UNIT4's subscription transformation continues as H1 delivers

Earlier in the week, UNIT4 released its half year results (download presentation.) While overall revenue growth was hardly sparkling at +4.1 percent, the main standout is that for the first time, subscription/SaaS revenue exceeded traditional on premise revenue. From the PR blurbs:

In response to the strong upward trend of SaaS and subscriptions licensing, UNIT4 is focusing heavily on further enhancement and sales of its cloud solutions. This resulted in a decline of 10% in traditional license (product) revenues but significant growth in SaaS and subscriptions revenues, which are up 43.2% to €32.5 million in H1 2013 (H1 2012: €22.7 million). The annual run rate of SaaS and subscriptions grew from €46.8 million in June 2012 to €67.2 million in June 2013, an increase of €20.4 million or 43.5%.

UNIT4 does a smart job of splitting out the impact of continued investments in FinancialForce.com so that analysts are better able to understand what is happening with that business. The company also provides color on FinancialForce.com growth potential. In short, the pure play SaaS business grew revenue 90 percent and showed a revenue run rate of $21.5 million (€16.1 million) including services by the end of June 2013, up 80 percent year over year. The total 'SaaS' annual revenue run rate was €67.2 million so in that sense, FinancialForce.com remains the junior contributor. How much longer? We cannot know at this stage.

Staff numbers at FinancialForce.com now total 208, up from 125 a year ago. From what I can gather, while FinancialForce.com has to make a case for investment in exactly the same way as any startup, it is not struggling to get the cash to bulk up resources. OK - so what does all this mean.

Check the comparisons

I struggle with the way UNIT4 has a 'moving target' way of describing SaaS, subscription and 'cloud.' For them, anything that's not a traditional license deal is varyingly described as cloud, SaaS and/or subscription in interchangeable terms. Regardless, there is no denying that the careful manner in which UNIT4 continues to position itself to the financial markets is paying off.

Check the comparative chart at the top of this post. There I have plotted UNIT4's share price over the last year, overlaying SAP, Salesforce.com and NetSuite's performance over the same period. It is striking to note that of all the vendors in this comparison, only NetSuite has outperformed UNIT4.

For itself, UNIT4 runs a comparison of its SaaS/subscription revenue growth rate (see image to the left) which suggests it is doing very well. Read that with caution. The company is in the early stages of hyper growth in those services so you'd expect to see very high rates of growth. And there is a touch of irony including Salesforce.com in this comparison since FinancialForce.com is built upon Salesforce.com's Force.com platform.

Where to  next?

UNIT4 is in the first full year of what I'd call 'normalising' itself after a reconstruction in 2012. It has a new CEO in José Duarte (currently co-CEO and in transition period) but it is early days and Duarte has yet to put his stamp on the company. The transformation to a full subscription model is being well managed but then UNIT4 is in vertical markets (principally government, retail, media, PSA and technology) that are ripe for the services model.

The biggest issue I have from a market perspective comes from what I see as a lack of imagination around messaging. The Business Living In Change (BLINC) thing has worked well for a number of years and continues to bring rewards as a low cost alternative. However, the company needs something fresh around which to breathe new life into the solution set.

We have yet to see whether turbulence around cloud following the NSA ruckus has any impact in FinancialForce.com's ability to continue at breakneck speed. Based upon my inquiries and the fact this report card is coming two months into Q3, the answer seems to be 'none.'

Over and above these topics, the market seems to like the way this is working for UNIT4 at both top and bottom lines, so there is no real pressure there going into the second half. More to the point, they're undergoing this transformation while in the public gaze but with few of the tremors I see among competitors trying to figure this out.

Disclosure: FinancialForce.com is a diginomica partner at the time of writing. It is also a product client of the author.