SaaS: Only Three Public Companies Are Consistently Profitable
Here’s a stunning observation about the SaaS (software as a service) market: Only three publicly traded pure play SaaS companies generate sustained GAAP profits, according to Gartner Inc. Does that mean SaaS isn’t living up to expectations?
That depends on your perspective. On the one hand, SaaS-centric companies continue to fetch lofty valuations on Wall Street. And SaaS revenues continue to grow quickly for many companies. But on the other hand, SaaS providers also face lofty marketing expenses and customer acquisition costs.
Plus, you have to keep Gartner’s statement in perspective. The statement only looks at:
- Publicly held SaaS companies — leaving scores of privately held SaaS businesses out of the conversation.
- Pure play SaaS companies — leaving hundreds of hybrid companies (particularly Intuit, Microsoft, SAP, Oracle, etc.) out of the SaaS conversation.
As I look at our own SaaS 20 Stock Index, I see numerous companies that have generated profits in recent quarters — but Gartner’s statement focuses on sustained profits and pure SaaS players. Plus, I must concede: I’m not sure which three SaaS companies Gartner is indirectly praising. (Anyone care to guess?)
Still, it’s one heck of a reality check from Gartner. Thanks to Ken Vanderweel over at Nimsoft for mentioning a series of Gartner stats to me — including the SaaS stat. It’s a real eye-opener.
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you have not pasted any link to Gartner’s statement, haven’t they mentioned the 3 companies?
Priyanka: The statement was in a Gartner PowerPoint Presentation and the slide did not mention the three companies by name.
Update: Salesforce.com announced that its fiscal second-quarter profit more than doubled amid strong revenue growth, leading the company Thursday to raise its views for the fiscal year, reported The Wall Street Journal…
Since Gartner is a lagging indicator regarding most new trends, such as SaaS, I always take their perspective with a grain of salt. However, the debate re: the profitability of SaaS has been going on for a while. You can read my response to Bruce Richardson of AMR Research who raised similar questions over a year ago at http://www.thinkstrategies.com/blog/2008/05/measuring-profitability-of-saas.html.
Well, it is probably important to consider the “company set” considered. Maybe it would be more relevant if they looked at Web-based services companies in general. Google would make that list as well as LinkedIn, Amazon’s cloud business and tons of others that target business users and are wildly successful. It’s clear that companies are rapidly moving to Web-based software and services. We are seeing that in the $20B IT Management market with our SaaS offering.
Brian
CEO
Paglo