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Salesforce.com profits plunge; Merrill Lynch becomes biggest customer

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25th Feb 2007
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By Stuart Lauchlan, news and analysis editor

Salesforce.com saw profits fall on increased revenue, but CEO Marc Benioff is bullish as ever and this week announced the company’s largest customer to date. The on-demand market leader revealed in New York that it now has a client with 25,000 subscribers - its biggest ever in the shape of Merril Lynch.

Merrill Lynch will be using Salesforce Wealth Management Edition which the firm hopes will take a chunk of Bloomberg’s market share. The software builds in client and prospect profiles, workflow, approvals processes and other necessary functions on top of the core CRM features.

"Merrill Lynch's decision to embrace on-demand is a clear indicator that the largest, most complicated, most technologically sophisticated deployments are now moving to the new model," said Benioff.

Apart from the mega-deal, the company gained "more than 250,000 subscribers" in the past 12 months. The company now has 47 customers with more than 1,000 seat deployments, up 81 percent from last year, and 150 customers with more than 500 subscribers. This is almost double the 45 percent growth rate in the customer base as a whole – important for reinforcing on demand’s enterprise credibility,

Total fourth-quarter revenue was $144 million, up 58 percent year on year, and up 11 percent on a quarterly basis. Subscription and support revenue was $132 million, up 60 percent from the previous year.

For the full year, the company reported revenue of approximately $497 million, up 60 percent from the same period a year ago. Subscription and support revenue was $451 million for the year, a year-on-year increase of 61 percent.

But there was a 98 percent slump in annual income. The company made an operating loss of $3.6 million compared to an operating profit of $19.8 million in the previous year. Net profit was $4.9 million, a decrease of 83 percent.

Revenues from Europe for the year were $75 million for the year - an increase of 72 percent. Growth in Asia Pacific was slightly higher at 79 percent with revenues of $35 million. Revenues from the US were $388 million, up 57 percent.

The firm is investing in expanding its infrastructure and staffing. "We are focused on growth and revenue and market share in a new company. We are organised and architected around those principles,” says Benioff. “If at some time we decide to maximise our efficiencies like you see these large players do, then that will be a sign the market is maturing or shrinking. Au contraire. We have found this is the time for on-demand computing, but to do that we have to have growth in sales, service, support and development to take advantage of the opportunity. That's the company we have created and we will continue to create.

“We are very excited about the opportunity. We are also very excited about our competitive position and we are also very excited about our new technology. But to take advantage of all of that, we have to have the corporate infrastructure to be able to execute on what are probably the most aggressive goals in the industry. I do not think any software company is growing faster this quarter than Salesforce.com, certainly at our size.

“We want to continue that momentum. We want to take advantage of the change. We want to continue to accelerate our market share gains and to do all of that, we want to expand our infrastructure, which includes our employee base. We are very optimistic around our competitive position and the development of our pipeline because of the trends that we see in all of our market segments around customers wanting to go to on-demand computing. In almost every geography and market segment that we are in, we are seeing that continued growth. That is evidenced by the report that we just provided you on the state of the company.”

Armies and soldiers

Benioff adds: “Our technology has been doing anything but standing still. Our innovation accelerated dramatically in 2007 with announcements of new products like Sandbox, Unlimited Edition, Apex Mobile, Summer ‘06, Salesforce PRM, Salesforce for Google Adwords, App Store, Winter ‘07 and perhaps the most significant innovation for us and the industry, our new Apex programming language, which is now in beta.

“For the traditional software industry, which ekes out a new release every six years or so, this would be a remarkable list of accomplishments for a decade. But for us it is business as usual in an exciting new industry that we are defining and leading.”

Benioff highlights the forthcoming announcement of the 25,000 seat subscriber. “When was the last time you hear Oracle or SAP say that they closed a 25,000 user CRM deal? Or when was the last time you heard Microsoft say they closed a 25,000 or 15,000 user CRM deal?,” he asks. “Or can you name a customer who has 1,000 users on any of our competitors’ platforms in customer relationship management that has the customer satisfaction level?

“We are competing against organisations who have large established direct sales organisations like Oracle and SAP, and to compete against them and their mainstream accounts, we have to have similar armies and soldiers. I am sure that it is clear that two of Oracle’s very largest high-tech accounts, Cisco and Dell, just decided to go with Salesforce for their large enterprise application deployment. That competition takes place in person in their offices at the highest levels of their company and we have to be able to be prepared to present and represent ourselves in a peer manner. That is our distribution model and, of course, we won those customers away from Oracle.”

But is the collapse in profits a reason for investors to be getting nervous? “We don't think so, for two reasons," comments Ovum’s David Bradshaw. “The more mundane reason is that, according to Salesforce.com CFO Steve Cakebread, a change in the way that stock-based compensation is accounted for is responsible for most of the reduction in profit margins. But also, as a subscription business, every sale or renewal brings revenues for subsequent quarters, not just the current quarter.

“More importantly, the company is self-consciously trail blazing the software-as-a-service (SaaS) market. It is seeking to grow into being the dominant ecosystem in the on-demand world. We can quibble about some elements of the company's strategy, but investing in a market position to make its lead unassailable before the behemoths wake up to the danger seems a good strategy here.

“Perhaps the most significant comment came towards the very end of the earnings call, when Benioff remarked that the company had 'cracked the code' on relationships with systems integrators like Accenture and IBM GS. These relationships have been problematic for SaaS vendors, because SaaS has tended to reduce the services take for the systems integrators. If Salesforce.com has truly solved this problem, then it has the key to lasting growth in the large enterprise sector.”

Find out more about Stuart Lauchlan

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By AnonymousUser
01st Mar 2007 19:34

...on relationships with systems integrators like Accenture and IBM GS".

That's a huge challenge for "on-premise" ISV's let alone SaaS vendors. If Salesforce really has come up with a formula that delivers acceptable value to these SI's, I'd really like to know what it is.

Is it sufficient to move them away from their traditional high value services-based offerings such as Siebel, where they have a lot of investment on the bench?

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