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Supply Chain Matters Initial Impressions of Proposed Acquisition of NetSuite by Oracle

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This week the world of enterprise software featured yet another blockbuster acquisition headline, that being Oracle’s planned $9.3 billion acquisition of Cloud ERP provider NetSuite, Oracle’s most expensive acquisition to-date.

This acquisition has an interesting twist in that Oracle founder and now CTO Larry Ellison was already a prominent investor in NetSuite, and the firm’s CEO, Zach Nelson managed Oracle’s marketing efforts in the 1990’s. According to business media reports and an Oracle statement, the proposed deal will close only if holders of a majority of NetSuite’s shares not held by Ellison and his family actually approve this deal. One other possibility is that another enterprise tech provider provides a counter-offer but that seems unlikely.

NetSuite’s primary marketing messaging centers on the claim to be the top dog in Cloud ERP, providing one unified business management suite, encompassing ERP/Financials, CRM and Ecommerce for more than 30,000 organizations. This enterprise technology provider has indeed been on a roll and many of my fellow industry analyst and technology market influencers have been impressed with the firm’s market prowess and management style.  One of the more important aspects of the company’s technology is its appeal to mid-market companies that can little afford expensive and elongated ERP implementations and ongoing support.

Since the window for final approval of this acquisition may well extend itself, we will frame our Supply Chain Matters commentary to initial impressions pending further briefings and information.

First, the financial scope of this acquisition once again reinforces that Cloud computing momentum is a real attraction for both the overall market and for technology providers themselves.  We all collectively anticipated additional, larger and more expensive acquisition moves among the enterprise software players and Oracle was no exception.

Upon scanning other viewpoints, some are indicating that Oracle needed to shore-up its Cloud platform offerings.  That is not how this analyst views it.  By my view, it’s a pure play in seizing market share opportunity, particularly in the mid-market segment beyond current efforts centered on Oracle’s existing JD Edwards suite.  NetSuite’s attraction and market uptake includes some existing SAP customers who elected to augment their corporate backbone IT applications needs with more flexible Cloud ERP in either a two-tier subsidiary ERP or specific augmented business process support option such as CRM. NetSuite’s Suite App extensions further allow for add-on capabilities such as inventory management, basic procurement or Ebusiness support capability.

From a supply chain and product management perspective, there are other interesting possibilities that can come from the combination of NetSuite and Oracle’s existing applications. Oracle currently provides broad SCM and PLM full suite support applications for both traditional license and Cloud based deployments.  We have previously expressed our view that Oracle SCM Cloud provides one of the only broader based supply chain management suites available in a public Cloud deployment option. Here again, the opportunities for augmenting NetSuite with such capabilities opens new opportunities for existing or prospective customers.

An open question in our mind will be how Oracle ultimately positions its current application offerings as well as NetSuite from an overall pricing strategy perspective. There could be some interesting options for added market or industry penetration.

At this point, the dust needs to settle and the approval process needs to complete.  However, the opportunities are rather interesting.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Contrasting Information Technology Vendor Transitions to Cloud Based Computing Needs

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Supply Chain Matters has continually provided our readers insights relative to the increased momentum and ongoing impact that Cloud based computing has had across multi-industry settings. Such impacts are not only quickly changing ongoing software and IT hardware deployment strategies for line-of-business and cross-functional supply chain management teams, but the financial fortunes of existing high-profile enterprise and IT technology vendors themselves. Cloud computing equates to lower margins but more recurring subscription-based revenues for technology firms and thus the transition has to managed skillfully.

Over the past week, three high profile tech vendors, IBM, Microsoft and SAP have announced their latest financial performance results with contrasting pictures related to transitions.

In in case of IBM, financial headlines from the results from the most recent quarter now reflect 17 continuous quarters of revenue declines. Revenue for Q2 dropped 2.8 percent while earnings fell nearly $1 billion. As readers may be aware, IBM continues to manage an ongoing shift to build new strategic businesses, termed strategic imperatives to drive growth while the tech vendor’s traditional business segment continue to decline.. Strategic imperatives include Cloud computing, analytics, artificial intelligence, security and mobile.

