We’ve written several posts, recently, on the topic of Steve Ballmer’s announced departure from Microsoft. We think the real driver for this change arose with Microsoft’s last quarterly return, when the shifting preferences of enterprise customers from on premises data centers to private cloud, hybrid combinations of private cloud and on premises computing plant, and even multi-tenant public cloud offers made itself known in the form of significantly lower revenue numbers, and even a dent to overall margins.
We don’t think a lot of the talk about a need to compete better in the small, smart, mobile device market really amounts to much. But when the core customer for the business — enterprise business and comparably sized organizations in the public and not for profit sectors — start to shift what they buy to substantially lower cost cloud systems, a thorough re-architecture of the business is required, which provides a great segue for Steve Ballmer’s announcement.
The New York Times published an article by Quentin Hardy on August 21, 2013, titled Shifting Tech Scene Unsettles Big Players. We think Mr. Hardy’s article presents a case very similar to ours quite well.
In his article Mr. Hardy remarks “[b]ut the bad earnings news from older, big tech companies does not — so far — appear to be spreading to more youthful Internet companies like Google or Salesforce.com, which provide their software as a service over the Internet.”
We visited the Salesforce.com website and took a look at the latest available 10K filing, for the quarter ended April 30, 2013 (we’re not sure why the July 31, 2013 earnings report wasn’t available on the SEC filings site, but we couldn’t find it). We noted total subscription and support revenues for the quarter of $892.6MM, vs a cost of $208.99MM.
So support is costing them 23.4% of total gross sales. We don’t see how mature ISVs (Microsoft, HP, IBM, Oracle) can make it on these numbers. First, we think the impact of sales is far too low to sustain any of these businesses, and second, the cost of support is simply too big a percentage of sales. Keep in mind, Salesforce.com has been around a while, so we don’t see this one “getting real big” anytime soon.
Google, in our opinion, is another story altogether. We’ll take a brief look at Google tomorrow.
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