Adobe + Day Software Coming Together: Cautious Optimism

The Enterprise Software space is undergoing big change. No, I am not talking about just the shift to SaaS, Cloud, Potentially increasing spend etc. Its seeing momentum of a different kind - form a moment of pause, it is getting rediscovered as being sexy again. Different enterprise players make different moves to sort of remain relevant and continue their growth. This week, Adobe announces its plan to buy Swiss software maker Day Software. Day Software is a content management company focused on the high growth markets of Web Content Management, Digital Asset Management, Social Collaboration and Targeting & Optimization. A quick reading shows that following Adobe’s acquisition of Omniture in September 2009, this move by Adobe is clearly aimed at getting into the web experience management (WEM) market place . The expectation here is that Adobe would help its customers through its combined offerings the capabilities to bring together the audience insight gained through the web analytics of Omniture and Day’s CRX content platform. The acquisition price is about US$240 mn, a 67% premium over Day’s last 90-day average price. Analysts note that Day Software had $44 mn in TTM revenue (based on filings and current exchange rate) and has been growing at 40% yoy. Goldman Sachs estimates the EV value of Adobe to be about $214 mn, which implies an EV/LTM revenue multiple of 5.1X vs. 5.0X for Adobe’s Omniture acquisition.

Day has been positioning itself as a leader in the web experience management space for a while. Web experience management, sometimes called customer experience management acts a single platform to manage all interactions, across a variety of apps and business systems like ERP, CRM etc. Day’s products like Web CMS CQ5 and their content repository CRX will become integral bedrock to this solution set. Adobe has outlined its vision of leveraging the benefits of Day being a leader in the WEM market and a as a heavyweight in developing the concept of next generation content management with focus on web experience. Day comes with an array of capabilities – particularly its Social Collaboration and CQ 5.3 Personalization, Segmentation and Targeting capabilities make its case as a leading player in the arena of web engagement.

Day Software has been making substantial efforts to improve on their capabilities and were sort of repositioning themselves as THE WEB EXPERIENCE management Company for some time and were building rich functionalities centered around personalization, collaboration and analytics leveraging its content repositories. A robust content repository integrated well with a variety of functionality centric add-ons one that can integrate with social networks is a killer combination and that’s the direction that Day was moving towards. A larger company like Adobe with higher resources and a killer analytics product like Omniture in its stable can potentially create a new momentum for Day’s product. The integration roadmap would be a key thing to watch here. Day might be less known in US corporate circles given that it is Europe headquartered and most of the leading CMS players are US headquartered, but Day has widely known in the open source and open standards community. Day has been an active contributor to the Apache projects like Sling & Jackrabbit and the open source community is watching to see how Adobe will work on this moving forward. Similarly Day has been a big supporter of CMS repository standards (JCR and CMIS, JSR standards) and it has to be seen what direction Adobe would like to take moving forward post the acquisition. For some, Adobe and open standards represent opposite ends of the spectrum!

For Adobe, a big player in the creative and front end space, this deal is significant, as it helps them to do two things:

A. First time Adobe gets a real shot at getting a slice in the back end – content management space – traditionally they have partnered to get a grip on this space and have made limited impact with their own efforts in getting there thus far. It’s a paradox that was unfathomable for awhile and with this move, Adobe gets a real crack at it.

B. Adobe, based on the nature of their core business has been mostly doing shrink wrapped solutions whereas a content management solution has to be sold to enterprises as an infrastructure with different sales and support mechanisms.

However, for their customers, some answers to questions /scenarios like these are very important :

A. How would Adobe help move Day’s offering into cloud – given Omniture’s experience in the cloud and Adobe’s clickstream and how much and which way these could be brought to work with Day’s software. (Moving transactional data and content into the cloud is the hottest area for enterprises today – this is a VERY BIG OPPORTUNITY here)

B. Day’s customers would be hoping that Adobe keeps the direction of the product evolution in its core areas and can invest more and accelerate research and development besides potentially integrating with Omniture and Adobe’s content creation tools.

C. Adobe has OEM’d Alfresco in some of its Livecycle Enterprise - how classy Day product could integrate there is an open issue.

