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NetSuite (NYSE:N) delivered a solid quarter, indicated it was gaining traction with its OneWorld ERP suite and took a few jabs at SAP’s Business By Design. The larger question: Where’s the tipping point for on-demand ERP?

That question was raised by JMP Securities analyst Patrick Walravens. The tipping point question is worth asking. The ramp for enterprise resource planning applications delivered as a service has been slower than categories that are easier to implement—such as CRM. However, you can project out to a point where on demand ERP will gain more momentum.

Walravens in a research note indicates that the tipping point for NetSuite may be two to three years away. He said:

A tipping point for this business may only be 2 or 3 years away, much like SAP hit a tipping point in the late 1980s. NetSuite is making great strides with both its OneWorld product and country localizations. OneWorld represented 31% of new business bookings in the quarter and with an average selling price of around $100,000, and NetSuite was recently certified in SAP’s backyard, Germany. We believe NetSuite’s continued localization efforts will pay dividends for NetSuite in future years, and we would not be surprised if NetSuite made bigger pushes in countries such as Israel, France, Italy, and Spain in future years.

NetSuite CEO Zack Nelson said on a conference call that a shift to ERP as a service is underway. “Our top line growth when compared with the double-digit negative new license growth for traditional ERP vendors indicates a continued shift in customer demand from on-premise stand-alone accounting packages to NetSuite’s cloud-based business applications suite,” he said.

Also see: NetSuite’s second quarter better than expected

However, NetSuite is working off of much smaller revenue figures. If you buy the argument that on-demand ERP will be immensely popular those revenue figures should ramp significantly. When those revenue figures explode the next logical question is: What about SAP?

CFO James McGeever was asked directly about the SAP threat and its on-demand suite, Business By Design.

On Business by Design, from our data it’s basically the single greatest product that you still can’t buy, so we don’t really see it in any deals.

Our understanding is you’re really not going to see a rev that you can actually buy until next year, so that’s been - I think they announced they were going to ship it in 2007, so, as predicted, 2010 they may actually get something out that people can actually use. But don’t get me started on Business by Design. I don’t want to go too crazy.

McGeever’s right—to a point. SAP isn’t totally off the runway yet with Business By Design, but it can be bought in qualified environments. And SAP is baking in analytics to Business By Design, which is a nice (potentially differentiating) feature that’s tough to scale. Simply put, SAP is having trouble scaling Business By Design as it tries to match what it does on-premise.

On SAP’s second quarter earnings call, CEO Leo Apotheker said the following about BusinessByDesign:

Our on-demand offering portfolio solutions are designated to different target groups, large enterprise, business users and the mid markets. For the mid market, it is Business By Design, and I am pleased to say that Feature Pack 2.0 is ready for productive use. It was released on time and according to plan. 2.0 includes many new features with a lot of additional functionality and end-to-end business scenario.

We also announced a new collaboration agreement allowing SAP Business By Design to be preconfigured to use nine complimentary Web services from Business Wire, [Talk09], Google and others. We are broadening the control availability of Business By Design.

In the second quarter, SAP reported €73 million in subscription and other revenue. That roughly equates to $102 million of revenue for on-demand software. However, the breakdown between sales of Business By Design and things like Business Objects on demand wasn’t available. For context, NetSuite had revenue of $152.5 million in 2008.

Also see: SAP: cautious optimism going forward and SAP revenues slump, in line with analyst expectations, bottom line up

Add it up and NetSuite has a great window of opportunity to line up systems integrators (already happening) and grow its user base with customer wins such as LogMeIn and Jollibee and OpenTable before SAP really comes gunning for it.

In the meantime, NetSuite hones its skills against Sage and Microsoft’s Great Plains/Dynamics unit.

And we wait for this on-demand ERP tipping point.

Source: NetSuite: Where's the Tipping Point for On-Demand ERP?