Josh Greenbaum is a curmudgeon (and a fellow Enterprise Irregular). I don't think I'm speaking out of school here, in fact I would hasten to say he probably wears that badge with pride. Like many curmudgeons, much of his perspective can be a worthwhile reality check in an industry that tends to look on the bright side of things. As an investor, I'm usually appreciative of differentiated perspectives, contrarian viewpoints, and challenged assertions.
But today I can't help but wonder how Josh got so off track with his latest misbegotten musings.
It’s finally time to call a spade a spade, or in this case, a soon-to-be has-been a has-been. Of course, doing so after the fact sounds too spiteful, so I’m going to do it well ahead of the curve. While these kind of predictions are hard to get right, I think I’m calling this one correctly, based in part on a similar call I made five years ago.
My prognostication is about Salesforce.com, and here goes: Salesforce.com is the next Siebel, the next CRM has-been, the next low-priced software buyout opportunity, unless somehow the company gets sold before its stock begins to tank or it engineers a remarkable turnaround from its current moribund strategy. It may take a couple of years, and there may be some big blockbuster announcements and a couple of good quarters in the interim, but it’s gonna happen, and it’s gonna be ugly...[continued]
I encourage you to read Josh's entire piece in its entirety. Let me now discuss with you the many ways I think he's missed the broad side of the barn here.
Josh says:...I had a similar epiphany (pun-intended, all you ex-Epiphany customers and shareholders know what I mean) about Siebel way back in ’02 (and Epiphany from the get-go, BTW). Remember Tom Siebel, the man “who could see around corners” (at least according to a glowing cover BJ from Forbes). Sometime in mid-2002 I started seeing three problems with his business model, all of which seem to be repeating themselves five years later with respect to Salesforce.com...[continued]
Taking credit for calling Siebel's demise in "mid-2002" is akin to declaring Joe Montana was a talented QB on the day of his Hall of Fame induction. For those with neither the energy nor preclusion to look back at the state of Siebel five years ago, allow me:
- Q2'02 License revenues -- $170.1mm (down 41% YOY)
- 1H'02 License revenues -- $416.2mm (down 33% YOY)
- Q2'02 Total revenues -- $405.6mm (down 28% YOY)
- 1H'02 Total revenues -- $883.4mm (down 24% YOY)
- Q2'02 Operating income -- $37.2mm (down 66% YOY!)
- 1H'02 Operating income -- $127.6mm (down 42% YOY!)
- Q2'02 Operating margin -- 9.2% (vs. 19.8%)
- 1H'02 Operating margin -- 14.4% (vs. 18.8%)
Those numbers paint a bleak picture. Let's also not forget that Siebel was involved in those nefarious "swap transaction" that were de rigeur of the times. According to SEC filings, $50.4mm of Siebel's 1H'02 revenues were from vendors who also sold Siebel services and goods. Oh, and Siebel also announced a 16% reduction in its global workforce to boot.
Should we even both comparing the state of Siebel when Josh "called their demise" with the current state of salesforce.com?
- Q1'07 Subscription revenues -- $147.7mm (up 56% YOY)
- Q1'07 Total revenues -- $162.4mm (up 55% YOY)
- Q1'07 Operating income -- $12.1mm (up 62% YOY)
- Q1'07 Operating margin (ex stock comp) -- 7.4% (vs. 7.1%)
- 35% INCREASE in headcount
- Deferred revenues -- $296mm (up 62% YOY)
- Off balance sheet bookings > deferred revenues
Now, let's take a look at Josh's "three problems with the business model"
Sometime in mid-2002 I started seeing three problems with his business model, all of which seem to be repeating themselves five years later with respect to Salesforce.com:
Josh says...1) Siebel’s claims to deep integration with the rest of the ERP stack were exaggerated. This lack of integration made it much easier to rip and replace Siebel, and therefore left it vulnerable to…
My retort...The world has changed. We're in a time when open APIs actually mean something. SAP and Oracle are betting their futures on the premise of object-oriented architectures. Integration, while never trivial, is a different conversation today than it was five years ago.
Josh says...2) An increasingly robust set of offerings from SAP and Oracle: while not necessarily as robust as Siebel, the value of out-of-the-box integration greatly exceeded the Siebel’s best-of-breed value-add.
