Salesforce.com’s earnings

Posted: November 20, 2006 in CRM

You have to take your hat off to Salesforce.com, I think.  Last week’s earnings call was a thing of beauty.  It was the kind of thing that I bet every entrepreneur must dream of doing someday—reporting to the investors on a great quarter for their newly public company. 

It wasn’t so long ago that rivals would call me every time Salesforce.com announced their latest subscriber-base growth to say things like, “They’re lying, nobody has that many customers.”  Certainly, the callers didn’t have that many customers.

Well, times change and some of those vendors are out of business now but Salesforce.com is still announcing increases.  These days, as a public company, there’s an added incentive to tell the truth.  It’s called jail and that’s one reason the company takes great pains to be transparent about the things it needs to be transparent about.

For the quarter, the company’s CEO, Marc Benioff, said that the company added 61,000 subscriber seats representing 2,300 companies and that revenue was up 57% year-over-year.  Not too shabby.

It’s funny but there are still nay-sayers out there.  On one hand it is very healthy to be skeptical—some of us make a living at it—as long as there is some legitimacy to the argument.  For example, people still ask me about defections or customers who do not renew.  That’s a fair question and one that is masked by reporting the net increases in seats and customers, but even as net numbers what the company reported looks pretty healthy.  What’s interesting to me is that some other companies in the on-demand space are making offers to re-host customers who might defect.  In other words, defectors are going to other on-demand solutions, not so much to in-house systems.

On the other hand there are skeptical comments that in my opinion don’t really shed much light on the overall phenomenon of on-demand computing.  An example here would be the contention by some of the competition that on-demand isn’t suitable for this or that application area. 

While there is some legitimacy to that kind of thinking, it also represents a nicely packaged retreat up-market by conventional vendors who are digging in to some hard to reach niches.  For instance, some banking application areas are required by law to house their systems behind their own firewalls to prevent data theft.  But how long will something like that survive if the alternative solution proves to be equally safe and significantly less expensive?

We’re number 40!

At last week’s earnings call, Benioff made a big deal about his company’s revenue run rate.  The company says that it generated $130 million in revenues in the latest quarter putting it on track for a half-billion dollar annualized run rate.  The significance, according to Benioff, is that only forty software companies in the world have revenues that large.  Thus Salesforce.com figures itself to be one of the forty largest software companies, an inauspicious position for a company whose tag line is the end of software.

The biggest rub for Salesforce.com right now might be just how to position itself.  Fortieth Largest Software Company doesn’t exactly roll off the tongue and neither does the largest software as a service company, though it is far more germane.  Though the lion’s share of its revenues come from CRM and most of its product focus is in the front office, CRM might, in a few years, prove to be too constraining of a description.

Most people I talk to agree that Salesforce.com’s future is in its platform and application hosting businesses.  Already according to one tidbit announced at the earnings call, there are companies subscribing to the service, not for the CRM functionality, but who instead want the development and deployment environment for their IT shops.  These companies are happy to use the platform to build and support applications in-house for their unique business processes and to run them as hosted solutions for their employees.

There’s good logic to that approach because it makes the applications available to traveling or remote employees that need access to company information and who need to participate in its business processes.  This approach relieves the IT department of a lot of overhead leaving more time to concentrate on the business process.  It is in this capability that I think that both the company’s long term direction and its description lie.

We all know that applications served from the Internet can be delivered virtually anywhere, and applications written for the on-demand platform can unite business processes that span the globe and that are indifferent to time zones.  All this can greatly accelerate the pace of business while reducing error and costs.  To date, companies that wanted that kind of functionality usually had to come up with 24/7 support infrastructures which can add a lot to a company’s IT costs.

So rather than retreating up market as many other companies might be doing, Salesforce.com now has an opportunity to create another new market niche where it can be number one instead of number forty.  I still don’t know what to call a facility that enables and enhances global business processes, but I bet the Hawaiian word, “wiki,” will have something to do with it.  Just a hunch. 

As Benioff might say, aloha.

So, what did you think?

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