Salesforce.com leverages AppExchange as outsourced R&D...acquires Kieden

A few weeks ago I participated in a detailed conversation with some fellow Irregulars centered around AppExchange. It was a detailed and varied conversation featuring many different perspectives.

• AppExchange-ing Ideas with the Irregulars

At the time, I wondered whether AppExchange was as much a chance for salesforce.com to outsource R&D and cherry pick tuck-in technologies (and people) as it was about driving near-term revenues and creating a platform.

I then asked if SfDC was using AE as a way to outsource R&D efforts; and whether they would use their considerable currency (i.e., their stock) to make acquisitions of the "best and brightest" developers and products on AE.

• Ismael wholeheartedly agreed and iterated that SfDC should be doing this; it's good business and a great way to build up an ecosystem in a cost-effective manner
• Charlie suggested that SfDC is doing a "fantastic" job of cultivating even the smallest ISVs
• Dennis noted that SfDC has already bought two ISV partners, and agreed its likely a continuing strategy

Today, salesforce.com validated my assertion by acquiring Kieden. Kieden is a very cool little company that I had the chance to see firsthand at the SfDC AppExchange Seminar in New York (for a detailed review of that meeting, check out Mark's writeup). Kieden was one of several AppExchange partners highlighted in a presentation that revolved around the power of enterprise mashups and how easy it was to build compelling new services by simply tying together SfDC's API with other available metadata (like Google Maps and Google AdWords).

SfDC is re-branding the Kieden solution as Salesforce for Google Adwords. The Kieden solution allows salesforce users to create and manage their AdWords campaigns directly from SfDC. You can then automatically track leads (i.e., click throughs) all the way through deal closure. Imagine the power of a sales rep knowing that the customer he just signed was a direct result of a specific keyword placed on the Google network? Or imagine the power of a marketing executive seeing in real-time which keywords are leading to closed deals versus which ones are generating click throughs from unqualified leads (which could in turn be turned off and spending could be redirected to the high throughput campaigns).

• Online Demo

Interestingly, SfDC is planning on charging for this service on an organizational basis...the tear sheet suggests $300 per organization per month. If SfDC can make this pricing stick, it will help ASPs and set a precedent for further monetization of the AppExchange.

This is the second time in the last few months SfDC has brought an AppExchange solution in-house (Sendia is now salesforce Mobile Edition). For a company I've taken to task in the past for their de minimous R&D spending, I have to tip my cap to this model as it truly does enhance the SfDC development ecosystem in an efficient manner. SfDC has been on a roll of late, reporting a blockbuster quarter that blew past analysts expectations and put to rest some of the concerns that emerged in the prior quarter.

Update (10:30 PM EST): Looks like Phil Wainewright has a similar perspective on today's news.

Related Threads:

• Salesforce enters search engine marketing space (Dan Farber)
• NetSuite does search engine optimization too (Dan Farber)
• AppExchange Seminar in New York (Mark Crofton)
• AppExchanging-ing Idea with the Irregulars (Woodrow)
• Who will Salesforce buy next asks Phil Wainewright (Woodrow)
• Sendia out an SOS (Woodrow)
• A Quick Math Lesson for Salesforce.com (Woodrow)

Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained a long equity position in CRM but did not maintain a short position in any company mentioned. We also may, at times, carry derivative options on underlying positions as a hedge.

crm kieden sfdc salesforce.com saas benioff appexchange software r&d m&a irregulars ondemand google adwords mashups campaign management markcrofton woodrow

Comments

[Mark Crofton]

Yeah, Jason, I doubt they overpaid. And I would imagine that with a company with this amount of revenue the financial "analysis" was pretty simple. My point was more around noting that there are financial benefits to purchasing a 3rd party ISV instead of just having them as a partner (especially if SFdC believes it can increase sales by employing its own field, marketing etc).

[Jason Wood]

I'm going to assume that SfDC isn't discounting Kieden's pricing sheet too much in the initial going. If you take that at face value, this is a situation whereby Kieden was doing very minimal revenue. According to published reports, Kieden had 45 customers. Even if you assume they were getting $300 per organization per month (I would contend they discounted that to initial clients for references and building a base), you're talking about $162,000 in annualized subscription revenue. Even if they were charging a ton more, even 10x more, you're talking about a $1.6mm company. Given SfDC's public market valuation (well north of 25x FCF based on current consensus); there's almost no Earthly way SfDC "overpaid" for this company at least in terms of justifying it on their current valuation as a publicly traded equity.

[Mark Crofton]

Rick, I think there are potentially advantages to purchases like this: 1) Financial - you would imagine that SFdC would have done a valuation based on future earnings/cash flows that led to a purchase price that makes financial sense (i.e. is value creating to the shareholder). Afterall they now get to recognize the $300/mth in revenue whereas before they didn't get a dime when Kieden sold its product 2) More seamsless integration of functionality into core CRM product. Many AppExchange products are (or appear to be given use of SFdC UI) fairly well integrated. But now they have the opportunity to actually integrate the Kieden functionality into the core CRM product. Related to this is that SFdC can now determine the future product direction whereas before they could have merely influenced it.

I think your question is a valid one and I'm not sure that in the case of this acquisition the potential advantages were worth the purchase price(not sure they weren't either). But I imagine there are acquisitions in which they would be.

[Rick]

This deal is interesting on a couple of levels. First of all, this seems a little further afield from traditional enterprise applications. Secondly, if the ecosystem is developed already, what advantage does sfdc have in buying them? Is it a software delivery platform, or an application consolidation strategy. I continue to be impressed with the software ecosystem that sfdc has developed, but I believe the brass ring is when industrial strength applications are delivered through sfdc. By the way, I love what you guys are doing - I'm an equity analyst with Morningstar (rick-dot-summer-at-morningstar-dot-com) and love participating in the dialogue.