D. Cultural Integration : Day Software is Swiss based software maker and Adobe is primarily based in the Silicon Valley and ably supported by their teams in India – this is going to be kind of tough getting them together . (My view is for Adobe to leverage Day’s talent besides in integrating Day products with Adobe by leveraging them to work in Adobe platforms like Extensible Metadata Platforms

The risks of enterprise software mergers and integration are well know but in this case , the space is a reasonably neat fit (with some minor conflicts) but the upside possibilities abound!. The hidden value is to bring together content creation, content management and analytics together and straddle the transaction to analytics value chain - this is indeed a great space to play in. On the whole, upside for Day’s customers exist but Adobe needs a very finely thought out plan, to be executed really fast and with sophistication for this marriage to deliver and endure well enough

Enterprise Software : The Moments Of Pause

SAP announced major executive board level changes on Sunday. Léo Apotheker moves out out as CEO and in comes Bill McDermott, head of the field operations, and Jim Hagemann Snabe, head of product development, who will now share the top job. Interestingly, SAP promoted Vishal Sika, chief technology officer (CTO) to the SAP Executive Board.

Joab Jackson and Chris Kanaracus have an excellent write up at Computerworld, with some excerpts from an internal email from Apotheker to SAP employees. I found in it a curious piece of information - references to the results of a recent SAP employee survey, which found a dramatic loss of confidence in senior management, according to a Financial Times report.

In the conference call earlier this morning, Plattner sounded a humble note on SAP's unilateral decision to increase its software maintenance fees, in the midst of a recession. As reported by Computerworld:

He addressed head-on one of the most heated issues in SAP's recent history -Its recent decision to move customers to a richer-featured but more expensive Enterprise Support service. The plan rankled users worldwide, particularly those with older, stable systems and little need or desire for additional support.

"I was part of the decision that we had to raise maintenance fees," he said. "That is not something we can put in Léo's shoes. This was done by SAP. We made a mistake and we have to change course here, and regain trust from the customers who were more than upset. Unfortunately, the head of the company takes the blame, whether it was just or not."

It is well known in the industry circles that SAP by showing cost-of-living indices managed to push maintenance fees at around 22% despite several customer misgivings.

On the same development, Bob Evans has a very good piece in InformationWeek on SAP's failure to put its customers front and center:

Speaking in broad strokes about trust and the need to rebuild it, Plattner said this: "What SAP has to re-establish is that we have trust between all involved parties: the [SAP] Supervisory Board, [SAP] Executive Board, the co-CEOs, the management team, the employees, the works council, the partners, the customers, and the employees working for our customers." Do read Bob Evan;s very insightful perspective on the order of importance provided to various stakeholders therein.

For me, the issue that bothered the most :Why did the customer backlash was so felt? Even when Leo assumed office, it was widely believed that SAP needed someone to destroy the set ways of doing business fully factoring in the market transitioning away from the upfront license and implementation and operating cost model. When the year-on-year spend on SAP kept to be a very large numbers, business concerns on SAP spend was always an agenda item for discussions inside enterprises. When the 2008-2009 slowdown happened, while the IT spend was coming down, many were seething when the big ticket items like that of SAP spend could not be touched at all and there was really very little that business could to step out of this logjam! In fairness to SAP, this might have been generally tue of most of the big on-premise enterprise software vendors, but SAP probably had to bear the brunt as the core/ frontline software inside many business. This at a time SaaS & Cloud were the ringing buzz all across the enterprise while like the big old iron – SAP was there reminding business of the just gone era’s model of software and operations! The need for innovation in the SAP eco-system has been amply clear – customer’s were always vocal about this - but the almost regimented groups within SAP appears to have hardly got it and continued to persist on the past operational models - we are now going to see what quick steps SAP takes to reposition itself – how it becomes more agile, nimble , caring and friendly to customers. There are some tough and challenging positions that SAP may have to take to move forward and come out successful – the talent is there, the heart seems to be there going by Hasso’s comments– fast execution would make the ultimate difference here.

There are great lessons here – When a company gets dangerously out of touch with what its customers do and want and need, and with how those customers rate and reward IT vendors in these days – there is a big discernable shift – the ringing message is customers want to do a great deal more with a whole lot less. In an age of short cycles, the model of software product companies trying to harvest with almost EOL products with maintenance coming at a high price when the commercial barriers to adoption of the next generational technology constantly coming down is quite comical to say the least. The whole enterprise software ecosystem is closely watching the next steps here and what happens here wil in many forms affect the entire enterprise software ecosystem. I do no want on –premise enterprise systems to be thrown out with the bath water, though. Without doubt, wherever designed and implemented properly, these systems continue to serve the their purpose . What comes in the way is their rigid and sometimes monolithic architectures, which bring unreasonable rigidity and inject unwanted complexity in the way business can leverage them. With the result, they tend to become a costly asset akin to an old utility that needs massive budgets for maintenance – whereas identical spend in newer technologies can perhaps yield far better business demonstrable business results. My wish is simple :Like in the world of mass customization - I want simple, service enabled modular functionalities with multiple delivery options – On-premise, SaaS & Cloud based made available and with reasonable integration/orchestration mechanisms these can be brought together on need basis and which can bring down the TCO of enterprise software adoption while simultaneously, increasing business benefits realized!

