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Salesforce: More Than Just a Pretty SaaS

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Posted August 17, 2006 By Michael Hickins     Feedback

Salesforce.com establishes new benchmarks and shows new revenue streams.

Salesforce.com surprised analysts with a much stronger second quarter than expected.

As impressive as the raw numbers, however, was the manner in which the leader in on-demand customer relationship management (CRM) software is diversifying its revenue streams.

The company reported second quarter income of $118 million, a 64 percent improvement over last year's Q2.

Pro forma EPS of 6 cents was another surprise, 2 pennies higher than expectations.

Earnings were pro-forma because the company actually lost money on a GAAP basis, but with $331 million in cash and only $1.2 million in debt, its balance sheet garnered high marks from analysts.

The company also added 57,000 new seats, well above the consensus estimate of 47,000, and now has more than a half million users.

Salesforce.com impressed analysts with the quality of its revenues.

For starters, Salesforce made significant strides attracting large enterprise customers.

Software-as-a-service (SaaS) is supposed to appeal more to small and medium sized businesses (SMBs), but Salesforce demonstrated that its solution is robust enough to gain traction in the high end of the market, too.

CEO Marc Benioff said the company generates income from small, medium and enterprise-level companies in equal parts.

He noted significant customer wins with Nokia , Bear Stearns , Wells Fargo and others.

"We're able to reach any company of any size anywhere in the world," he said during a conference call.

Salesforce increased the average number of seats per customer, from 21 in Q1 to 27 in Q2.

Those numbers reflect its newfound success with larger companies, wrote First Albany Capital managing director Mark Murphy in a research note.

Liz Herbert, who follows SaaS for Forrester Research, noted that Salesforce is beginning to win multi-thousand seat deployments, in some cases beating out the likes of SAP and displacing Siebel.

"They're surprising people with their ability to penetrate into the larger enterprise segment," she told internetnews.com.

Salesforce has also begun to tap into new sales channels.

The company introduced AppExchange OEM Edition in May.

The solution is a way to attract ISVs wanting to create on-demand CRM solutions under their own brand while leveraging the Salesforce infrastructure and ecosystem.

In June, the company introduced Partnerforce as a way for customers to manage their indirect sales channels more effectively.

Merrill Lynch analyst Kash Rangan noted that new levers "will become more key" in measuring the company's success.

Rangan noted that these and other premium offerings, like mobile availability and the Unlimited Edition "are driving new wins and repeat business."

Herbert said that Salesforce.com is using AppExchange to become more than a point solution vendor.

"They're trying to be a SaaS platform, not just an application," she said.

More than that, Salesforce is taking dead aim at its on-premise rivals on their home turf.

Benioff contrasted software vendors such as SAP, Oracle and Microsoft with Web-based companies such as Google and Salesforce.com.

"We're part of a larger movement to get companies off software and onto the Internet," he said.

It's still difficult to gauge how well Salesforce is doing against on-premise CRM vendors like SAP or Siebel, now owned by Oracle , since neither company breaks out pure CRM deals from other software license revenue.

But the guess is it still has a long way to go.

"Salesforce has something like 24,800 customers, which is really huge. And Siebel has only 4,000," noted Herbert.

"But the reality is the number of seats they have is a lot higher."

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