There was some good news however for IBM in that Cloud services revenues reportedly increased by 30 percent in the latest quarter, amounting to $3.4 billion.  An additional 11 acquisitions were closed in the quarter, many focused on analytics and AI based capabilities. Within the supply chain applications segment, previous acquisitions have faltered and some have now been sold-off.

IBM’s former notion of building and deploying Smarter Commerce capabilities appears to be languishing. With the latest financial results, equity analysts and investors seem to be growing weary as to whether or when IBM can fully transition to the new wave of computing and information technology needs and deliver total revenue increases.  In essence, IBM may be in a process of re-sizing itself.

On the other hand, Microsoft’s latest quarterly performance provides a different picture regarding managing the transition from on-premise to Cloud based computing. While total revenues declined a reported 7.1 percent In the vendor’s most recent fiscal fourth quarter, the company posted $3.1 billion in net income. The largest gains originated from Azure Cloud computing services with quarterly revenue amounting to $6.7 billion, growing a significant 102 percent on a year-over-year basis. In essence, as The Wall Street Journal concluded, Microsoft’s Cloud segment is growing while the Windows desktop and phone unit ae declining.

Microsoft is further moving aggressively in strategic partnerships with other technology and industry firms. At its recent Sapphire customer conference, SAP announced a strategic partnership with joint plans to deliver broad support for the SAP HANA® platform deployed on Azure and General Electric recently announced that it will partner with Microsoft in uniting their Cloud computing and analytics technologies in a partnership that will bring GE’s Predix IoT platform for the Industrial Internet to businesses running on Azure.

Speaking of SAP, earlier this week the German based enterprise software provider reported what the company termed as record revenues and profits yet the quarterly numbers seem otherwise. Second quarter total revenues increased 5.3 percent on a year-to-year basis while operating profit increased 81 percent to €1269 million. The company’s earnings news release was quick to highlight strong growth in the Cloud segment, as subscription and support revenue grew a reported 30 percent to €720 million.  Further noted was:  “The total of cloud subscriptions & support revenue and software support revenue reached 63% of total revenue in the second quarter of 2016, up one percentage point.” We portend to by no means be perceived as a financial specialist blog, but it would seem by reading the financial detail that SAP has lumped traditional software licenses and support revenue into a sub-category of Cloud and software that is termed “Predictable Revenue.” Albeit we will leave further interpretation up to the financial experts.

In its earnings press release, SAP indicates that it is significantly outpacing its main competitor in cloud and software revenue. We interpret the unnamed to be that of Oracle, which in June reported both fiscal 4th quarter and full year financial results. In our commentary related to Oracle we noted that Cloud based revenue in the quarter was $859 million, up 51 percent on a year-over-year basis. Additionally, Oracle’s strategies addressing Cloud are from our lens, far broader and currently incorporate not only database, applications and SaaS offerings but platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS) services as well.  They include additional IT infrastructure hosting choices, either private (behind the firewall) or public  for businesses in addition to applications. We further reiterate our assessment that Oracle is currently the only enterprise technology provider offering a full suite of supply chain and manufacturing applications available on a public or private cloud platform.

Thus we have different impacts and transitions occurring among enterprise software and technology providers and organizations and businesses need to read between the lines to discern which of these players has the most solid longer-term strategies. That would include support needs of businesses and organizations to seamlessly transform their computing and applications to more affordable and less disruptive Cloud platform choices. In some cases, that has led to aggressive and sometimes expensive acquisition strategies to springboard innovation and availability timetables. The other force is obviously the needs of stockholders and stakeholders to preserve both short and longer-term margins and profits.

In the middle of all of these efforts often resides boasting and marketing hype as to which Cloud platforms and strategies are the best for customers.

The transition and the effects will continue and businesses need to continue to do their homework in market education and vendor intelligence.

Bob Ferrari

© Copyright 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.


Oracle Reports Fiscal Q4 and Full Year 2016 Financial Performance- It’s All About Cloud Momentum

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Oracle reported both fiscal 2016 fourth quarter and full year financial performance with executives indicating they were thrilled by the results as well as the current momentum of this enterprise technology provider. Oracle CEO Safra Katz indicated her optimism that the company is working to position Oracle as a customer strategic partner for the Cloud.

