Software vendor financial results #1 (Adobe, Amazon AWS, Google, Micro Focus, Microsoft, ServiceNow)
Software vendor financial results can be more interesting for ITAM & SAM managers than they might first appear. Looking at how the software vendors are performing on a quarterly and annual basis can give the savvy organisation some good insight. Who is likely to increase audits? Where might good discounts be found? What upcoming business model changes might impact us? Hints to potential answers for questions like this, and more, can be answered by taking a look at the vendor’s results.
In this first part of what will be a regular series, we look at the recent results for:
See part 2 featuring more vendors including Autodesk, IBM, & Oracle, here.
Adobe
FY19
For the full fiscal year, Adobe revenue was just over $11bn. This represents a greater than three-fold increase since Adobe switched to a SaaS subscription model. Revenue increased over 20% compared to FY18. Around three-quarters of Adobe’s revenue comes from their Creative Cloud offering. This is further evidence of the revenue-generating power of subscription software, with Adobe posting growth like other SaaS giants such as Salesforce and ServiceNow. In less than ten years, Adobe have transformed from a company built around incremental major releases of heavily pirated software to one enjoying continuous, predictable monthly revenue growth…although at a fair amount of displeasure to many of their customers; I was a reseller when Adobe first made this switch and wow – some of the conversations we had!
What does this mean?
The general consensus is that Adobe are winding down their audit activity and, with positive revenue such as this, one would imagine that will continue to be the case. If organisations are continuing to buy more, why spend the time and money to audit?
Amazon AWS
FY19
For the full fiscal year, Amazon AWS revenue was just over $35 billion and operating revenue was $9.2 billion; a 36% and 26% increase respectively. All good numbers but the growth rate of around 34% is much smaller than Microsoft’s recently reported 62% growth for Azure; with Computer Weekly reporting that Microsoft are gaining 2-3 percentage points of market share each year. Amazon say that “we think we have [started] with a very big lead in this space” but history is filled with organisations that had a big lead over Microsoft…and not many of them have held on.
What does this mean?
Things are still going very well for Amazon AWS but it’s clear that Microsoft Azure is closing the gap – perhaps this will lead to Amazon being more open to discounts, especially on long-term deals. It may also mean competitive displacement programs and other attempts to take Azure customers – if you have a multi-cloud environment, playing them off against each other could pay dividends in certain cases.
Google Cloud
FY19
Alphabet, Google’s parent company, say that Google Cloud is now on a $10 billion annual revenue run rate, with this primarily driven by Google Cloud Platform (GCP). They point towards cloud infrastructure and analytics being key elements, as well as their Anthos and G-Suite offerings, with an increase in deals over $50 million too.
What does this mean?
While most of the IaaS cloud discussion focuses on Amazon v Microsoft, Google have made the position of “The Third Cloud” their own and are moving in the right direction. As with all the cloud vendors, if you can help them increase their revenue and/or number of customers, you’re in a strong position to negotiate.
Further Reading
https://abc.xyz/investor/static/pdf/2019Q4_alphabet_earnings_release.pdf?cache=05bd9fe
Micro Focus
FY19
The financial year for Micro Focus ended on October 31, 2019 and it’s safe to say it did not have a good year. However, with the various acquisitions and divestitures made by Micro Focus, their accounts aren’t always straightforward.
Revenue
The generated revenue in FY19 was $3.3 billion, which represents a drop of 29.6% on their previous FY…BUT that FY was 18 months long! If you look at the 12 months from October 2018 to October 2019, it was a drop of 9.1% – still not great but certainly not quite as bad as it first seems. Adjusting for constant currency reduces that drop further to 7.3%.
Operating Profit
It’s being widely reported that Micro Focus saw a 41.2% drop in operating profit which, in the words of a teenager, is “major oofs” – that is, not good. However, that pesky 18-month FY is causing problems again – the annual reports shows that if you compare October 17-18 and October 18-19, there was actually a 16.4% increase in profits in the latest FY. However, that didn’t stop the market responding negatively with a drop in share price.
