SmoothSpan Blog

For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

Salesforce.com Prooves the SaaS Point

Posted by Bob Warfield on February 28, 2008

SFDC is up big in the markets this morning on great quarterly results.  Importantly for SaaS skeptics, profitability is also way up.  Equally as important is management’s commitment to continued improvements.  They’re projecting over a billion dollars in revenues and 32-33 cents a share in profitability, up from not quite $750M and 15 cents this year.  In other words, profitability is expected to increase even faster than revenues.  Salesforce will evidently be more efficient going forward. 

I’ve said for a long time that it’s cheaper to acquire SaaS customers than perpetual customers, and that the only reason companies like Salesforce aren’t more profitable is that they’re throttling expenses to maximize growth.  With Salesforce coming up on the $1B mark, there will be less need to spend so much.  Growth has flattened a bit, although its still excellent, and as they’re coming up to the $1B mark, the brand, and more importantly, SaaS itself, is well established.  Time to dial back on the aggressive spending a bit and show how the business can shine for shareholders.

Various pundits have speculated on whether SaaS is recession proof.  I’m not sure anything is truly recession proof, but a recession certainly favors SaaS over the traditional On-premises model.  Why?  Because the risks are lower for SaaS, the up front costs are lower, and it’s just plain easier.  When you’re facing a recession with budget cuts, that matters a lot more than getting best of breed or starting some new boil-the-ocean IT project.

The next shoe to drop will be the acquisition game.  As Salesforce makes its shares more valuable through increased profitability and continued growth, they create a valuable currency that gives them an unfair acquisition advantage.  Simply put, if their stock is more valuable than what they acquire, they newly acquired profits and revenues will be more highly valued too.  This creates the sort of virtuous cycle that has kept Oracle going lately, and is an important tool in the growth arsenal as a company reaches that stage where it has an unfairly valuable currency with which to acquire.

There are certainly lots of great targets out there, but Salesforce will need to be careful to look at companies that can be folded in with a minimum of trauma.  Avoid products that have high installation costs, for example.  Increasing Salesforce’s market cap will also be important to warding off the bigger fish, such as Oracle, that may want to acquire them.

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