In its fiscal fourth quarter, Oracle reported $10.6 billion in total revenues, down 1 percent in U.S. dollars and flat in constant currency. Of that total number, Cloud based revenue in the quarter was $859 million, up 51 percent from last year. Total on premise software revenues were $7.6 billion with software updates and product support revenues at $4.8 billion, up 4 percent from last year. Operating income for the fourth quarter was $4 billion and net income was reported as $2.8 million. Operating margin in the fiscal fourth quarter was 37 percent.

For the full fiscal year, total software and cloud revenues for Oracle totaled $37 billion, representing a growth rate of 2 percent in constant currency. Cloud, SaaS and PaaS segment revenues were reported as $2.2 billion, growing 52 percent. Cloud infrastructure as a service was $646 million, growing 11 percent. On-premise software grew slightly in constant currency to $26.1 billion, as continued growth in software support offset could-related declines in new software licenses.

Co-CEO Mark Hurd indicated that Oracle currently has nearly 2600 Fusion ERP customers operating on the Oracle Public Cloud, with more than 2000 new PaaS added in Q4 alone.

Oracle further raised its financial guidance for the current Q1-FY17 quarter

From an overall strategic growth perspective, Oracle Founder, Executive Chairmen and CTO Larry Ellison outlined two specific longer-term strategies. The first is to continue to accelerate the enterprise technology provider’s SaaS and PaaS ongoing growth rates with a goal to at least double the growth rate of the company’s closest competitors. He indicated to analysts that Oracle has a fighting chance to be the first SaaS company to make it to $10 billion in revenue and to dominate this market segment. He felt Oracle was a major player in ERP, HCM and CRM, along with Service Management and almost the only player in supply chain and manufacturing.

That latter observation is one that Supply Chain Matters shared in our coverage of Oracle Open World last fall, our belief that Oracle is currently the only enterprise technology provider offering a full suite of supply chain and manufacturing applications available on a public or private cloud platform. Once more, Oracle can provide added options for infrastructure and database hosting needs, either private or public. This can be especially attractive to up and coming industry disruptors or mid-marker manufacturers and services providers looking to gain advanced technology at lower cost.

The second major point of focus outlined by Ellison is that of infrastructure as a service (IaaS) data centers that are now being converted to next generation technology providing broader compute power and efficiencies at lower cost. Ellison observed that a huge amount of interest and demand related to IaaS stems from existing and new SaaS customers and even larger amounts of customer interest and demand originating from Oracle database customers looking for opportunities for decreased operating costs and higher efficiencies. In the financial performance briefing he noted:

Our database customers want to move their application into our cloud putting their database on to our platform as a service and then their applications, so a lot of custom applications on to our infrastructure as a service, these two things go together.

For supply chain functional and line-of-business teams, this is indication that IT teams continue to seek broader cost reduction and service enhancement opportunities in managing data management and reporting needs. With Oracle databases so prevalent across supply chain and product management applications areas, this is an important trend to monitor.  From our lens, Oracle’s efforts are now clearly focused on moving existing and future customers to Cloud based applications and computing, a core strength of this enterprise technology provider.

It further represents an indication that Oracle will counter SAP’s HANA efforts with additional options to allow Oracle database platforms the ability to support applications and analytics needs in Cloud based environments.

No doubt, during Oracle’s upcoming annual Open World customer conference being held in September, there will be more information regarding Oracle’s efforts to accelerate its march to the Cloud.

Bob Ferrari

© Copyright 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


The New Era of Responsiveness and Attention to Enterprise and Supply Chain Software Customer Needs

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In our prior Supply Chain Matters briefing, this author provided initial highlights and takeaways regarding important shifts in strategy that came out of this week’s SAP Sapphire customer conference. In this particular posting I want to briefly contrast recent enterprise software conference we have covered to highlight contrasting messages regarding customer needs.

As was noted regarding SAP 2016 Sapphire, the primary message delivered was Empathy for customer needs along with yet another commitment toward simplicity and openness to customer needs for faster and far more affordable technology deployment. SAP was forced into this posture because customer’s are making their voice heard and our demanding more attention to their particular needs and requirements for technology deployment.

