Salesforce.com to fall short of half-billion target

Despite a strong set of results, there must have been some disappointment at Salesforce.com that it doesn't expect to close out the financial year as a half-billion-dollar company.

Despite a strong set of results, there must have been some disappointment at Salesforce.com that it doesn't expect to close out the financial year as a half-billion-dollar company. Although it trumpeted its latest quarterly results as marking the first time a software-as-a-service company has achieved a $500 million annual revenue run-rate (multiply the quarterly sales of $130 million by four and you easily blow through to an annualized $520 million), it also confirmed its revenue guidance for the fiscal year to 31st January 2007 at $493-$495 million — just $5 million, or one percent, below the magic half-billion threshold.

If salesforce.com were a conventional software company, putting on that crucial extra $5 million wouldn't be a tall order.The laws of physics make such a growth spurt virtually impossible The company would just need to sweeten two or three seven-figure deals and bring them in before the 31st January cut-off date. It's happened often enough at the likes of Siebel, Oracle and the rest. But salesforce.com doesn't operate to that model. Going into the final quarter, it already knows most of what it will do in the coming three months because its subscription revenues are contracted in advance.

Conjuring an extra $5 million in sales from somewhere isn't a matter of accelerating the pipeline for a handful of deals. The average value of each of its 27,100 customers last quarter was $4800. It added a record 2,300 net new customers last quarter, and its revenues rose $12 million, which averages out at just over $5200 extra revenue per new customer. So whichever way you look at it, generating an additional $5 million in the current quarter means taking on 1000 more new customers — 40% more — than it did last quarter.

The laws of physics make such a growth spurt virtually impossible, simply because of salesforce.com's size. Last quarter's 10.2% growth over the previous quarter is the most sluggish percentage growth Salesforce.com has achieved in recent years (neck-and-neck with fiscal Q4 2006, when it suffered several well-publicized server outages). In raw value terms, the $12 million uplift is also down on the previous two quarters, which added $13.4 million and $13.6 million respectively. And yet $12 million in new revenues alone is astonishing when you consider that's more than the total annual revenues of most successful SaaS vendors.

Salesforce.com is prudently predicting a similar percentage rise for the current quarter. To hit the half-billion-dollar figure for its annual revenues, it would need to do significantly better, adding a barnstorming $17 million in net new revenues, which equates to a 13.1% increase on the previous quarter. The company has had faster growth spurts in earlier quarters: Q1 this financial year was 14.9% up on the previous quarter, and in the previous financial year Q3 and Q1 put on 15.0% and 17.6% respectively — but at significantly lower revenue levels.

You can bet your bottom dollar that Marc Benioff and his executive team would dearly love to hit that half-billion-dollar figure for the financial year, and will likely pull out all the stops to do it. But whether they can achieve it or not is a finely balanced calculation, and not one to gamble on just now.

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