Salesforce.com Needs Focus On Margins, Acquisitions

As we saw in our other posts on SaaS companies, the SaaS sector is still doing pretty well. Let’s now examine the results of the leading company in the sector, Salesforce.com. On February 26, Salesforce.com (CRM) reported its fourth quarter and fiscal year 2009 results. Despite the recession, Salesforce.com beat estimates and managed to achieve revenue of more than $1 billion in the fiscal year, becoming the first SaaS company to do so.

Q4 revenue grew 34% y-o-y and 5% q-o-q to $289.6 million compared to revenue of $216.9 million and growth rate of 50% in Q408. Net income was $13.8 million or $0.11 per share beating analyst estimate of $0.07 per share on revenue of $285 million. Margins continue to be low, one of Larry Ellison’s beefs with the company, and to some extent the sector.

Subscription and support revenues were $266.1 million, up 35% y-o-y and 5% q-o-q. Professional services and other revenues were up 15% y-o-y and 2% q-o-q to $23.5 million. Total customers are 55,400 with 3,600 new customer additions. The company’s churn rate continues to be less than 1% per month.

Deferred revenue was $594 million, up 24% y-o-y and 27% q-o-q. Cash from operations in Q4 was about $76 million, down 7%. For the full year, operating cash flow was $230 million, up 12% and total cash, cash equivalents and marketable securities at the end of the year were about $883 million, up 19% y-o-y and 8% q-o-q. It has more than 3,500 employees, up 250 from Q3 and 950 or 35% over last year. Last month, its Chief Strategy Officer Steve Cakebread resigned. Boy, it must be really not very rewarding to be Marc Benioff’s strategist!

By region, revenue in the Americas grew 32% to approximately $209 million, Europe grew 25% to $48 million, and Asia-Pacific grew 60% to $32 million, increased 60%. International revenue represented 28% of its total revenue, up from 27% last year.

With Salesforce.com’s focus shifting towards the enterprise (it now prefers to call itself an enterprise cloud computing company rather than a SaaS company targeting SMEs), it has scored many account wins against Oracle (ORCL) and SAP (SAP), such as the EMC win against Oracle. I believe it will go on an acquisition spree like Oracle, although it is most likely to buy smaller companies already on its platform. An example of this could be Apptus, a small, approximately $3 million a year contract management offering. Other popular applications like VerticalResponse, Lucidera, InsideView, are interesting prospects as well.

Annual revenue in fiscal 2009 was $1.077 billion, up 44%. Net income was $43.43 million or $0.35 per share. Going forward, Benioff needs to look at ways of increasing margins. My hypothesis is that it could do so effectively by layering on other synergistic applications that its existing customers are likely to purchase. Doing so via acquisitions would be fine. I am, in fact, surprised that the acquisition spree has not quite started yet. In my opinion, it is a necessary next step to restructure the margin equation for the company.

Based on its performance, Saesforce.com has lowered its outlook for fiscal 2010. It now expects 2010 revenue in the range of approximately $1.3 to $1.33 billion from the earlier outlook of $1.35 to $1.36 billion. GAAP EPS is expected between $0.54 and $0.55. For the first fiscal quarter, it expects revenue to be approximately $304 to $305 million and GAAP EPS to be in the range of $0.10 to $0.11.

The stock is currently trading around $31, recovering well from its 52-week low of $20.82 on November 21. Its market cap is about $4 billion.

Comments

[Rob601:]

SF.com has weak analytics - they should look at acquiring SaaS-based business intelligence solution like salesanalyzer.com.

Mar 10 07:10 PM

[petercandle:]

Agree with the author that the only way to address the margin dilema is to enable an acquisition strategy.

The Business Process Management (BPM) capability in the SF applications is very weak, a common gripe from it's customer base. They should look at acquiring a company that would enable a strong standards based BPM layer across the Force.com platform.

We're using an Appexchange solution, Workflow Optimizer, which provides us with a full BPM solution.

Mar 11 03:46 AM

[Ian Gilyeat:]

The thin margin is easy to understand given their focus on growth. Their spending continues to outpace the amount of cash they are putting on the balance sheet. Deferred revenue is up 24% whereas revenue and headcount growth continue in the 35% ranges.

Also, if they're going to acquire, I would expect it to happen in the professional services arena. They are now breaking out professional services revenues for investors. This indicates a long-term committment to growing this revenue segment. Companies like Astadia are attractive targets to help balance the revenue mix and boost professional services.

Mar 11 07:59 AM