Looking through their financial statement, it’s clear they’re on a mission to streamline processes and, ultimately, reduce excess costs wherever possible. $126.3 million of their $294.2 million “exceptional costs” were from consolidating Micro Focus onto a single IT platform, with a further $119.6 million spent to “increase efficiency”.
Sales Results
The Micro Focus report shows us that, even when adjusting for constant currency and only comparing two 12-month periods, sales were still down for Micro Focus:
License = -7.2%
Maintenance = -6.2%
SaaS & other recurring = -11.1%
Micro Focus say that “stabilisation of license revenue” is a key objective for them going forwards. They also say that the drop in maintenance is due to a variety of temporary factors relating to the HPe business and, as such, do not “see the decline in the financial year to be indicative of [the] underlying maintenance revenue trend”.
Changing business models
When it comes to SaaS, Micro Focus state they will be accelerating their move to subscription and SaaS revenue models. First of all, Vertica will make the transition, followed by parts of the security portfolio, and then ADM (Application Delivery Management) & ITOM (IT Operations Management) in the future.
What does this mean?
Whenever you see a software vendor post a decline, it’s common to wonder how they might regain that lost revenue – and audits often seems to be the answer. We’ve heard from organisations around the world over the last 2 years that Micro Focus audits seem to be on the rise – will these results, although not as bad as some may say, cause them to increase their focus on license audits further throughout 2020?
It’s worth thinking about the move to SaaS too, how might that impact your software budgets for example?
Further Reading
https://investors.microfocus.com/media/1665/ara-fy19-micro-focus-prelim-statements-final.pdf
Microsoft
Q2 FY20
Microsoft had another strong showing in their Q2 FY20 results with revenue up 14% to $36.9 billion, operating income up 35% to $13.9 billion, and net income at $11.6 billion – a 38% GAAP increase.
Highlights include:
- Office 365 Commercial revenue up 27% (30% in constant currency)
- Dynamics 365 revenue up 42% (45% in constant currency)
- Azure revenue up 62% (64% in constant currency)
which quite clearly shows, again, that Microsoft’s focus on cloud is paying off for them. A 60%+ increase in Azure revenue is close to double what Amazon saw with AWS, putting Microsoft in a strong position in the IaaS market.
What does this mean?
If you’re not already on your Microsoft cloud journey, you will find ever-increasing pressure to get onboard. We’re seeing the cloud focus manifest itself in various ways, including a range of Software Assurance benefit changes towards the end of 2019. If you’re already in their cloud, they’ll want you to use more – move from Office 365 to Microsoft 365, step up from E3 to E5, add Dynamics 365, start using Azure. Once you’re in Azure, there’s an almost limitless number of additional services you can start using across your organisation – can you ever have too much cloud?!
Further Reading
https://www.microsoft.com/en-us/Investor/earnings/FY-2020-Q2/press-release-webcast
ServiceNow
Q419 / FY19
ServiceNow saw a strong finish to their Q4 (Dec 31st) with $899 million revenue, up 35% YOY. At the current pace of growth, with FY19 seeing total subscription revenues of $3.25 billion, expect ServiceNow to be just shy of a $5 billion company by the end of 2020, and exceeding $10 billion by 2023 (New CEO, Ex-SAP CEO Bill McDermott’s goal).
Notably for the ITAM market, Bill mentioned to investors that US Department of Veteran Affairs was secured as their biggest ITAM client. VA buying into ITAM amongst other IT components on the platform (19 of the top 20 deals purchased 3 or more products). A notable name and huge account in the evolution of their ITAM offering.
What does this mean?
With ServiceNow extending its reach up into the C-Suite as digital transformation enabler, and across into new products, it’s never too early to start optimisation of ServiceNow spend – particularly with them reporting 80%+ gross profit margins on subscriptions.
Further Reading
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About Rich Gibbons
A Northerner renowned for his shirts, Rich is a big Hip-Hop head, and loves travel, football in general (specifically MUFC), baseball, Marvel, and reading as many books as possible. Finding ways to combine all of these with ITAM & software licensing is always fun!
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