Dell bets on Salesforce.com's platform as a service

Dell bets on Salesforce.com's platform as a service

Summary: Amid a quarter that Salesforce.com CEO Marc Benioff called "spectacular," but spooked analysts worried about future growth was an interesting nugget: Dell has jumped on the platform as a service bandwagon.

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Amid a quarter that Salesforce.com CEO Marc Benioff called "spectacular," but spooked analysts worried about future growth was an interesting nugget: Dell has jumped on the platform as a service bandwagon.

On Salesforce.com's second quarter conference call (earnings recap, InStranet acquisition) Benioff revealed that Dell signed a three year deal to use force.com to build applications through 2011. Specifically, Benioff said:

Of note, Dell has signed a three-year agreement through 2011 to use the force.com platform to build and deploy applications to their entire global workforce. This was the single largest transaction in our history and makes Dell one of our most diverse customers. Dell will use Salesforce services for sales force automation, partner relationship management, innovation management through their Dell ideastorm.com website, customer support, and full enterprise wide application and deployment using force.com platform as a service.

The Dell deal could be characterized as a classic Salesforce.com upsell. Here's the history of Dell events per Benioff:

You know, what we originally started with Dell, as I’m sure you know, is we built the ideastorm.com website for them using our Ideas technology. We deployed the Salesforce automation system for them, for all of their sales force worldwide, which is a substantial organization. And then we also helped them enter the indirect channel through delivering the Dell wall, which is their partner portal based entirely on our partner relationship management technology. And then we saw them having interest in customer support. Then they came to Dream Force last year and got very excited about building on force.com and building custom applications. We also have been working with some of their key software providers to port some of the applications that they have internally natively onto force.com for them to use. And all of that together, suddenly we were one of their key technology vendors and it really gave them the ability to sign what we call an enterprise license agreement with us. And that is a three-year agreement that goes through 2011, and it is for their entire global workforce. And as I said, it is the largest transaction that we’ve done.

That Dell Force.com buildout will be worth monitoring in the future. But the Dell win will likely be overshadowed on today as analysts debate Salesforce.com's deferred revenue and billings in its fiscal second quarter. Salesforce.com's billings (revenue plus the change in on balance sheet deferred revenue) of $272 million were up 34 percent from a year ago, but that's off 2 percent from the first quarter. In the second quarter a year ago billings were up 46 percent.

As Dennis Howlett notes, it appears that Salesforce.com's growth rate is slowing. However, there may be a few moving parts here. William Blair analyst Laura Lederman has a few theories on the growth equation for Salesforce.com, which will obviously have a more difficult time growing as it becomes a larger company.

Theory 1: Salesforce.com's business is becoming more seasonal. In the fourth quarter, Salesforce.com had calculated billings growth of 71 percent. That growth may have drained the pipeline for the first half, says Lederman.

Theory 2: Salesforce.com is selling to larger companies that like to be billed annually. Lederman explains:

Turning to a more complicated view of deferred revenue additions and subtractions, most large companies are billed annually. For illustrative purposes, assume that 100% of the $140 million that salesforce added to the deferred balance in the January quarter were yearly billings. Therefore, halfway through the year, the company would have amortized $70 million on the income statement, bringing deferred for those accounts down to $70 million. These accounts would then be drained all the way to zero until the anniversary of the initial bill dates when the balance would return to $140 million (assuming no upsell). The impact on the deferred account by businesses that are billed quarterly can be even more complicated— if the invoicing date moves slightly, it can have a material impact on deferred revenues. For example, if a customer is billed on the last day of the period, the quarter-end balance sheet would show a full quarter’s worth of billings. If instead the billing slipped a day, then the following quarter’s deferred balance for this account would be zero.

Theory 3: Salesforce.com is becoming seasonal like most larger technology companies. The summer sales cycle is a slog.

Simply put, gauging Salesforce.com's future demand isn't clear cut. Then there's a disconnect between what Wall Street is monitoring and how Benioff runs the company. Benioff said:

I can tell you that managing the deferred number is not something that we do internally. It’s not part of our goals. Our goals are to close as much business as we possibly can close and to have as many sales people on the street that we can have and deliver the best technology possible, and those three things together deliver the unparalleled customer success that we’ve had in the company.