My retort...Somewhere in my office, I still have a product map provided to me from Siebel about five years ago displaying the breadth of their offering. They took pride in having several HUNDRED modules. They sold on the breadth and feature-richness of their application. Salesforce does not. Salesforce has gained a $700mm place at the table because of EASE OF USE. A handful of tabs. Ease of deployment. Ease of integration. The fundamental message that drives salesforce is not functional parity.
SAP and Oracle ALREADY HAVE CRM solutions with more bells and whistles. That's not the point. That's not what buyers want. What they don't have (or at least haven't displayed yet) is a real understanding of SaaS and utility computing. They haven't shown a product or sales strategy that will allow them to deliver a pure on-demand SFA solution at a price point that competes. Maybe they will, but having just spent time listening to Oracle's OnDemand update and looking at what SAP has to offer at Sapphire, I have to ask what Josh has seen that makes him think SAP and Oracle have closed the gap.
Josh says...3) The lower-cost Salesforce.com model was looking like a much better deal than high-priced Siebel, particularly considering points 1 and 2.
My retort...As of this last quarter, Salesforce's ASP was approximately $69 per user per month. On an annualized basis, that's $828 and includes any related hardware costs (since CRM provides their stuff on a hosted basis). Compare that to Siebel's ASPs at the time of their downfall. According to this article, the annual per user cost for a Siebel license was somewhere between $12,000-$25,000. We're talking about orders of magnitude here. Is Josh presupposing that there are now offerings that offer a more compelling price to value paradigm? Seriously?
Before we continue on with Josh's claims, let's take a moment to further compare and contrast salesforce.com with Siebel.
- Perpetual license vs. subscription -- Every quarter, Siebel started anew. Such is the problem with perpetual software. You get to bank a very profitable 15%-18% in annual maintenance renewals, but to grow year over year you need to find a way to replace the other 82%-85% of revenue and then some. In the perpetual model, there are only two ways to do that...1) Find new customers and 2) Sell more stuff to your existing customers. Inherently, the ability to correctly forecast demand and, coincidentally, build the organization at the right pace, was far more difficult than with a subscription business where SfDC has an excellent idea of what it's revenue stream is going to look like month by month.
- Shelfware -- A byproduct of selling perpetual software is, and will always be, shelfware. And CRM was inarguably the most egregious area. By some estimates, as much as 60% of purchased CRM seats were never deployed. More conservative estimates put it around 25%-30%. Either way, that's a massive amount of wasted money. With SaaS, you don't have that problem, at least not for long. Customers buy seats and provision them as needed. And they stop paying for them when they don't. Simple and elegant. And MUCH different than how things used to be. For Siebel, in its heyday, it was all too easy for Siebel to offer "volume discounts" to the tune of another few hundred seats. A CIO would rationalize the purchase by saying, "well, we'll use the seats eventually." Never happened.
- Feature Bloat -- Another byproduct of perpetual licenses is the drive to upsell features [some of which are yet to be coded!]. Customers that bought call center automation were convinced to buy self-service, and e-mail marketing at a discount! Sure, they didn't have immediate use cases for deploying those technologies, but what the heck? It was AT SUCH A DISCOUNT. Meanwhile Siebel [and everyone else in the game at the time] was getting CIOs to spend millions of dollars on features they would NEVER USE.
- Customer service and satisfaction -- No software company is going to have 100% customer satisfaction. The larger you get, the easier it will be to find dissatisfied references. Intuitively, Siebel's claims of 90%+ customer satisfaction never "felt right" did they? Yet, herein was the problem. When you've just spent $20-$30mm on an enterprise-wide Siebel implementation, how do you even think about leaving them if customer service is poor? You have to justify that massive upfront purchase by working down the amortization over years. Siebel [and other perpetual software vendors] weren't heavily incentivized to keep customers happy. They knew it was all but impossible for them to leave. Can you say the same for salesforce? I don't doubt they have their share of unhappy customers. Such is life. But when you're on a subscription model, it's a LOT easier for customers to vote with their checkbooks. Yet, I defy any analyst to point toward a tangible metric which argues that's happening to salesforce. 50%+ growth and less than 1% attrition argues that very few customers are dissatisfied to the point of it being a problem.
