Salesforce.com's Leap Into Cloud Computing: Salesforce.com's foray into cloud computing with its Sites initiative is an effort to shake the trees a bit and build revenue in the wake of a stock slide. More importantly, Salesfoce and its founder, Mark Benioff, must prove the ability of on-demand software to ride out the economic mess.
By Aaron Ricadela, Business Week Online, 11/09/08
Salesforce.com Chief Executive Officer Marc Benioff strides into San Francisco brunch spot Ella's, clad in workout clothes, replete with baggy shorts and a baseball cap. It's an unusual look for an executive known for pinstripes and boldly colored ties.Then again, the different look befits a person who's about to take the company he founded into uncharted territory. Grazing on a salad, the stocky executive says he's stepped up his workout schedule in the run-up to Nov. 3, when Salesforce will announce a new Web site-hosting business at its annual user conference in San Francisco. "By the end of my keynote, I want our customers to think about us in a new way," Benioff says.
It wouldn't hurt if investors, too, saw Salesforce in a new light. The company's stock is underperforming a dismal market, leaving some to ask when Benioff might sacrifice some of his go-go sales growth to show more profit -- and whether the company, which closed October at US$30.96 a share -- vs. $70 in August -- could soon be acquired by Oracle or by another big fish in the tech industry. Benioff is adamant that Salesforce is not on the block. "If someone wanted to buy it, where are these people?," he asks. And the company plans to keep hitting the gas on sales growth and market share in hopes of getting even bigger than the $1.07 billion in revenues it's expected to book for the fiscal year that ends in January. "We should be doing everything we can to maximize revenue and market share," he says. "We feel like we're Johnny Appleseed. We've planted a lot of seeds, and we plan to harvest a lot of apples."
Diversification Under Pressure
They'd better pick fast. Salesforce, which sells software that helps companies measure and manage contact with customers via the Web, is expected to surpass $1 billion in revenue for the first time this year. But Salesforce's stock price has slumped markedly since August, when the company reported billings to customers that fell short of analysts' expectations.
Now, Wall Street is asking if Benioff's vaunted pay-as-you-go model can survive a nasty economic downturn that's forcing customers to lay off workers and spend less on the sales-and-support staff that constitutes Salesforce.com's bread and butter. With "on-demand" software, customers have the option to pay annual or quarterly fees to rent a program, rather than making an up-front payment to own the software indefinitely. If customers curtail or cancel contracts in a downturn, Salesforce may need to diversify more quickly. "Marc Benioff is no dummy and he knows his core business is going to be attacked at the high end from SAP (NYSE: SAP) and Oracle, and at the low end from Microsoft (Nasdaq: MSFT), says Pat Walravens, an analyst at JMP Securities, who rates Salesforce stock "market outperform." "This is Strategy Planning 101. He can't compete on cost, so he's got to differentiate."
Cut to the annual Dreamforce conference on Nov. 3, when Salesforce.com unveiled its new software, Force.com Sites. It offers tools that will let companies such as Starbucks (Nasdaq: SBUX) and Dell (Nasdaq: DELL) build Web sites that solicit feedback from customers on pages served by Salesforce's computers. Force.com represents a foray into cloud computing, which lets customers pay someone else to house the ever-rising mountains of data and computing power needed to deliver information on the Internet.
Thickening Skies in Cloud Computing
Customers will pay Force.com according to how many page views are served up through the company's Web site. Salesforce also announced a deal with social networking site Facebook, allowing applications written with the new software to run as Facebook widgets.
As booming a business as cloud computing has become, it's also crowded. Google, Amazon.com and Facebook all have ambitions in the field, and Microsoft on Oct. 27 announced upcoming software called "Windows Azure," which would let companies build cloud applications that Microsoft runs on their behalf.
Benioff isn't one to shy away from competition. But even as he ventures into new territory, he needs to prove that the model for on-demand business software -- an area he pioneered -- can work as well in bad times as it did in good. Benioff says there's been no material change in prices or customers' ability to pay their bills. "There is no better model than ours for times like this," he says.
A List of Big Potential Buyers
Yet Salesforce's deferred revenues -- an indicator of new business signed per quarter -- have fallen short of expectations, causing consternation for investors. "Their business model is great, because I never worry about them missing their revenues or earnings, but that's not what they get judged on by the Street," says Heather Bellini, an analyst at UBS, who has a "sell" rating on Salesforce. "They're judged on deferred revenues, and the last two quarters they've been disappointing. If [Benioff] doesn't get it to be more than a CRM company, what goes through my mind is: 'Could he have the same fate as Tom Siebel?'" That was the former CEO of Siebel Systems, whose company was bought by Oracle after its performance tanked during the last tech bust -- in no small part because Salesforce ate its lunch.
There's speculation on Wall Street that Salesforce could be an acquisition target. Oracle, Microsoft, Google, SAP, and Cisco are potential acquirers, according to analysts and industry executives. Salesforce has always been considered attractive, but expensive. Now, "you have more possibility of some kind of transaction when the stock's at 30 than at 70," says Brendan Barnicle, an analyst at Pacific Crest Securities, who rates Salesforce stock "outperform," but slashed his price target for the company to $30 from $80 on Oct. 27.Analysts also wonder whether Salesforce, scheduled to report third-quarter results in mid-November, is entering a period of slower growth. Wall Street expects sales to increase 43 percent for the 2009 fiscal year that ends in January, but to gain only 28 percent in 2010. If Benioff were to tap the brakes on hiring and restrain sales and marketing costs -- currently 50 percent of revenue -- the company could drop more revenue to the bottom line. By the same token, if Salesforce keeps spending to acquire new customers the way it did when times were flush and customers kept needing to buy additional seats of its software for newly hired workers, any demand slump could hit hard. "The bear case is they're going to hit the wall at 60 mph.," Walravens says.
On-Demand Software Under Pressure
To be sure, Salesforce's business remains strong. It signed up a net of 4,100 new subscribers last quarter and profit keeps growing as a percentage of revenue.
But the very appeal of on-demand software could turn out to be the company's Achilles Heel. The software has proven itself by freeing vendors -- and their customers -- from pressure to close big deals at quarterly endings, locked-in investments to install and customize programs, and the pain of maintaining numerous versions of applications in the field (which came to plague Siebel and other traditional business software vendors). But the on-demand world, with its lower prices and lack of high-margin maintenance fees, also means vendors need to fight for every dollar.
Salesforce competitor NetSuite has been struggling. SAP has run into problems finding customers for a suite of on-demand business applications called Business By Design. "The biggest question is how [on-demand] companies fare in a recession," says Pacific Crest's Barnicle.
That's why investors who've bet on the category -- and on Salesforce -- may welcome a new look from Benioff and the company he built.