Nevertheless, the majority of questions from analysts hinged on the deferred revenue figure. The Salesforce.com growth debate will continue.

Topics: Dell, Enterprise Software

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3 comments
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  • Deferred revenues?

    I don't buy the deferred revenue argument. It doesn't make sense. If anything, having larger enterprise deals helps SFdC because it means the running Q's have guaranteed levels of income.

    Checking the last couple of Q's, there's no real change in deferreds so I'd suggest this is a non argument. If there were violent swings then it would be worthy of comment.

    However, the level of deferreds compared with top line is falling on a pro rata basis. That would confirm my contention that SFdC is figuring a general reduction in the 2H
    dahowlett@...
  • Salesforce bets on a large sales force

    From the quoted comment:

    Our goals are to close as much business as we possibly can close and to have as many sales people on the street that we can have and deliver the best technology possible, and those three things together deliver the unparalleled customer success that we???ve had in the company.

    [End quote]

    So much for the internet as a way to cut marketing/sales expenses and for open source in particular surviving on word-of-mouth.
    Anton Philidor
  • Is Salesforce.com the new ADP ... or the next Datapoint?

    Is Salesforce.com the new ADP ... or the next Datapoint?
    What will happen if blue sky clears the cloud?

    ***

    This headline recently appeared in several places across the Web:

    "Salesforce.com Passes $1 Billion Annual Revenue Mark"

    THIS IS NOT TRUE. I don't know whether this material misstatement arose from media manipulation or an honest mistake, but it's genesis is most likely this 20 August 2008 press release...

    "Salesforce.com Announces Record Fiscal Second Quarter Results"
    http://tinyurl.com/5m5mea

    ...the subheading of which claims:

    "First Ever Software as a Service Company to Exceed $1 Billion Annual Revenue Run Rate"

    THIS IS NOT TRUE, EITHER. "Software as a Service" is marketing technospin for "service bureau". And payroll processing giant ADP--another service bureau--exceeded not only a "run rate" but actual annual revenues of $1 billion in 1985:

    "The original outsourcer, Automatic Data Processing..."
    http://tinyurl.com/56y5tx

    Yes, SalesForce.com did report revenues of $263 million for their most recent quarter. And yes, they have raised "FY09 Revenue Guidance to $1.070 - $1.075 Billion". But NO, Salesforce.com has NOT passed the "$1 Billion Annual Revenue Mark". And despite Cheerleader/CEO Marc Benioff's effusive exuberance, some like Tiernan Ray do not share his enthusiasm:

    "Salesforce's Deferred Revenue Debacle"
    http://tinyurl.com/6oagtp

    Perhaps in an effort to meet ever-inflating investor expectations--a fire they themselves have fueled--Mr. Ray notes that Wedbush Morgan analyst Michael Nemeroff "...thinks Salesforce may be pushing customers to sign more multi-year subscription contracts by lower prices, which could be hitting deferred revenue." And reading that, for me, brought on a disturbing case of Datapoint deja vu:

    http://tinyurl.com/gk77r

    "By the early 1980s, Datapoint was a Fortune 500 company. Under immense pressure to increase sales figures, its sales representatives encouraged customers to place large orders at the end of the fiscal year, permitting the company to count the orders as revenue even though the money had not been received and, in some instances, the sold equipment had not yet even been produced.... When some of the customers went broke before paying their bills, Datapoint had to reverse sales or record substantial bad debts, which caused the company to lose $800 million of its market capitalization in a matter of a few months in early 1982. The U.S. Securities and Exchange Commission (SEC) ordered Datapoint to stop this practice."

    Is Salesforce.com the new ADP ... or the next Datapoint? Some say their business model is to take your watch and then bill you for the time. If so, what will happen to all those watches if blue sky clears the cloud?

    Bruce Arnold, Web Design Miami Florida
    http://www.PervasivePersuasion.com
    MiamiWebDesigner