At Oracle’s 2015 Open World customer conference held in October, Co-CEO Mark Hurd’s keynote address reflected solely on the current challenges and needs of today’s business leaders. Hurd noted the average CEO tenure is 4.5 years, and the overwhelming emphasis is performing quickly to survive. The pressures to take out costs, grown revenues and profitability is constant and that is translated across lines of business and supporting operations such as the supply chain. Further noted is that the average ERP application is 22 years old, namely pre-Internet, pre-Cloud, and pre-social applications.  Businesses are frustrated in their ability to update such scope of technology because of the concern for business disruption and added costs, what Hurd described as “ERP Fatigue.” Because of that, the majority of IT budgets today are consumed by maintaining existing technology vs. investing in new technology.  All of this is translated into by Hurd into Oracle’s ongoing ten year transition into becoming a predominant Cloud based applications, database and IT infrastructure provider dedicated to supporting the widest variety of customer technology adoption, deployment and ongoing support needs up to and including consuming IT needs in public utility type model. Founder and CTO Larry Ellison described the new era of utility computing as big as when PC’s arrived in the IT landscape, with more and more workloads destined to the Cloud. He also acknowledged that Oracle’s Fusion deployment took upwards of ten years because of the engineering efforts required, but at the same time, during this transition, all existing Oracle applications both legacy and acquired were supported by Oracle to assure a continuity of responsive support.

QAD which is focused on mid-market manufacturing and multi-tier ERP support needs conducted its Explore 2016 customer conference in May. Since 2012, QAD has been investing a hefty R&D budget directed at a major revamp of the firm’s ERP applications and technology deployment strategy which includes emphasis on enabling what this technology provider terms a more effective organization with more connected business processes. The emphasis articulated was listening to customer needs for providing more standardized solutions, a more flexible platform that included suite-wide analytics, along with product enhancements directed at  augmenting program/project management, manufacturing automation and customer engagement needs. Another major emphasis requested by customers was in enhancing the user experience and in providing more flexible Cloud ERP and Cloud EDI deployment options.  What impressed this analyst was the flexibility of options that QAD is providing its customers. Instead of a forced march approach compelling customers to move to the Cloud, QAD has fostered options to both maintain existing behind-the-firewall applications and deploy extensions of Cloud based applications within an overall cohesive systems architecture framework. The strategy extends through additional years with multiple on-ramps and deployment options.

And so it continues with many other new or existing behind the firewall and now Cloud based technology disruptors today, large or small. The emphasis is clearly focused on addressing customer needs and business requirements for faster, far less disruptive and more cost affordable technology enablement.

The days of a software customer conference focused on marketing buzz, the latest cool new technology or service are no longer being tolerated. Customers demand and insist on responsiveness to their needs, support and ever changing business need requirements. While IT remains influential, lines-of-business and senior operational executives are now the prime buyer influence and there are no legacy allegiances to enterprise software vendor lock-up. The focus is clearly what you can do for my business, when will you get it done and how will you save our business additional money and resources.

Most important of all, the notion of ongoing trust and business partnership has once again renewed itself, especially when it includes placing computing and decision-support needs in the Cloud.

The notion for never trusting what a software salesperson communicates or promises has transcended to seeking technology partners that completely understand the customer’s business needs and are willing to be a continuous responsive partner to those needs.

Bob Ferrari

© Copyright 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved


Latest Enterprise Technology Vendor Financial Results Point to Differences in Cloud Based Adoption Momentum

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It should be no secret that most enterprise information technology vendors have embraced cloud-based applications and technology as a dominant strategic direction. The reasons are obvious and compelling. They are the key to customer and long-term revenue and profitability growth. Recent quarterly financial performance reporting from key enterprise technology providers such as IBM, Microsoft, Oracle and SAP provide indications on business strategies gaining more customer attraction as well as market momentum.

In a prior Supply Chain Matters commentary, The Value Proposition of Cloud Computing is Broader in Scope and in Business Implications, we observed that cloud-based platforms and applications provide businesses with added flexibilities in their technology and software requirement needs.  Businesses remain under compelling pressures to respond to rapidly changing market needs and at the same time, continue to reduce costs. That includes the ongoing costs of IT, where studies continually reinforce that 50-75 percent of costs stem from maintaining existing IT infrastructure or business software applications. Rather than expending additional capital investments for IT hardware, infrastructure and applications support needs, cloud-based platforms provide a more attractive financial model that is more attuned to ongoing operational growth or adjustment needs. As noted, why settle for business process innovation that can cycle in intervals of 5 years or more, when an option of technology releases every 6 months are available?  Cloud based technology implementation can also be less disruptive to ongoing business operations since adoption involves a singular, consistent cloud-based application and support model.

