Is Onyx a candidate for acquisition right now?
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We're always a candidate for acquisition. In our nine-year life, we've been approached in one way, shape or form a number of times. It's partly because we have really good technology and we have solid financials. We haven't been running at this massive loss. If you look at the history of our company, we've actually been profitable more quarters than not. How do you convince customers and potential customers that Onyx remains a viable company?
That's a question that comes up [a lot]. It's primarily driven by competitors. Competitors will walk into customer [sites] with an unreliable financial analysis that says Onyx will be out of business in three days. That's not true. If you look at IBM or Unisys or any of the companies that we've signed up that are basically building go-to-market strategies with us, they've all done extensive due diligence financially and come back and said, 'They're going to be around for some time to come.' If you look at any of the financial services companies we do business with, they all do exhaustive due diligence and said, 'We're going big with Onyx.' It's the companies that don't have sophisticated financial analysts that have a harder time overcoming the viability hurdle. Our competitors make that a big issue. Onyx is getting pressure from all sides in the midmarket. Siebel, PeopleSoft, SAP and Oracle are coming down from the enterprise space. And you've now got Microsoft coming up from the low end. How intense is the midmarket pressure, and how can you withstand it?
What is different about PeopleSoft's and Siebel's midmarket strategy than it was five years ago? They've taken four or five different distribution tactics and all have failed. They don't have the product, the operational infrastructure or expense structure to go to the midmarket. I think we are the most ideally suited for the midmarket and [for] divisions of large companies with midmarket behavior because we're designed that way. Microsoft has a two- or three-version effort ahead of them to get to the midmarket, product-wise. And from a corporate infrastructure perspective, they've got that same effort. They've got to have direct sales, a direct service organization and domain experts in CRM. Have you seen them take market share from SAP or PeopleSoft with Great Plains? But from my perspective, I'm a lot more scared of SAP or PeopleSoft. They're big companies, they sell business applications, their infrastructure and their partner structure are [set for the midmarket]. When they announced five years ago they were getting in this market, that to me was the big deal. Your chief financial officer has said that the problem isn't so much in acquiring new customers but in getting those customers to buy enough licenses. If that's the case, how do you overcome that?
People are 'shorting' licenses up front. They're underbuying to start with. Maybe eventually they'll want 1,000 seats, but they're only doing 50 to start. And as they put the people on the seats and the project, they buy the remainder. People aren't going on the theory that they'll get this big financial discount by buying lots of seats up front. The license-to-service purchase ratio has changed, and I frankly don't know that it's ever coming back. Anyone that's depending on big license deals is in for a world of hurt. In March, you announced a hosting partnership with IBM. This is the first full week Onyx CRM is available through that hosting deal. What's the interest been like?
We anticipate having several customers live or signed up before the end of the quarter. We had two customers [Starbucks and a division of Microsoft] that were interested in the offering, but the IBM hosting deal wasn't yet available. They went with other options from Onyx.
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What do you make of PeopleSoft's acquisition of J.D. Edwards?
While the merger may give PeopleSoft the mass they feel they need to compete with the likes of SAP in the ERP world, it doesn't appear to address any of the key issues in CRM today such as delivering a more streamlined offering that is easier to implement and manage, or providing alternative delivery models such as subscription offerings or composite applications. In the short term, we feel that the merger will be disruptive enough that it will likely make it easier for Onyx to compete with these vendors. In the long term, who knows. That all depends on how well they execute on their plans for integrating the two entities.