Benioff Sounds Off
A year and a half ago, when software maker Salesforce.com was growing at a rate of about 60% a quarter with less than half a million users, its colorful CEO, Marc Benioff, declared that the company had a "million-subscriber dream."
Salesforce.com's (CRM) growth has cooled a bit since then, but on Dec. 5, Benioff got his wish, announcing that the number of subscribers to its online customer management software will cross the million mark in December, up from 900,000 in September. Salesforce.com also said it will donate $1 million to 10 charities, including the University of California San Francisco and the Bridge School, the school founded by musician Neil Young for children with disabilities. And the company unveiled a new software feature, available for an additional fee, that makes it easier for companies to share leads and orders.
Amid fears that corporate technology spending may be slowing, Salesforce.com continues to post solid results. On Nov. 15 it reported that fiscal third-quarter revenue rose 48%, to $192.8 million, and per-share net income climbed to 6¢, from break-even a year earlier. Salesforce.com also said it expects to exceed $1 billion in revenue for the fiscal year that ends in January, 2009.
But big competitors are sharpening their knives. At a conference in Boston on Dec. 4, SAP (SAP) showed a new version of its customer management software that users can run over the Web. SAP, the No. 1 vendor of business applications, is also aiming for a bigger slice of software sales to midmarket companies (BusinessWeek.com, 9/19/07), an area where Salesforce.com has been strong. And Oracle (ORCL) announced on Nov. 14 that it will deliver new customer management software (BusinessWeek.com, 11/15/07) early in 2008 to compete with Salesforce.com.
In a recent conversation with BusinessWeek.com's Aaron Ricadela, Benioff held forth on the company's revenue and cash-flow growth, the prospect of larger acquisitions, and competition with Oracle and SAP. Edited excerpts follow.
Salesforce.com signed a 30,000-user deal with Citigroup (C) during the third quarter, and you've recently closed a couple of other large contracts. Now you're announcing you're on the verge of having 1 million Salesforce.com subscribers. But you've stopped reporting subscriber numbers each quarter. Will you return to that?
Our deal with Citigroup was the biggest customer relationship management deal in 2007 that I'm aware of by anyone. I could say the value of the deal, but I'm not going to. In financial services, we have Merrill Lynch (MER), Deutsche Bank (DB), SunTrust Banks (SIT), and many others around the world as customers. Citigroup, who can choose to buy anything, chose software as a service. It was a very competitive transaction: Executives from other [vendors] were involved—the top guys. And we've won Canon (CAJ), an Oracle account that was using Siebel [a vendor acquired by Oracle]. We had a previous relationship with them, but this is a significant expansion—about an additional 4,000 users. Japan Post has 60,000 Salesforce subscribers.
But we're not going back to disclosing our number of subscribers each quarter. It's not a meaningful, revenue-based metric. We don't think investors should look to non-GAAP numbers. High-fidelity numbers like revenue, profit, and cash flow are things investors should measure us on. It didn't make any sense to me why people should anticipate a subscriber number. We're not just a one-product company. When we were a single-product company with salesforce automation, then it was apples to apples. Now it's apples to oranges.
The company's generating a lot of cash: $52 million last quarter, exceeding analysts' estimates by a long shot. And you have $571 million in cash on hand. How do you plan to use it? Will you make any acquisitions larger than the handful of small ones you made in 2006 and 2007?
The business churns out cash; it's a much purer representation today of [our] total business health. Our acquisitions so far have been small, insignificant transitions. We have a goal of getting $1 billion in cash on hand, and until we get to that, you won't see us do strategic acquisitions. In this industry, if you don't have $1 billion in cash on hand, then you're not doing your shareholders the best service. It gives you the protection to have a sustainable business over time. You will see margin expansion—it's part of our plan, and cash flow is the best leading indicator of this. It's also true in your personal life. I believe the phrase is, "cash is king."
So far, you've been managing the business to generate a slight profit or break even. Are there alternative ways to handle things?
We started including stock-based compensation in our numbers: Last quarter it was $14.2 million. We've also invested very heavily in [sales] and data-center infrastructure. We've had to build this company from scratch. We didn't buy this company—we built it. And you pay for that in the current quarter, though revenue is deferred. So even though I signed Citigroup, I'm not collecting any material revenue from them in this quarter. My contracts are timed, and there's revenue recognized each month. But we have more visibility because we know what's coming, which is why we've been so accurate in our forecasts.
Oracle CEO Larry Ellison said in November that he would deliver new customer management software early in 2008 to compete with Salesforce. And SAP has a new product coming out. Does the potential for these vendors to sell customers not just CRM, but an entire stack of software, make them more compelling?
I watched all the major keynotes at Oracle's recent conference, and I still can't figure out their strategy. It's not that I'm knocking their strategy; I just don't know what it is. Their innovation the last five years has been in the business model. But I have the highest respect for the company. They've doubled the revenues since I left nine years ago, to about $20 billion. Oracle has bought all these companies and is running them as independent units. They're becoming the General Electric (GE) of software. Oracle doesn't consolidate the sales forces, which I think is smart.
Speaking of acquisitions, do you think Oracle will end up buying BEA Systems (BEAS), which is pushing for a higher price than Oracle originally offered?
I don't think Oracle wants them. I think Larry is just screwing with Alfred [Chuang, BEA's chief executive]. That's just the way Larry does business.