Salesforce.com: 5 nagging questions ahead

Salesforce reported another strong quarter, touted its Dreamforce powwow in September and CEO Marc Benioff rattled off a number of big deals. Clearly, the cloud and social enterprise movement is on Salesforce's side. However, there were a handful of questions worth pondering about the company.

These questions won't be answered in the near-term, but will become more notable as Salesforce develops into an enterprise software juggernaut on par with the legacy giants---read Oracle and SAP---that it's trying to slay.

More: Salesforce.com delivers strong Q2, raises revenue outlook | Dreamforce '12 preview: Get ready for next version of Salesforce platform | Howlett: The Dreamforce party dampener

Among the big questions:

How will Salesforce.com's Workday relationship evolve? This Salesforce-Workday partnership is one worth watching in the years ahead. Today, Salesforce and Workday are strong partners. Workday CEO Aneel Bhusri will be at Dreamforce. However, Salesforce is also announcing Work.com, the rebranding and relaunch of its Rypple acquisition. Meanwhile, Salesforce had been rumored to want to acquire Workday, which will soon go public. Benioff was asked about how Salesforce would address the financials and human resources management space. He said:

At Dreamforce, we're going to be announcing Work.com which is our rebranding and redevelopment of Rypple, you'll be seeing the new version of that and our direction there. We'll also have with us Aneel Bhusri, the CEO of Workday. And, you'll see how we are working hard to integrate with them to deliver a full HR suite to our customers between a Salesforce.com's work.com system and Workday. And, you'll also see Workday's integration with Chatter as well. We're very excited about our initial focus here into HR.

Indeed, Salesforce isn't going to compete with Workday today. In fact, both have common mutual foes---SAP and Oracle---and could engage in coopetition on some fronts for years. However, the cloud software market will mature and that reality will mean the key players are likely to combine. If you look at a few years, it won't be all that surprising to see either a Salesforce-Workday merger or a head-on collision. Salesforce and Workday combined are a cloud ERP system. NetSuite is also a cloud ERP system, but it's owned by Larry Ellison, who happens to run a not-so-little company named Oracle. 

Will Salesforce have to acquire an email marketing and lead generation partner? The company to data has focused its marketing cloud on social and Benioff nearly declared e-mail pitches as dead. However, email marketing can be effective. Benioff indicated that Salesforce's marketing cloud could add email at some point---most likely via acquisition.

Benioff said:

When we look at a lot of the traditional marketing vehicles like the lead generation vehicles or the e-mail marketing vehicles, those are areas that we did not jump into because we just didn't see the same rate of growth that we saw in social media marketing. To that extent, we've mostly seen those companies be flat to modest growth and, in some cases, down. And, we believe that fundamentally companies are moving away from e-mail as their marketing vehicle and lead nurturing away from -- lead nurturing as their marketing vehicles and towards social media management. And, that's why we're excited. Now, I'm not saying that we won't include at some point e-mail and lead nurturing into our Marketing Cloud.

If that's what our customers want make no two ways about it, we'll deliver it to them. But, right now it's through partnerships and one of the great things that Salesforce has developed is the AppExchange. If you go to the AppExchange you're going to see thousands of pre-integrated applications into these services.

I just don't see enterprises going all social and ditching email marketing any time soon. My guess is that customers will ask Benioff to acquire one of its partners.

Is Salesforce becoming too dependent on large deals? SAP and Oracle make or break their quarters with huge customer wins. Salesforce may be going down the same path. Salesforce won large deals with Allergan, Virgin America, Nestle and a large "networking technology" vendor---most likely Cisco according to analysts. That unnamed networking vendor inked one of the largest deals in Salesforce's history.

When it came to large deal dependence, Benioff did an interesting two-step. He said:

The first thing that I'll say is of course Salesforce.com is not dependent on any one type of transaction to make its quarter happen. We have a rich and full portfolio across small, medium, and large business, as well as small, medium, and large transactions. Salesforce.com had an outstanding quarter in large transactions.

We profiled some of those including Allergan and Virgin and Nestle and others. And, we also closed a very large transaction, in fact one of our very largest transactions ever, with a large networking technology company which consisted of both a very important renewal plus an extremely large additional ACV, or what we call first-year contract component. And so, it was really a great quarter for large transactions.

Translation: Salesforce doesn't need big deals (wink, wink) but boy they sure are nice.

How much will currency fluctuations affect Salesforce? Salesforce is becoming a global business with Europe and Asia hitting $500 million annual revenue run rates. As a result, currency fluctuations---notably Europe's economic conditions---will matter more. Benioff explained the Europe plan today:

In countries that we have not had a presence that are significant IT-oriented countries, we've talked about this in the last 36 months, we have invested not only in the UK, which has been an anchor for Salesforce in Europe, but we've also made major investments in France and Germany. Those are paying off and that is the acceleration that you're seeing today. We, as you know, have shied away from countries like Spain and Italy. We're really focused on the UK, France, Germany, and the Netherlands as the heart of our first stage of Salesforce's growth in Europe. We're really getting ready for that second stage of growth.

How will Salesforce's billings profile (and growth rates) change? Benioff noted that social enterprise license agreements have allowed Salesforce to sell sales, marketing and service clouds as one unit without per user pricing. In addition, Salesforce is cutting more annual prepaid deals---two thirds of contracts are annual now. Analysts noted that move to longer-term contracts changes Salesforce's profile. For now, those deals, which really kicked off a few quarters ago, are juicing growth. Going forward, those contract practices could become a drag on growth as annual billing practices hit the one-year mark in the fourth quarter.

Analysts asked Salesforce CFO Graham Smith about any pushback on annual deals given the economy. Smith said:

We've seen very broad acceptance from our customers. And, clearly there are always a small number of exception cases that I get involved with. And, remember I have to approve all of the exceptions to this personally. So, I'm able to get a sense of how this is going directly. We've seen a consistent shift, actually, over the last few quarters. Looking at whether we look at Q4 or Q1 or Q2, the overall shift has been around 5 percentage points, 2 percentage points annual away from semiannual quarterly, monthly. So, that's the shift.

And, certainly, as you say, we're right around two-third annual in most quarters. As you know, that goes a little above two-thirds in Q4 because we have more large annual contracts typically in the fourth quarter. But, roughly a five-point shift for the last few quarters since we've initiated the program...

I think when this anniversaries in the fourth quarter we would certainly expect the magnitude of the reconciling items we've been talking about to diminish. However, I think we're going to continue to see a shift toward annual billings for at least the next 18 to 24 months from now.

We still have plenty of customers, as I mentioned, where we've got roughly two-thirds paying us annually. And, the other one-third are paying us either semiannually or quarterly, and then a small number monthly. We've still got all of those customers at some point to renew.