Software that increases the efficiency of corporate data centers, or that runs as an Internet-delivered service, is on a roll. Most of the fastest-growing software companies are doing one or the other, according to a CIOZone analysis of U.S. software companies' 2007 results.
All told, the revenue of public U.S. software companies jumped 24% in 2007, to $151.4 billion from $122.3 billion, according to CIOZone's analysis.
While it was a good year for many software vendors, it was particularly good for companies that have discarded the older paradigm of install-and-maintain and are making their products available as online subscriptions. Revenue at Salesforce.com-the pioneering company that turned customer relationship management into an online service-grew 51% to $749 million. NetSuite, a Salesforce rival focused on small-and medium-sized businesses, grew 62% to $109 million.
"The per-seat subscription model helps both sides scale," says Sumitro Sarkar, vice president of technology strategy at Thomson Financial, a Salesforce customer. Salesforce has removed a "real-estate" problem for Thomson, Sarkar says, by decreasing the number of servers it must maintain.
VMware, the fastest-growing software company on CIOZone's list, is also addressing the problems of physical space. The Palo Alto, Calif.-based company grew 88% to $1.3 billion as customers bought its virtualization products to help the servers in their data centers handle more computing tasks and run more applications. VMware's 154% net income jump was one of the highest profit increases on our list.
"I think that virtualization is absolutely going to be in everyone's portfolio, and on an increasing basis," says Mark Gathje, vice president of architecture and technology services at VeriSign, a provider of Internet infrastructure. The only question, he adds, is when will virtualization move beyond development environments, where corporate technologists are familiarizing themselves with it, and work its way into computers that deliver services to customers.
"I was at a conference where virtualization was one of the break-out sessions," Gathje recalls. "The moderator asked the question, 'Who's using virtualization?' and all 50 hands went up. When he asked, 'Who's using it extensively in production?' only one hand went up.
"QA [Quality Assurance] and development are a no-harm, no-foul environment," Gathje adds. Making a mistake with virtualization there doesn't carry the same penalty as doing so with a client-facing system.
Gathje is also a customer of BladeLogic, another fast-growing software company with its eye on the challenges of the data center. The Lexington, Mass.-based company sells software that helps data-center experts see at a glance how their servers are configured-information that can help them roll out applications faster and reduce the amount of staff they need to devote to server management.
"Everybody's dealing with the server-sprawl problem," says Vick Viren Vaishnavi, BladeLogic's vice president of worldwide marketing. "We're not talking about 10 or 20 servers-we're talking about thousands and hundreds of thousands of servers globally. As a result of all that, it's increasingly difficult for I.T. organizations to be responsive."
BladeLogic (2007 revenue growth: 86%) also helps companies comply with some of the strictures regarding information rights and control that are in place as a result of Sarbanes-Oxley. For instance, auditors sometimes ask who has initiated a change in an information system. The BladeLogic system provides detailed reporting on that.
"There's a lot more granular accountability than there was in the pre-Sarbanes era," says Gathje, who says VeriSign has about 8,000 BladeLogic licenses deployed. "With a tool like BladeLogic, simply by running reports, you're most of the way there."
VMware and BladeLogic are two of a small group of software companies that managed to go public in 2007. Other software-company IPOs included NetSuite and enterprise applications vendor Deltek.
Of those four, only BladeLogic doesn't appear on our list of fastest-growing software companies. It entered 2007 with $28 million in sales, below the $50 million cutoff we used to make sure the list wasn't skewed toward very small companies that most CIOs would be unlikely to find themselves doing business with.
In studying the results of the fastest-growing U.S. software companies, CIOZone divided them into two groups-those who entered 2007 with at least $150 million in revenue, and those who entered 2007 with between $50 million and $150 million in revenue (see methodology).
The fastest-growing small company was Omniture, of Orem, Utah, with an 80% revenue rise. The company, which offers a suite of Web analytics, has become the de facto service for hundreds of prominent companies looking to verify their Web traffic to advertisers, or use that traffic to get a better understanding of what their customers want.
"Online is starting to inform a lot of the offline," says Gail Ennis, Omniture's senior vice president of marketing. "People are really seeing that Web analytics and online marketing are becoming a foundation for their business."
For instance, Ennis says, the head of corporate marketing at Ford Motor, speaking at a recent Omniture conference, talked about how the buying process now starts with a prospective customer going online to download brochures and information, such as the location of dealerships. "The general best practice has become, let me get my online world together, and use that to attack the offline channels," says Ennis.
Omniture's growth last year was helped by the acquisition of Instadia, a Copenhagen-based Web analytics maker that gave an immediate boost to Omniture's European business. Omniture's growth should benefit this year from its purchase of Visual Sciences, a San Diego-based company that Ennis describes as having been Omniture's main rival.
Because of the size of the companies on our $50 million-to-$150 million list, they tended to grow faster, with median growth of 30%, versus a median of 20% for the larger companies. But just 60% of the smaller companies turned a profit. By contrast, 90% of the larger fast-growing software companies operated in the black.
In some cases, large software companies provide indispensable pieces of infrastructure at big enterprises. They are also benefiting from a trend in which corporate technology managers are trying to reduce the number of suppliers they work with.
Thomson's Sarkar, for instance, says his firm is looking to cut its preferred list of suppliers to about a dozen. It's inevitable, he says, that those suppliers will include Microsoft, whose .NET framework underlies many of Thomson's applications, and Oracle, whose database software is critical to an information services provider like Thomson.
"At the end of the day it's all about data," Sarkar says, speaking of Oracle. "I don't think there's any doubt about how relevant they're going to be."
While Sarkar is concerned about the "monopolistic factor" as more of his software spending ends up in fewer hands, he says corporate technologists have few alternatives to continuing to work with increasingly powerful vendors.
"It's like flood insurance," he says. "Nobody wants a flood."