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.