As I see it, gone are the days of investments centered on big-bang inititatives. In the userbase that am interacting with, there's almost a near fatigue effect all around when it comes to fresh IT investments, while supporting existing/ongoing initiatives consume most part of the planned spend budget. Here comes the opportunity actually - this forces people to think of highly innovative and purposeful initiatives - this opens the space for newer software players with fresh solutions - big monoliths obviously can't get there that fast. Smaller software players who have been weakened by the onslaught of consolidation and slowdown, unfortunately would fall by the wayside. In sum the situation is slowly but surely opening up opportunities for fresh play. Some see it as SaaS opporunity, some see it as new players ..but for sure a slow but steady momentum is building up in search of the elusive futuristic solutions and no software vendor – however big and mighty can ignore /try go against the stream or swim slowly along the stream!

The Changing Enterprise Software Momentum

Changing economic sentiments, and diminished IPO market create the perfect storm for the Big 4 MISO - (Microsoft, IBM, SAP, and Oracle)as they see the medium/small sized vendors are beginning to make M&A moves. See this:

-> Adobe acquires Omniture

-> CA buys NetQoS

-> VMware buying SpringSource

-> PE players scooping Skype

-> Intuit buying startup Mint

- >Avaya buys parts of Nortel

Clearly momentum is slowly beginning to hit the M&A circuit - the backdrop has been that this year has seen very few deals compared to last few years averages. Some trends at work that shape the thinking on why the immediate future could see more and more of continued consolidation. Sramana Mitra assesses the prospects of some players. One may ask - why think of enterprise software when consumer technologies and internet infra/app players are getting more attention. As I wrote here, the consumerization of enterprise technology has the potential to open up new powerful combinations. The possibilities of such fusion of different worlds may open up good chances for disruptive innovation - this provides a platform for such an ideal fertile ground that can lead up to a potential business model innovation – so enterprises need to be well prepared to capitalize on such possibilities. What should the CXO’s do in such contexts: Embrace such technologies faster and in innovative ways align them to their business growth plans. Consumer technologies are not a taboo to be shunned - these need to be constantly assessed for their potential for innovative leverage in growing business.

• Strategic acquisitions target vendors with new product presence/ strong recurring revenue streams in well established areas. The cognoscenti keep whispering that large maintenance revenues as an area for potential targets. Look at Oracle’s reported numbers for this quarter: GAAP new software license revenues were down 17%; software license updates and product support was up 6%.Nurturing a profitable and recurring revenue stream will allow many vendors to share overall development and support costs as they weather the next storm. The hunt is on for vendors who fit this bill as megavendors and private equity actively chase after these assets.

• Weaker companies would see much lowered publicly traded vendor valuations. For companies on the prowl for acquisition with a target class, its never been cheaper and easier to acquire a competitor. Most P/E ratio have become quite attractive and fall below the standard 2X to 3X revenue price target.

• International market expansion. the larger vendors express tremendous interest in acquiring new distribution channels, micro industry verticals, and new geographical coverage. Many in the MISO ecosystem see a lot of turbulence and rumors of M&A run fierce as the partners consolidate to gain scale for regional and global delivery.

• Most privately held vendor exit strategies revolve around acquisition not IPO. Many firms with IPO plans have been told by their boards to refocus on revenue growth and partnerships. The intention - use partnership success to both drive revenue growth and attract acquisition by a larger vendor. Many see acquisition by the Big 4 as the best exit strategy at this point in time.

• Newer delivery models get more and more acceptance : If we analyze the standalone new sales numbers we may get to see this trend clearly. MISO on-premise license revenues may keep dropping/stagnating and in some cases record very moderate growth (in specialized areas). The ERP refresh rates may slowly begin to show a downward trend! SaaS and cloud players need to and i would believe will expand their presence beyond FAS,CRM & HCM spaces - this may also include on premise players getting to offer SaaS solutions in niche areas like procurement, PLM etc. Cloud computing models would over time get to become more popular with ease of use, quick implementation times, pay as you go, no infrastructure model a la google or salesforce and are in fact seeing more faster adoptions.

• Net-Net : Despite the expectations of a slow moving economy, end users should assume that the biggest vendors/ faster moving niche vendors will continue their torrid pace of acquisitions. As these acquisitions factor into long term apps strategies and planning for 2010 purchases, users must assume that truly specialized solutions with significant industry footprint will be acquired. Many customers recommend niche vendors that they work with to the megavendors to acquire them so that their investments are deemed to be safe.