Microsoft operating chief Kevin Turner outlined how the software giant is entering a "biggest innovation year ever" and took a jab at Salesforce.com and how customers shouldn't bet on an unprofitable company under generally accepted accounting principles.
Turner's argument, outlined briefly at Microsoft's partner powwow, isn't new. A few analysts have noted that software as a service companies aren't exactly churning out money on a net income basis. On a non-GAAP basis, which basically excludes all the bad stuff like depreciation, options and other hits to the bottom line, cloud companies look pretty good.
Here's Turner's money slide:
The big question here is whether enterprise customers should care. Obviously, Salesforce has shown it has staying power. The company is also the largest cloud application player. Revenue has grown each year and Salesforce has been adding sales staff. The company is clearly in investment mode and critics will note that sales efficiency has tanked as Salesforce chases after SAP and Oracle.
Overall, software as a service companies have a harder time raking in profits. License and maintenance revenue---a cash cow if ever one was invented---are replaced by subscriptions in a cloud model. It's a different ballgame entirely.
But here's the catch: Customers may be more concerned with how vendors make money not whether they are GAAP profitable. For instance, software vendors may not want to gloat about increasing maintenance fees each year like they're charging college tuition. In some cases such as a cloud model, customers may like that a company isn't raking in dough.
In any case, Turner's case is a bit flawed. A more apt comparison for Turner would be comparing Microsoft's cloud efforts, say Dynamics in the cloud or Office 365, on a net income basis. Chances are pretty good Microsoft is investment mode there too and losing money. It's also a good bet that Turner would never put up Microsoft's cloud financials (and I'd exclude Bing just to play fair).
The point: GAAP earnings don't always tell the tale. Salesforce's cash flow---also a way of measuring company's health---has been increasing on an operating basis.
In the end, Turner is trying to portray Salesforce as some fly-by-night startup. And why not? If Microsoft can project some fear, uncertainty and doubt maybe the company lands a few cloud sales. My guess is Turner's slide is some meat and potatoes for hard core partners and little more.
Here's the core financials on profitability and cash flow via Thomson Reuters.