To go from being the darling of Wall Street to seeing your stock collapse by 27 per cent in one day is a rough ride to take, but Salesforce.com has just learned some harsh realities about being a publically quoted company.
In a classic demonstration of investor fickleness, Salesforce.com watched its market value plummet 27 per cent following a presentation at the New York Stock Exchange, in which senior executives attempted to convince analysts that it would chart a steady, transparent growth path with predictable revenue recognition.
Investors on the other hand appeared to want to hear more hype and outlandish predictions from the first major dot com floatation since the internet bubble burst. When management issued financial guidance below analyst estimates of 6 cents a share, the stock price crashed. Chief Financial Officer Steve Cakebread forecast $160 million to $165 million in revenue for Salesforce.com's 2005 fiscal year, which ends January 31.
But the three major Wall Street analysts currently following the company made their forecasts without the benefit of any guidance from Salesforce.com's management. Companies pursuing an IPO are forbidden by law to comment on prospects in the weeks leading up to the actual float. Salesforce.com CEO Marc Benioff declined to comment about the stock market's reaction, but sources close to the company indicated that he was baffled by investor reaction.
The most sceptical analyst commentary came from Donovan Gow with American Technology Research, who lowered his earnings estimates and price targets. "The lack of guided earnings growth supports our thesis that the company will have a tough time growing earnings in the face of a tough competitive environment" he said, adding that Salesforce "has had great top-line growth but is spending tons of money to do it".
Other analysts were more generous in their assessment. "There is nothing I heard in that meeting that would change my positive view of this company's direction" said Peter Coleman, analyst with Schwab Soundview Capital Markets. "I will be pounding the table harder than ever for this company."
Calling Salesforce.com’s guidance "very conservative", Prudential's Brent Thill told clients "In our opinion, [Salesforce.com] is showcasing the direction where the entire software industry needs to go - easy to access, hosting-based applications priced for widespread consumption. While our forecast includes some fairly aggressive growth expectations, at the current stock price, we believe [Salesforce.com’s] valuation is beginning to look a little more interesting."
Unlike other Internet companies when they IPO-ed, Salesforce.com is profitable, earning $3.5 million on revenue of $96 million in its last fiscal year. Benioff touted the advantages of Salesforce.com's business model becuase it enabled revenue to be recognised gradually with no urgency about closing deals at the end of quarters. As such, Salesforce.com should have a more predictable revenue stream, he said.
The company said it has added 14,000 more subscribers during the first two months of its current fiscal quarter, raising the total number to 161,000. Its business comes in nearly even thirds from small, medium and enterprise customers, said company executives. More than 80 percent of sales are in the Americas, with the remainder coming from Europe and Asia-Pacific.
Eschewing moves into other market sectors, Benioff said that Salesforce.com’s development priority is meeting the company's three-times-a-year upgrade schedule, which calls for spring, summer and winter editions. The latest upgrade, the Summer '04 edition, went live two weeks ago and boasts 100 new features include user-interface tweaks and added customisation options.
The company is developing deeper functionality in areas its customers cite as priorities, including customer service and analytics, but for the foreseeable future, the company doesn't plan to push add-on modules for additional fees, according to Pat Sueltz, Salesforce.com's president of marketing, technology and systems. "We're still working through a lot of that" Sueltz said. "We'll listen to our customers and act accordingly."
The company was also at pains to dismiss the idea that it could not compete as an enterprise player against the likes of Siebel and SAP. It touted a global win with Cisco, which first trialled the software in the UK and it now rolling Salesforce.com out "worldwide as part of Cisco's global implementation of CRM". This will take in "multi-thousands of users". Another customer offered up as evidence was UK sales outsourcer Innovex, which has 650 users on Salesforce.com.
Overall it was a tough day for Salesforce.com. This was its first public outing as a public company and it was left with something of a unjustifiably bloody nose. For his part, Benioff himself went to sleep that night $120 million down on his personal stake in the company.
But the overall message remained one of steady growth and transparent revenue recognition models, messages which Wall Street should respond to once the initial fervour surrounding the recent IPO fades. As for that all important area of pricing, Benioff had one promise for customers "Our pricing strategy is, don't raise the prices," he said. "We tried that once before, and it backfired".