Is Salesforce.com in the cross hairs as mature ISVs jump into the customer data and analytics markets?

Salesforce.com acquired ExactTarget in 2013. Arguably, ExactTarget can produce a comparable quality of customer data to Facebook, or the just announced IBM Twitter partnership. But as Marc Benioff, CEO remarked during Salesforce.com’s Q2 2015 Earnings Conference call, Salesforce.com is an enterprise cloud business.

We’ve written at length in this blog on the unique character of enterprise business markets for computer hardware, software (including cloud), and networking. As Benioff noted during a joint presentation with Satya Nadella, CEO of Microsoft, to announce the addition of Salesforce.com as a supported CRM option for Microsoft’s Office 365 customers, Microsoft, itself, is one of Salesforce’s largest customers for ExactTarget services.

But servicing the needs of businesses marketing non durable commodities to consumers is a very different story, which Facebook seems to be winning. Salesforce’s growth rate, at 38% year over year is enviable, but Facebook’s year over year growth rate of nearly 60% is a lot better. Would it make sense for a stagnant mature ISV named IBM, desperate for some big growth, to see an opening to bring ExactTarget-like capabilities to a different market?

IBM certainly has a presence in every leading marketing business in the US and Western Europe. As a trusted partner of Ogilvy and Mather, Forbes, etc. a partnership with Twitter, which promises to provide them with a very unique set of data collected from Twitter’s “fire hose” to be fed into their Watson analytics solution looks very promising.

Salesforce, on the other hand, with Keith Block, an exceptionally capable sales and marketing executive for enterprise business markets, as President, looks clearly dedicated to signing up more enormous businesses like Microsoft. One can certainly argue the very large marketing businesses IBM presently services (and, in turn, the manufacturing and service-providing customers of these marketing firms like Procter and Gamble) fit the bill for legitimate Salesforce targets, but in this writer’s opinion it isn’t likely the way they are leveraging ExactTarget will meet the needs of Omnicom, etc for the consumer non durable goods market. This writer spent a lot of time with IBM from 1994 to 2001 and can speak to what was then a deep, strategic relationship with Ogilvy, Forbes, and others.

So the ExactTarget capability does look like something a mature ISV like IBM would want to repackage for its own, and very different set of consumers.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Is Anyone Really Betting On Enterprise Business Embracing Public Cloud Anytime Soon?

Senior Executives at Microsoft® have been uniformly presenting the company’s heavily branded statement of current and near term objectives — to be the leading provider of productivity solutions in a ‘mobile first, cloud first’ world — since Satya Nadella assumed the role of Microsoft CEO. Salesforce.com still promotes its catchy 1-800-nosoftware toll-free number on its website. But is there an ISV, anywhere, really betting on enterprise business fully embracing public cloud solutions anytime soon?

The likely answer is “no”. In an interview titled ‘Ginni Rometty: Reinventing Big Blue’, which was conducted by Leslie P. Norton, and published on Barrons.com on May 31, 2014, Ms. Rometty notes: “Every client I speak to – every head of every business – is interested in cloud, to a certain degree . . . ” (quoted from Leslie P. Norton’s interview, as published on Barrons.com). But Ms. Rometty doesn’t offer any more specificity about just how interested the CEOs she is speaking with are in cloud.

Anyone reading the transcript of Sterling Auty’s interview with Judson Althoff, President Microsoft North America, from the 2014 JP Morgan Technology, Media & Telecom Conference, can gain further clarity, by industry type, as to the likely level of interest an average CEO will have in cloud computing offers:

“[I]f you talk about the cloud motion, for example, you have a different propensity to want to move to the cloud with different speeds depending on those markets. We would love to always help our customer make that journey to the cloud because of the efficiencies that it brings, the new collaboration capabilities that it brings, and the return to shareholder value that it brings. But at the same time, heavily regulated industries don’t have the propensity to want to move there just because of all the complications around security and data privacy.” (quoted from the above mentioned transcript. A link to the entire transcript has been provided earlier in this paragraph)

Getting back to the Barrons interview with Ms. Rometty, Leslie P. Norton refers to a “survey published by the Open Data Center Alliance”. This survey reports a mere 70% of the CEOs interviewed were willing to forecast running at least “40% of their operations on internal clouds by 2016”. Readers otherwise unfamiliar with cloud jargon should understand “internal clouds” amount to any private network supporting Ethernet data communications. I believe what Norton means by “internal clouds”, are IaaS resources managed by a third party (for example, Amazon AWS, Microsoft Azure, Google Compute Engine, or IBM’s offer), but entirely dedicated to a single tenant. Company proprietary information is reposed on these IaaS resources for access by company personnel from either mobile locations, or from company facilities.

