Salesforce.com: Is subscriber growth slowing?

Salesforce.com decided last quarter that it won't disclose quarterly subscriber totals.

Salesforce.com decided last quarter that it won't disclose quarterly subscriber totals. But that move only raises more questions.

In many respects, Salesforce.com's first quarter was very typical. The company reported a profit of a penny a share and revenue of $162.4 million. It also upped its outlook and touted a big customer win--Japan Post, Japan's postal service that is being privatized.

Nevertheless, there is some unease about Salesforce.com. Here's a look at the key concerns:

Subscriber growth maybe slowing: When a company stops reporting quarterly subscriber totals it's often because growth is slowing. This lack of transparency irks analysts. Friedman Billings Ramsey analyst David Hilal calculates that Salesforce.com added 38,500 to 47,500 subscriptions based on the company's average revenue per user calculation of $73.25. While those subscriber totals are nothing to sneeze at Salesforce.com added 90,000 new subscribers a quarter ago and 45,000 in the first quarter a year ago. "While we expected these to be down sequentially, it looks as if these might also be down on a year over year basis," says Hilal.

As for the customer count, Salesforce.com (all resources and drilldown) added 2,500 new customers, down from 2,700 in the fourth quarter and 2,220 a year ago.

Capital expenditures are a worry: Salesforce.com's operating margins were 8.1 percent, below the 9 percent most analyst projected. CFO Steve Cakebread noted that Saleforce.com could easily pare back its spending if it wanted to accept lower growth rates, but that move "would be short-sighted."

 

"We are fundamentally disrupting an industry at a time when market momentum is moving in our direction and the competition is struggling to evolve. The investments we are making to date are essential for us to emerge as the dominant on-demand application and platform company of the future, and thus levering too quickly creates risk in achieving that goal," said Cakebread on the company's conference call. The company didn't outline its chocolate budget.

Competition: CEO Marc Benioff was pretty blunt about how the company sees rivals such as Oracle and SAP. He said:

"We are all about changing this game in the software industry with basically two things, a new technology model and a new business model. These two new models are very, very different than what Microsoft or Oracle or SAP do, or have done or even do today. When it gets right down to it, no sector of the software industry has more interest from customers than on-demand. Everybody wants to understand on-demand and go into on-demand, but really Salesforce.com and other pure play software service companies are able to bring those customers that vision of the future and innovation. People look to us as innovators. People look to us as basically the visionaries in on-demand computing.

The reality is they don’t look to those companies for that because they haven’t provide that. They’ve had rhetoric or they put their words there but they haven’t delivered the technology, the solutions and just think about it -- who are their top customers? Who are -- Oracle, SAP, and Microsoft, what are their top large customers in on-demand?

Hilal, however, noted that at least some of Salesforce.com's 53 percent increase in operating expenses in the quarter was due to spending "in order to fight increasing competition."

Hilal's take is true to a degree. As Salesforce.com moves upstream it will increasingly butt heads with the likes of SAP and Oracle.

Overall though it's hard to argue with Salesforce.com's success thus far--the win of Japan Post will give the company a foothold in the Japanese IT market. At Japan Post, Salesforce counts 5,000 subscriptions, but the postal service has 400,000 employees so there's upside to be had.

However, declining to provide quarterly subscriber totals is a bad move. While management doesn't view the metric as relevant it is less transparent to company watchers. Jeffries analyst Robert Schwartz noted that the Salesforce.com conference call "felt far less transparent than in the past." That's because it was.

For instance, Schwartz noted that Salesforce.com was mum on how it will monetize its Apex platform. It also didn't detail pricing or features. Additional detail on AppExchange has also been lacking. Schwartz says more details may come Monday at Salesforce.com's developer conference in Santa Clara.