Salesforce Revenue Soars, but Earnings Per Share Fall Flat

Salesforce.com announces record customer increases and revenues, but its third quarter profit is only break-even on a per-share basis.

Marc Benioff, Salesforce.coms chairman and CEO, had much to crow about during the companys Nov. 15 fiscal third quarter 2007 earnings call.

The company announced record customer increases, record earnings and a cash flow of more than $30 million.
It also achieved its goal to become the first on-demand software company to reach $500,000 annual run rate—a goal Benioff set previously. And its only the beginning, as far as Salesforce is concerned. "We are one of the top forty software companies in the world of our size," said Benioff. "That sets up our next dream: to be the first billion dollar [on-demand] software company." Total revenues for the quarter were reported at $130 million, an increase of 57 percent over the same year-ago quarter, and a 10 percent increase over the last quarter. Subscription and support revenues were $118 million, an increase of 59 percent year-over-year, and 11 percent over the second quarter of 2007. Customers rose a record 2,300 during the quarter to total about 27,100 companies subscribing to Salesforce.coms offerings, a 45 percent increase from the same year-ago period, and a nine percent increase over the last quarter. Subscribers—the number of users in a company—broke another record: 61,000 subscribers were added during the quarter, bringing the total number of subscribers up to 556,000. "We closed a lot of business in the third quarter, unabated by competition," said Benioff. The biggest competitor missing from the mix, according to Benioff: Siebel Systems, which was acquired by Oracle at the start of 2006. "The big change [in the competitive landscape] is the disappearance of Siebel from the market," said Benioff. "Our information is that Siebel On Demand has less than the number of subscribers in four or five years of being in business than we did this quarter—61,000 subscribers exceeds what Siebel has been able to do." Benioff said Salesforce.com is also starting to replace existing Microsoft 3.0 CRM (customer relationship management) implementations, though he had no company names to offer. Is Salesforce on the prowl for acquisitions? Click here to read more. At the same time, he said he is seeing little in the way of competition from SAP, which announced its hybrid CRM offering last February. "We feel very good about the competitive landscape," he said. The question that Salesforce.com likely mulls is how long that competitive landscape will remain barren. There is a ton of additional on-demand providers, not just CRM, which Salesforce traditionally sells, but also providers in other verticals, including ERP (enterprise resource planning). At the same time, the big three ERP players—SAP and Oracle on the high end, Microsoft on the lower and mid-tier—are hammering out their own on-demand strategy. While Salesforce clearly has the lead, there will come a time in the not-too-distant future (2007? 2008?) where those cash-rich players will have a viable on demand option that likely spans beyond hosted CRM. To wit: Microsofts "Titan" release, expected in 2007, will offer a multi-tenant version of CRM. Oracle, which has strong development might, bought Siebel, and is most likely planning something with that technology. But Salesforce is doing what it should to continue to grow its business. Its growing its customer base beyond CRM with offerings like AppExchange and Apex, a custom development language. And its hammering out what could be significant relationships with the big system integrators. Benioff announced during the Nov. 15 call, though with few details, a relationship with IBM that will have Big Blues sales team selling Salesforce.coms on-demand solutions. "IBM is coming up to speed faster than we expected [in learning how to sell on demand software]. We are now working on a major government contract," said Benioff. "Thats exciting to us. They can reach out to organizations where we dont have that [ingress]. A year ago, [system integrators] said on demand cant sell, on demand cant customize, and now were seeing the only way to go is on demand. It has taken a critical investment to get to this point—a tipping point with the SI community." At the same time, Salesforce.com is veering further away from its CRM roots by developing vertical applications and bundling those with partner offerings. Benioff gave the example of financial services applications that are available now on AppExchange. He said to expect more vertical offerings in the future. But there is a fly in the ointment—particularly for shareholders looking to cash in on Salesforce.coms relatively wide-open competitive landscape: the companys earnings came in flat for the quarter. Because of about $10.2 million in stock-based compensation and about $0.06 million in amortization fees, Salesforce.com earnings were reduced by $0.06 per share, according to Steve Cakebread, the companys chief financial officer. The company posted a third quarter profit of $339,000 or break-even on a per-share basis. Thats compared to a profit of $13 million, or 11 cents per share for the same year-ago period. Check out eWEEK.coms for the latest news, reviews and analysis about productivity and business solutions.