- Financial transparency -- I can't stress the importance of this enough. As an investor, the beauty of the SaaS model is transparency. There is no need to read the tea leaves. We will KNOW when salesforce's growth is slowing. A huge chunk of salesforce's backlog is visible ON THE BALANCE SHEET. That was never the case for Siebel or other perpetual software companies. In a perpetual software model, you had no way of measuring the status of the pipeline from quarter to quarter beyond making channel inquiries. It was guesswork for not only investors, but the COMPANY ITSELF. When you run your business using a monthly renewal system, it's far more difficult to game the system. This is not to say salesforce won't ever fall short of expectations, or lower guidance. But it's all but impossible for them to miss on the order of magnitude we saw from Siebel five years ago.
Josh's final contention relates to Marc Benioff's penchant for promotion:
The parallels, unfortunately, regarding Marc’s claims for App Exchange, his one strategic ticket out of his current mess, are a little too similar. Marc has been making lots of exaggerated claims about App Exchange, the value of the VC money that has been thrown into App Exchange, and other issues regarding how well his company is really doing. I’ve written some about this, others like Phil Wainewright have weighed in, and a few more in the blogosphere (Sinclair Schuller in particular) have also noted the credibility gap that Marc is building for himself.
My retort...First of all, bravado is par for the course in enterprise software. Whether it's SAP's promise of 100,000 customers by 2010 or Larry Ellison's perpetual declarations of dominance over each piece of the software stack, there is always going to be a tendency by this industry's CEOs to put lipstick on a pig. It's ALWAYS important to challenge the assertions of any executive. They are going to try their best to slough off the problems and fluff up the opportunities. But at the end of the day, I don't hear Benioff making any declarations about how initiatives like AppExchange or Koral or Apex are going to drive near-term business results that they've failed to back up. In fact, if anything I think he and CFO Steve Cakebread have UNDERplayed their ability to grow revenues outside of the traditional SFA category.
Josh concludes with why he's SURE salesforce.com is the next Siebel...
So how can I be sure that Salesforce.com is the next Siebel? To be sure, I’m more ahead of the curve today than I was in 2002. By the time my second column had come out on Siebel’s survey hooey, the wheels were already falling off. Whereas SF.com probably has a couple of good quarters left in it. But the wagons are circling, and so far Marc’s only chance for turning things around is so unsuccessful that he’s resorted to bluster and BS about what’s really happening.
What wagons is he speaking of?
- Does Josh realize that salesforce could see a 3x-4x decline in its growth rate and still be growing faster organically than SAP and Oracle?
- Does he not see that SAP and Oracle have both found SaaS religion [in rhetoric, if not deliverables] as a result of what Benioff and company have done? Is SaaS declining in importance as a category?
- Have studies come out suggesting that fewer CIOs are interested in deploying SaaS?
- Has Marc's "bluster and BS" led to missed financial targets?
- Have bookings stopped growing 5x the industry rate?
- Is SfDC still not, BY FAR, the fastest growing enterprise applications company?
- Has SfDC stopped winning deals among SMEs, or have SAP and Oracle started to?
- Are customers unsatisfied?
- Are they not winning larger deals against entrenched ERP vendors anymore?
- Have SAP or Oracle produced a new product and delivered tangible results against them?
- Have deferred revenues stopped growing at 50% per annum?
- Are ASPs declining?
- Is there evidence of shelfware?
- Does SfDC still not have highly valued stock currency with which to make acquisitions (where is SfDC's Scopus, I wonder)?
- Is SfDC suffering customer attrition?
- Are its incubators not fully stocked?
- Have 100 of 250 ISVs not signed up for AppStore referral?
- Have companies like DreamFactory, CRMfusion, Vertical Response, Keiden and Koral not built real businesses off AppExchange?
- Has Apex been panned by analysts or customers in the early going? Have 10,000 customers not installed apps from AppExchange?
There are PLENTY of questions in front of SfDC. I'm not yet convinced AppExchange is going to be a major league platform. We have no way of knowing whether Apex will lead to significant growth in the partner community. As an investor, I struggle with when we should demand more of the company's monthly revenue to flow through to net income instead of fueling further growth. I ask myself if they're spending enough on R&D. I'm all for asking questions, I'm just not for misbegotten prognostications.
Note: This is not a
recommendation to buy or sell CRM, ORCL, SAP
or any other security, but is merely a personal analysis to foster
discussion for informational purposes only. At the time of this
writing, I and/or funds I maintain discretionary control over
maintained long equity position in CRM but did not
maintain a position (long or short) in ORCL or SAP . We
also may, at times, carry derivative options on underlying positions as
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