Sector Overview: SaaS

The SaaS sector has been relatively unaffected by the weak economy. Since the SaaS business model helps cut costs, business has been good, with most companies beating estimates quarter after quarter. However, the stock prices have taken a beating in the later half of the year. This presents a great opportunity for the stronger players to consolidate and investors looking for a bargain to buy. Let’s take a look at which companies should best be able to withstand the recession.

Salesforce.com (NYSE: CRM), the leader in the SaaS sector, is at the top of my Top Eight SaaS Stocks list. With more than $800 million in cash, it is a hot favorite for playing the role of consolidator. Salesforce recently initiated revenue guidance between $1.35 and $1.36 billion for FY2010. But even though the company has turned in a strong performance quarter after quarter, its stock has fallen about 50% over the year and is trading around $30 with market cap of about $4 billion. Analysts anticipate a slowdown; I anticipate an acquisition spree in 2009.

Concur (CNQR), the expense management software maker, is another company that is booking profits in the recession as companies look to control costs. Concur helps companies enforce travel policies and control costs through its systems. As per the results of a recent survey by Reardon Commerce, a competitor, 68% of travel managers say the top priority for businesses is travel policy compliance to bring down costs. Concur is trading around $30 compared with about $35 earlier in the year, a fall of just 14%. Its market cap is about $1.5 billion and 2008 revenue was $215.5 million.

Omniture (OMTR) is another company that is strong enough to consolidate its space. Earlier in the year, it acquired Visual Sciences and has recently acquired the search and merchandizing assets of Mercado. The stock has lost about 70% of its value and is currently trading around $10, with market cap of about $730 million. The company’s not strong enough currency-wise to play the consolidator role, but it may recover in 2009.

Taleo (TLEO), the talent management leader with 2007 annual revenue of $128 million and Q3 2008 revenue of $46.8 million, also joined the ranks of consolidator with its acquisition of Vurv in July. However, its stock has fallen about 80% this year to currently trade around $7. My interview with CEO Michael Gregoire can be found here.

Its rival SuccessFactors (SFSF), which has a strong CEO is on my list of Long-Term Hold Stocks as well as the Top Eight SaaS stocks. SuccessFactors went public in November 2007 and was trading around $9. It is currently trading around $8 with a market cap of about $460 million after a strong third quarter.

Also on my Top Eight SaaS Stocks list is RightNow (RNOW), which is also on the path to profitability. Earlier in the year, it made its shift from the licensed software business model to SaaS. Its stock is currently trading around $7, a fall of about 50% over the year. Its market cap is about $250 million. That seems very cheap.

Citrix (CTXS) is another company on my Top Eight Stocks list. It has a SaaS portfolio but is not a pureplay SaaS company. Time and time again, I have concluded that this company could be a good acquisition target for big companies like SAP (SAP), Oracle (ORCL) and even IBM (IBM). It is currently trading around $23 with a market cap of about $4 billion.

The last stock we will discuss is NetSuite (N). After going public in December 2007 at $26, it is currently trading around $8, and has a market cap of about $480 million. It acquired OpenAir in June this year. Recent earnings coverage is available here. I am less bullish about this one as the competition in the SaaS ERP space is steep.

Disclosure: None

Comments

[tbpeders]

I also think the SaaS sector stands to gain from the downturn. At Zendesk (zendesk.com), at SaaS help desk compamy, we have experienced strong growth since our launch last year and we have seen no decline in the number of trial sign-ups and conversions so far. Of course that might change, but we're bullish about 2009 as we're already seeing many customers deflect from more expensive offerings.

2008 Dec 17 11:11 AM

[Amy Wohl]

We're expecting 2009 to be The Year of the Acquisition as more successful XaaS companies buy interesting but less successful SaaS companies and portfolio holders (like IBM, Oracle, and SAP) decide to be in the SaaS business. As you noted the question is who is likely to be acquired and by whom. Only a few on your list are likely to be bought -- they're mainly too pricey and have portfolio plans of their own. A tier or two below them are dozens, even hundred, of firms that will not survive this year without being acquired. We are going to see a lot of activity,

2008 Dec 17 03:23 PM

[M-P]

This is a good overview. The SaaS space has a lot of positive aspects and I believe - as I've written elsewhere on SA - that there will be some consolidation in '09. The potential for a SaaS player on an Oracle-like scale is coming ... a massive cloud in the sky that can exploit their distributed computing power and secure data centers will gain some economies and efficiencies. Many of the security concerns and uptime issues have been remedied - as bandwidth expands globally, the issue around speed and concurrent users should improve. The challenge with SaaS is also one of its advantages - it's easy to propagate new versions and functionality, but it can hard to get the uptake and adoption on all the new functionality - coming at a quarterly clip. As a lesson from Siebel Systems, the SaaS players need to be careful at not getting into a functionality race with themselves and hurting some of their key benefits -turn-key implementations, easy to use and understand, solid adoption. As each of the major players gain more enterprise customers, they will have better lock-in (more integration) and more stable annuity streams. Watch the customer lists/names.

2008 Dec 17 08:40 PM

[Ranjit Nayak]

This list identifies a small set of publicly traded SaaS companies.There are many more mid and small sized private companies. If the SaaS model truly lives upto it's promise, we should see a lot more organic growth in 2009. Mergers should happen too if a rapid growth is necessary to compete in fragmented markets. The big software players would resort to acquisitions if they see SaaS markets grow as rapidly as the Gartner predictions in Jan 2008 suggest.

1. By 2010, 15% of large companies will have started projects to replace their ERP backbone (financials, human capital management and procurement) with new service-oriented architecture [SOA] and SaaS-based solutions).
2. By 2012, business process management suites (BPMSs) will be embedded in at least 40% of all new SaaS offerings, as providers strive to make business processes explicit and mass-customizable by their customers.
3. By 2012, more than 66% of independent software vendors (ISVs) will offer some of their applications optionally or exclusively as SaaS.
4. By 2010, 85% of SaaS vendors will offer uptime service levels of 99.5% or beyond in standard contracts, as well as performance SLAs.
5. By 2009, 100% of Tier 1 consulting firms will have a SaaS practice.

2008 Dec 19 11:51 AM

[Laxman.R]

It is certainly impressive to see SaaS move on from just being a paradigm a few years ago to more main stream. The challenge for SaaS is to penetrate the back haul of an enterprise, where typically ERP implementations reside. Not sure if that would be entirely possible due to the various challenges with customization, integration, impact to mission critical apps, availability, reliability etc.

But at the same token established ERP vendors like ORCL, and SAP beware - as penetration of SaaS into the enterprise back haul could hurt real bad!!

2008 Dec 26 03:42 PM