Two indexes give a picture of the market's health. The Software Insider Index includes both on-premise and SaaS services. SaaS Index Insights is a pure SaaS index. Bernard Lunn uses the report to explain the benefits and the critiques of SaaS companies.

Both reports show significant growth for the SaaS markets with Salesforce.com still remaining as perhaps the company with the greatest potential.

Software Insider Index

The index includes 22 publicly traded companies. All of the companies showed year-over-year quarterly growth. But the SaaS providers grew the most. Every company grew 14% to 26%.

Ray Wang sees a few trends emerging:

• SaaS vendors continue to grow in mid to high double digit growth rates for subscription revenue. SuccessFactors (26.81%), Salesforce.com (24.78%), and Concur (20.49%) moved past 20% year over year quarterly growth.
• Ariba ($93.2M) nears the $100M per quarter revenue benchmark as Blackboard ($101.5M) continues to grow from this achievement in Q1 2010.
• RightNow (19.58%), NetSuite (16.83%), Ultimate Software (15.67%), and Taleo (14.63%) all showed solid quarters of growth, though these growth percentages show slight declines.

SaaS Index Insights

Bernard Lunn uses his report to discuss the value of SaaS. He writes:

What Investors Should Focus On During This Phase Of The
Transition To SaaS

We believe that we are in the "tornado" phase of the transition to SaaS. This is a reference to Geoffrey Moore's series of books such as Crossing The Chasm. The tornado phase is when the market is growing fast. This is when winners emerge and create a lot of value.

In short, growth is all. Investors prize revenue momentum above all.
Optimizing profits by keeping costs low is a lower priority. That can
wait until markets have anointed a clear winner and growth starts to
slow.

However, a lack of profitability and cash flow is a cause for concern.
The SaaS model at scale (above $50m in annual revenues) should be
highly profitable. If a company is losing money, that is major red flag. If
a company has a profitability ratio that is significantly lower than the
average that is a cause for concern. If the revenue momentum is
strong enough, investors can look beyond what may be a short-term
drag on profits due to an investment in growth.

In short, the primary factor we focus on is revenue momentum. If
we see that momentum we look at other factors.

No surprises really. SaaS companies will continue to run at a far faster pace than on-premise counterparts.

The numbers speak for themselves.