Salesforce.com (CRM) is on a roll, having guided the Street to expect $700mm in Calendar 2007 (FY08) revenues; implying 40%+ revenue growth. If SfDC successfully meets its guidance, it will put in among the top 40 software companies in the world and well on its way to the mythical $1 billion mark which has been a true rarity over the industry's history. I'm not going to discuss the stock or its valuation [that's for you to decide], but the revenue trajectory is particularly impressive for two reasons:
- The industry has matured...we're no longer in the days when dozens of industry players are growing 20%/30%/40% per annum. 40% growth off a $500mm base was one thing in 1999, it's entirely another in 2007.
- The growth has been organic [primarily]...SfDC isn't growing through acquisition. Yes, they acquired Sendia and Kieden, but combined they make up a very small component of SfDC's revenue base.
SfDC has been a hot topic among the Enterprise Irregulars lately; from SIs embracing SaaS to Apex to ApexConnect to the recent earnings results. During one particular thread, the subject of SfDC's competition came up; and I was surprised by the lack of consensus. The reason for the lack of clarity on some of my EI counterparts is understandable for several reasons:
- Salesforce's marketing machine works very hard to skew the reality
- The big incumbents work equally hard to skew the reality
- The SaaS upstarts try (but often fail) to skew the reality
- The 2nd tier on premise hangers on are well served to downplay the reality
So here's my quick and dirty take on Salesforce.com's competitive landscape:
- Big ERP (Oracle and SAP) -- To hear Marc Benioff tell it, his company competes against the old way of software computing. There's a reason the SfDC logo is a "no software" button. And it behooves Benioff to portray SfDC as the David who's going to take down the duopolistic Goliaths in Redwood and Waldorf. And that mentality (and marketing messaging) extends throughout the entire DNA of the company. Yet, this is more about tomorrow's inevitability than today's reality.
For every Cisco (which went from 7,500 to 15,000 subscribers last quarter) there are thousands of small deployments. As of last quarter, SfDC had 27,100 customers and 556,000 subscribers...that's an average of 20.5 subscribers per customer. Compare that to SAP (12 million users, 36,200 customers).
What's interesting on this front is that both sides help perpetuate the myth. SAP and Oracle doth protest too much, and are intimately aware of everything SfDC does. Neither wants to lose a major enterprise customer to them, and they have both tried hard to downplay the significance of SaaS while at the same time portraying themselves as emerging participants in the services-driven delivery model.
Clearly, over time, SAP and Oracle will compete more directly with SfDC as they move downmarket while SfDC continues to push upmarket. But for now? Talk to bag carriers at all three vendors and ask them how often they face off against each other.
- Microsoft Dynamics -- Dynamics generated $919mm in revenues during FY06, which included approximately $470mm in license revenues. Although MSFT doesn't break out the individual components of Dynamics license, they did attribute the majority of license growth to new seat additions for Dynamics CRM. Why don't we hear more about MSFT vs. SfDC? 1) SfDC doesn't market against Microsoft aggressively. 2) Dynamics is too small a portion of Microsoft's overall business for many to pay attention to.
- Sage Group -- As an American I am guilty of paying too little attention to Sage. My friend Dennis Howlett does good work keeping tabs on them, but we here in the U.S. forget that they're not only one of the major players in Europe, but generated more than $600mm in U.S. revenues this fiscal year. Sage drives much of its growth through acquisition, and is unapologetic about it. But when you look at its CRM portfolio, you realize that Sage is squarely in the SfDC competitive cross hairs. ACT! and Saleslogix are two of the major incumbent brands among SMBs...many times when an SMB is making the decision to buy SfDC, it's coming at the expense of Sage brands (and the de minimous organic growth for Sage would lend credence to that assertion). What percent of SfDC wins come against Act! and Saleslogix? I don't have accurate data there, nor should we expect that data from either side. The incumbents don't want to admit to losing share to the SaaS juggernaut, and SfDC would much rather focus on the wins against the big boys (which are perceived by the market as more significant).
- The other mid-market incumbents (Pivotal, Onyx) -- Pivotal and Onyx used to be kings of the midmarket; finding a niche just under the realm where Siebel, Clarify and Vantive dominated. Today, both vendors have been swallowed up (by CDC and M2M Holdings, respectively) as the acquirers look to capitalize on the predictable cash flows their maintenance revenues streams provide. Pivotal was consolidated into CDC in 2004 while M2M acquired Onyx earlier this year. At the time of the acquisition, Onyx was floundering, generating a meager $2 million in license revenues in its last publicly disclosed quarter (Q1-06).
- Other SaaS plays (NetSuite, RightNow, others) -- SfDC is the largest and most visible SaaS vendor, but it's not the only one. I've written quite a bit about both RightNow and NetSuite, both of which compete head-to-head against SfDC frequently enough. NetSuite hasn't shown the ability to scale into Global 1000 enterprise deployments, but is a competitive alternative among small businesses and departmental bake-offs. RightNow, via its acquisition of Salesnet, is seeing SfDC more often. There are lots of other SaaS startups out there, one or two of which are eventually likely to become THE threats to SfDC's dominance (just as SfDC was once the little engine that could fighting against the on premise status quo).
- Homegrown and Custom -- CRM has been around for so long, and has become such a prominent component of the enterprise application topography that we mistakenly presume it's ultra-saturated. Yes, a great many companies (large, medium and tiny) have implemented some measure of SFA functionality. But don't underestimate the amount of greenfield opportunities that exist, particularly among small businesses. I can't tell you how many conversations I've had with companies that would be categorized as SMBs who admit in an honest moment that most of their sales prospect and pipeline management is done through email and Excel. The appeal of buying a service and paying for it monthly with limited upfront costs has helped drive adoption among the homegrown crowd; something that even the lower price point, on-premise CRM vendors had difficultly doing.
Salesforce.com has maintained for some time that its mix of business is roughly 1/3rd large enterprises, 1/3 medium-sized enterprise and 1/3 small businesses. Hardly scientific, but logical to accept when you look at the basket of vendors they're competing against. From a trend perspective, SfDC is going to face off against SAP and Oracle increasingly in the coming years. SfDC is moving up market, and broadening its reach in a variety of ways. Meanwhile Oracle (which already has a strong foothold in the mid-market via J.D. Edwards and Peoplesoft) and SAP (also a surprisingly large SMD presence and a major focus for future growth) are moving down market. But, for now, as much as the vendors themselves and Wall Street would like to think otherwise, SfDC is beating up on a lot of other folks a lot more than they are giving Henning and Larry's crew fits.
Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained long equity position in CRM, CSCO, MSFT and SAP but did not maintain a position, long or short, in any CHINA, ORCL, RNOW or Sage. We also may, at times, carry derivative options on underlying positions as a hedge.