For enterprise and other technology providers, cloud-based offerings are becoming a very strategic growth aspect, affording such vendors a more recurring, subscription based revenue stream that can provide more predictable revenue and profitability stream.

The ongoing open question remains in strategy and ongoing execution.

In their latest quarterly financial reporting, both IBM and Microsoft reported setbacks in anticipated cloud based revenue growth. The latter was somewhat of a surprise, since Microsoft’s Cloud based growth trajectory had shown consistently positive growth. IBM on the other hand, by our lens, continues to have an ongoing execution problem in bringing Cloud based technology and applications to market on a more timely and compelling basis. IBM’s cloud-based strategy remains a work-in-progress while its legacy services businesses remain a drag on revenue and profitability growth.

A far more interesting contrast, one perhaps more of interest to our blog readers is that of Oracle and SAP.

The latest SAP financial performance release features the headline of first quarter non-IFRS Cloud subscriptions and support revenue growth of 33 percent at constant currencies on a year over year basis. The Walldorf Germany based technology provider reported what it termed as a solid 23 percent growth in new Cloud based bookings equating to roughly $165 million in new cloud-based revenue in the first quarter. Further declared was that the total of cloud subscriptions and support along with software support revenues (we interpret that to mean all software support) reached a 69 percent share of total revenues in Q1.

The financial report additionally cites SAP S/4HANA customer momentum in the quarter adding more than 500 customers of which 30 percent are described as new customers. By our lens, the wording smacks more of a marketing brief since there is still a lot of confusion relative to the overall composition and deployment needs of S4 HANA, particularly from an overall end-to-end supply chain support perspective.

Meanwhile, SAP’s bread and butter software license revenues fell 13 percent with the implication that the conversion to a predominant Cloud-based services business model remains somewhat of a challenge. An evidence point relates to sales and marketing expenses which have grown 5 percent year over year.

In mid-March, Oracle reported fiscal Q3 2016 results for the quarter ending in February and Supply Chain Matters featured key highlights and takeaways. The headline was that Cloud software as a service (SaaS) and platform as a service (PaaS) revenues were up 61 percent at constant currencies while total Cloud revenues were $735 million, up 44 percent in constant currencies.

Our calculation of the total of Cloud subscriptions and support added to total customer support revenues equate to 76 percent share of Oracle’s total revenues in the February ending quarter. That would imply that Oracle’s broader strategy of support for both IT infrastructure and various software applications may indeed be garnering increased momentum.

Once more, Oracle has placed more emphasis on the amount of customers that have gone live with various Cloud based infrastructure and applications. Oracle states that it had more than 250 customers go-live on Fusion SaaS HCM and Fusion ERP in Q3 alone. Oracle further declares nearly 2000 Fusion ERP customers thus far, ten times that of Workday. Equating that number to a prior Oracle industry analyst briefing declaring 1500 Oracle Cloud ERP customers at the end of fiscal Q2, implies another 500 customers on-board in the latest quarter.

Right now it’s difficult to equate that to equivalent SAP S/4 HANA total customers to-date since reporting by SAP is elusive. Oracle Fusion ERP does contain some basic supply chain business process support. As we have noted in prior commentaries, Oracle has developed, by our lens, one of the broadest cross-functional SCM public-cloud based applications currently available in the market.

Thus, our scanning the latest financial results of select enterprise technology vendors, our assessment is that Oracle’s broader Cloud product support strategy coupled with more integrated sales execution is indeed paying off in added market momentum.

Rest assured, this remains an ongoing competitive battle, and more evidence will need to come forward. However, from an overall Cloud based supply chain business process support perspective, we continue to believe that Oracle provides broader and clearer options for Cloud based benefits in addressing both IT cost reduction needs as well as flexibility in cloud-based applications deployment either in private or public Cloud based deployments.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Disclosure: Oracle is a client of the Ferrari Consulting and Research Group, the parent of the Supply Chain Matters blog.


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