Salesforce surge foretells cloud evolution

A good quarterly report should encourage resellers and vendors alike to analyse the CRM provider's strategy, notes Larry Walsh

When people think of Saleforce.com, they immediately think customer relationship management (CRM). After all, Saleforce.com was built on disrupting the staid CRM market by making it available to more buyers as a cloud service.

But Salesforce.com is so much more than CRM, as shown in its latest quarterly earnings report. The cloud company posted stronger than expected earnings and profits as demand for its other cloud business applications such as human resources, customer service and marketing application surged.

And the surge wasn't just in volume but value, as the company landed nine deals worth more than $10 million each.

Sales topped $834.7 million for the quarter -- slightly better than the estimated $830.9 million.

The big indicator in Saleforce.com's fiscal health is the type of deals it was signing; 80 per cent of new engagements were annual recurring contracts, giving Saleforce.com a predictable and sustained revenue outlook.

Sales and growth are so strong that chief executive Marc Benioff told analysts that Salesforce.com could pass SAP this year as the world's largest supplier of customer management software.

There were a few trends worth noting, in my view, in the Salesforce.com earnings.

Growth is coming from non-core CRM applications. Salesforce.com has been branching out into line-of-business applications that traditionally attract non-typical IT buyers. As a result, it is finding new pockets of money to tap.

Salesforce.com buyers are, increasingly, larger companies. As several analysts noted, Saleforce.com seems to be landing as many whales as schools of small fish.

This is significant, in my opinion, as it shows enterprises are increasingly willing to put more faith in cloud services, as opposed to traditional mission-critical, on-premises applications.

Value and sustained revenue is coming from business analytics, marketing and revenue-generating applications.

Benioff noted that Salesforce.com is looking to buy more marketing companies to enhance its appeal to chief marketing officers and other marketing folks.

Salesforce.com sees and is building value in non-infrastructure apps and clouds.

These trends are notable because they show the direction cloud computing is evolving in.
Where much of the market is focused on pushing conventional infrastructure into hosted environments or converting basic applications such as email and office software into cloud services, Salesforce.com is establishing itself on the next cloud level of providing automated, and potentially managed, business processes as a service.

Conventional cloud services are quickly commoditising, being reduced to low-price sales. This is unfolding in the hosted services market as companies such as Rackspace and Amazon continue to cut prices to attract customers.

Recently, Rackspace slashed data transfer prices by a third. The price cut was in response to changes in Amazon's pricing, which drove down administrative costs by a similar amount.

The same phenomenon is seen in Microsoft's quest to transform its traditional Office products to cloud services. Last week, Microsoft opened Office 365 to partners for general sales and administration.

This means all Microsoft partners can resell and bill for the cloud service. Microsoft is doing this to expand market reach and accelerate sales. In doing so, Microsoft will flood the market with supply points, ultimately driving down prices and value-add opportunities.

Salesforce.com is showing, yet again, it's in the vanguard of cloud computing evolution.

It's aiming at sustainable value and rising about the din of commoditiasation. This is something that other vendors and resellers should consider when embarking on a cloud journey.

However, building cloud market share is expensive. While Salesforce.com is growing revenue and, on paper, profit potential, it continues to operate at a loss.

Expenses exceeded revenue by $20 million,five times as high an operating loss as in the same period the year before.

Salesforce.com is spending heavily on sales and account acquisition, setting itself up for future growth rather than short-term profits. That's the price Salesforce.com is paying for its future ambitions.

Larry Walsh is president and chief executive officer of Channelnomics

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