I haven’t always been the biggest Marc Benioff fan. And not just because, arguably, that title is held by Marc Benioff.
As the PT Barnum of enterprise software, Benioff grabbed ink through stunts and quips that reporters couldn’t ignore. But I never felt comfortable writing about him, because I always felt like I was getting played. Like I was just a cog in his great ability to “work the press.” I found it hard to have a real conversation with him, or know what he really believed versus what was spin.
Later, I thought it was lame when he tried to drape Salesforce in a social flag long after social was already hot. It was like watching your dad try to moonwalk. Sure he has the install base, but I’ve never met a user who says Chatter is the superior social product. And, while we’re at it, I hate that new logo with the cutesy cloud. Just embarrassing.
But I’m finding myself suddenly bullish on Marc Benioff after his earnings call yesterday. Specifically when he said this, on defending his lack of profitability in the face of a nosebleed market valuation of 90 times 2013′s projected earnings:
“I am very committed to expanding our margins. But I just delivered a 37% growth year. I think it is a mistake to be delivering 25% growth right now. This is the renaissance! This is the great time of the cloud! We’ve all changed how we’re using computers and there needs to be an enterprise company that can deliver this at scale. But at the same time I’m committed to raising margins. That’s important for the company. We’re trying to do it all, and doing it all is hard.”
Benioff and I agree on one thing: Rare cases like Atlassian aside, software is still sold, not bought. And that takes armies of sales people. And those people cost money. Benioff had every right to be annoyed on that call. As long as he’s growing the top line by such a gargantuan amount– no easy feat once you’re in the billions– no one on Wall Street should even bring up the word “margins.”
The previous 13 years of Salesforce’s business– as great as it’s been–has all been a preamble to this: Companies are just now, finally, after more than a decade of talk and prognostications actually starting to think about ripping out pre-Internet software and put in more modern systems of record.
We are finally– in the slowest-moving revolution known to man– about to see a major upset of Oracle and SAP, but only if companies like Salesforce and Workday and in some cases, NetSuite, are each aggressively on their game. Now is the last time any Salesforce investor should think about margins. Benioff is right, this is (finally) the renaissance. And Benioff is one of only players from the first SAAS wave who got enough escape velocity that he can play for keeps.
There is much more land he needs to grab. For instance, only 19% of his revenues come from Europe right now. When Oracle was a comparable size, 35% of its revenues came from Europe. Europe has lagged in SAAS adoption to date, and getting aggressive there will require spending serious cash on data centers and sales people to seduce CIOs into something they know is the future but don’t want to do anything about quite yet.
While everyone is complaining about Salesforce’s margins and lack of profitability, the company has continued to close more big deals. There’s a pretty obvious correlation between the two.
This is why entrepreneurs hate to take their companies public. There are so few who can stand up to pressure like this from the Street, but its ironically the best ones who do including Jeff Bezos and Larry Ellison. I have to grudgingly admit that Benioff deserves to be in that group.
stray dingo - "Also, please provide me a solid argument why LE should move into the cloud? I still have yet to hear one which does not involve the use of “speed of delivery” and “cost” which are both smoke an mirror arguments in the first place – CRM on premise systems can be delivered in 6-8 weeks on premise or via a private cloud for fixed price contracts." Larry Ellison started NetSuite: http://tech.fortune.cnn.com/2011/05/16/larry-ellisons-two-favorite-companies-oracle-and-its-competition/ ......NetSuite was Ellison's experiment in selling software-as-a-service. He helped found the company back in 1998 (along with Evan Goldberg, who now serves as chief technology officer) and remains NetSuite's largest shareholder. Oracle and NetSuite have always had the Ellison connection, and now the two companies are formalizing their relationship with a technology partnership..... He's smarter than both of us. Sarah is on to something.
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Like"There is much more land he needs to grab." Salesforce is such a strong, capable powerhouse of a business and it seems, one by one, the behemoth companies sign up, and more importantly, stay. "Companies are just now, finally, after more than a decade of talk and prognostications actually starting to think about ripping out pre-Internet software and put in more modern systems of record" Absolutely! What people forget about on premise is that using these products feels painful. Pitch perfect e-commerce/media web experiences only serve to underscore the neglect often seen in enterprise B2B desktop solutions. SaaS not only offers a different delivery system but a chance to rethink and streamline large-scale software's information architecture.
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LikeSeriously, SaaS is nothing but an alternative software deployment option eg a choice between insourcing or outsourcing....there is nothing you can do in the cloud that you cant do onpremise - if fact i would argue that there are more limitations. Gartner recently reported a trend that it has started to pick up on amongst early Large Enteprise SaaS adopters who are moving back to on premise with costs being a key driver. The reality is that when you try integrate complicated front and back office processes between the cloud and on premises you quickly find TCO being blown out of the water. In order to achieve true CRM success you HAVE to integrate front and back offices otherwise you have an island solution. Ask Marc how many enterprise clients of his have their call centre fully integrated with a SAP backend? Also, please provide me a solid argument why LE should move into the cloud? I still have yet to hear one which does not involve the use of "speed of delivery" and "cost" which are both smoke an mirror arguments in the first place - CRM on premise systems can be delivered in 6-8 weeks on premise or via a private cloud for fixed price contracts. The fact is SFDC is quickly going to find itself outflanked by SAP, Oracle and MS as each of these firms offer "choice" to their customers vs. a one size fits all offering. Finally, the day is coming when SFDC will have to massively increase prices in order to deliver the shareholder returns needed to justify the current valuations - my predication is that CRM will be selling for $50 this time next year ;)
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LikeQuick follow up - 90X projected 2013 Earnings is stunning. That does put Marc Benioff up there with Jeff Bezos and Amazon in terms of rare air.
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LikeEnjoyed your take on the "slowest moving revolution of all time -- the cloud and SaaS." Geoffrey Moore of Crossing the Chasm fame and MDV has stated that all systems of engagement, such as Salesforce are best served from the cloud. When big systems of records like Oracle and SAP migrate to the cloud or get replaced by cloud providers, then watch out -- this revolution will move. Every revolution needs a powerful, charismatic leader. I agree with you that Marc Benioff is one.
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LikeThe biggest drain on Salesforce margins was their backend, which was running Oracle and Sun servers. The licensing costs to Oracle were extreme, since there was an instance per-customer (this is inside info that I got and the information is now old). To improve their margins they had to develop their own software stack to power the platform, something similar to AWS. I don't know what they have right now but judging by the margins I would say that it isn't anything super-efficient.
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Like"Now is the last time any Salesforce investor should think about margins." But after the tech bubble, do you really blame the street for questioning a low margin/high growth strategy? Plenty have not forgotten how burned they were from this very investment thesis in 2000. There are always exceptions, and obviously after CRM's report, they simply re-affirmed belonging in that group. But lets not kid ourselves, the street has *always* given Benioff the benefit of the doubt as the stock's valuation ratios suggest, despite recent negative chatter.
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Like100% dead on target. Now is the time to stomp on the gas pedal in the enterprise cloud.
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