sales or GAAP accounted revenues -- which would be required if they have truly made the jump to a SaaS model as they claim.
The problem? You fail to mention when it comes to subscription-based SaaS companies operate under different financial models than traditional licensed software vendors. The critical financial measures for SaaS companies are backlog and profitability -- both strong indicators of future viability and growth. (A fact that industry analysts overlook, but financial analysts and VCs like Tech Strategy Partners recognize.)
Consider this tale of two companies: A traditional SaaS company (like Ketera or Procuri) and a traditional licensed software or self-proclaimed "hybrid" license/SaaS company (like Emptoris or Ariba). Each company wins a $1 million deal.
According to GAAP standards, the SaaS company must amoratize that revenue over the term of the contract -- let's say 3 years. More specifically, they can only recognize 1/36th of that contract value each month -- so, in the SaaS world, a January deal is "worth more" than a Q4 deal when accounting for the current year's GAAP revenues. By contrast, the installed software vendor operating under the traditional licensed model can recognize and report the full $1 million value of the contract once the software is delivered/installed. (Caveat: If the vendor closes a deal at the end of Q4, he may not be able to legitimately report the total contract value as revenues in that fiscal/calendar year unless the software is delivered installed in that year. So Q4 claims should be viewed with caution.)
On the flip side, the SaaS vendor begins the next fiscal year with a base of the committed revenue of the remainder of the three year contract. So, if the original deal was signed in January, the SaaS vendor can only recognize $330,000 of the total value of the contract in that year. However, the SaaS vendor begins the next year with $670,000 in backlog. By comparison, the licensed software vendor begins the next year with $0 in backlog from the previous year's contract.
These accounting gacts should raise questions when Emptoris claims both that 65% of its deals were "SaaS" deals and that a big portion of sales came in Q4. If they were truly SaaS and ascribed to standard accounting principles, they would only report 1/33rd of the value of these Q4 SaaS sales as revenues in 2006 -- and even that's assuming they closed all those Q4 deals at the beginning of the quarter. This discrepency alone suggests that Emptoris is either not made the jump to SaaS as it claims or it is "obsfuscating" (your word again) financial interpretation by reporting bookings as revenues. (Their use of the term "sales" is open to interpretation as to whether they are referring to revenues or bookings. The lack of clarity I assume is intentional.) This is an appropriate practice under traditional license models when vendors can recognize revenue upon delivery and deployment of software to a client -- but this violates standard accounting rules under subscription-based SaaS models.
In other words, when it comes to selecting (and comparing) application delivery models, you can't have your cake and eat it too. Vendors operating under a license model can recognize revenues on the sales they close and deliver in that fiscal year, but they forgo a predictable and recurring revenue stream. SaaS vendors can only legitimately report revenues from a multi-year subscription according to GAAP principles. But in return, the SaaS provider (and its customers and investors) benefit from higher predictability associated with annuity-based revenue streams.
Two great comments and observations ... thanks for taking the time to dig into the financial aspects of rev rec and respective installed / SaaS business models. You have done far more justice to the subject than I could.
Spend Insider, I think you missed the forest I was pointing to, by focusing on a tree.
The main point is that these vendors, who are indeed performing well, are over-hyping and in several respects crossing a conventional boundary. When in fact, they need not do so. What is your opinion on this central point?
It seems that you are saying that because Procuri is on a SaaS model, and because they have a nice backlog, they are not over-reaching in marketing a 150% “increase in incremental revenues”, as if it were a revenues or overall company growth metric? You say this is ok, because Ariba discussed an increase in incremental revenues in their call. But… Ariba cites no % increase in “incremental revenues” in their press release (no public company titles their press releases in this manner, because it is misleading without a nuanced discussion). Further, checkout the slick graphic on Procuri’s homepage, it boldly announces “150% growth” again, very misleading – since in 2006 the company’s revenues only grew by 50%, and they themselves state that their backlog grew by only 50%. Trying to position 50% company growth as if it is a 150% growth is an SEC no-no, any way one cuts it. Can you point to a press release or website example of a public company that has pushed the envelope this far?
About that tree:
This is my awareness of accounting of SaaS subscriptions vs. Perpetual License + Maintenance. I assure you I’m quite versed. You seem to have latched onto to my statement that Procuri’s revenues last year grew by 50% and their backlog grew by 50% to be a cause-and-effect statement, and that therefore I clearly don’t understand the relationship between the two. This is not the case. I stated that the backlog growth was 50% for 2006 because that is what Procuri reported in their press release. Why did I even include the 50% backlog growth stat in a description of the obscure term “increase in incremental revenues”? Well, I figured that someone would say “ah, you don’t understand they are a SaaS vendor” so the 150% growth is related to their backlog – but since backlog grew by only 50%, that is not the case.
I assume your twisting of obfuscate to “obsfuscate” was in jest. But your post's premise is that I’m misinformed and in need of an education, so for the record :-)
ob•fus•cate (past and past participle ob•fus•cat•ed, present participle ob•fus•cat•ing, 3rd person present singular ob•fus•cates)
verb
Definition:
1. transitive and intransitive verb make something obscure: to make something obscure or unclear, especially by making it unnecessarily complicated
2. transitive verb confuse: to make somebody confused
Cheers.
Touche! I do apologize for my incorrect use of words. I did not intend my comment to be a criticism of your analysis. I should not have used the phrase "misinformed" to describe your analysis of the recent private company "earnings" releases. (In fact, I agree with your premise that these companies are demonstrating strong growth on an straight Y-o-Y revenue basis and should tone down the rhetoric.)
Instead, I should have used the phrase, "incomplete." With a name like "M&A Maven" there is no doubt that you are well-versed in the financial differences between the true SaaS and traditional perpetual license models. However, I am doubtful that the rest of the SpendMatters audience (or the general software and spend management industry) has this same level of understanding.
This is why I thought it important to illuminate the details of this subject. Per your latest post, it would seem that you agree that business and financial models -- and overall success metrics -- of these are vastly different. And I would hope that you would agree with my warning to readers to be careful of companies that claim to have significant business from SaaS and attribute a large portion of overall 2006 revenues to a big Q4. In the new age of subscription-based pricing, these two metrics just don't add up.
In fact, it might be helpful if you would provide a tutorial for SpendMatters readers on the financial aspects of the SaaS model -- considering that almost all coverage on this subject here has been limited to time-to-value and TCO metrics.
I second SI's invite to offer a SaaS tutorial. In fact, I'd like to print it as a guest blog, if I could.
Cheers, Jason