These “internal clouds” are, by no means, public, multi-tenant offers. Norton confirms this by noting “[Open Data Center Alliance] Member interest in public clouds barely budged at 20%”.

Bottom line, ISVs with products predicated on an enterprise customer relying on on premise computing resources should be able to earn healthy returns for the foreseeable future. Unless/until solutions become available to ensure a much higher level of privacy and security for corporate, proprietary information, than is the case, presently, the situation does not look to change very much, if at all, at least for another couple of years.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Has Salesforce Completed Its Transformation Into an Enterprise Sales Organization?

On May 20, 2014, Salesforce.com reported its results for Q1 2015. The speakers included Marc Benioff, CEO, Keith Block, President and Vice Chairman, and Grant Smith, Chief Financial Officer. It should be noted Mr. Block will complete his first year at Salesforce.com in June, 2014. He came to the company from Oracle® Corporation, where he spent 26 years, from 1988 to June, 2013, in a series of sales management roles, which culminated in a tenure of nearly 10 years as EVP North America where he had responsibility over a multi-billion dollar revenue generating effort.

As I wrote earlier in this blog, on April 2, 2014, in a post to this blog titled
Cloud SaaS ISVs Develop Sales Strategies for Enterprise Prospects, Mr Block is, perhaps, one of the strongest examples of a master of the Complex Sale, which is a sales concept championed by Jeff Thull. After all, Mark Murphy, a software analyst for Piper Jaffrey referred to Mr. Block’s tenure as EVP, North America for Oracle as an opportunity “to run, arguably, the largest and most profitable enterprise software business in the world.”

So, given this backdrop, the analyst questions Mr. Block fielded about just how long it will take before the sales teams at Salesforce.com produce a “9 figure deal” make a lot of sense, especially when one considers the ratio between Salesforce’s present market cap of $30.62B and a staggering forward price to earnings ratio, for its CRM public stock, of 149.25 to 1. Mr. Benioff’s reflections on the level of success the business has achieved are certainly admirable. The company sounds like a terrific place to work and a great contributor to its social surroundings. But the forward price to earnings ratio requires a sense of urgency, on the part of management, which was somehow lacking, in my opinion, in Mr. Benioff’s opening remarks.

Mr. Block cited a win at Manulife, an expanded relationship, where they leveraged “[Salesforce] Service Cloud to develop a customer engagement platform, with very personalized service across their life insurance, wealth management and investment products” (transcribed from remarks made by Mr. Block recorded on the audio webcast).

He went on to refer to several other enterprise-wide wins at other larger organizations, across several industries. But Rick Sherlund asked a very big question: “I think we’re all waiting for 9 figure deals. Is that realistic? Are there deals of that magnitude in the pipeline that we can look forward to over the balance of this year?” (transcribed from a recording of Mr. Sherlund’s question, which is included in the quarter’s webcast).

In my opinion, Mr. Block’s reply to the question signaled a much slower pace of change than, perhaps, the analysts in attendance would have wanted to hear. On the notion of whether there are any “9 figure deals” in the works, he merely referred to a “natural evolution” of relationships with important partners, which, over time, he argued, exhibit the potential required to support sales of this magnitude at some future date.

Disclaimer: I have no position in Salesforce.com whatsoever

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Cloud SaaS ISVs Develop Sales Strategies for Enterprise Prospects

The days of dramatic sales growth for Cloud SaaS ISVs like Salesforce.com are, apparently, over. A new emphasis, as Keith Block, President and Vice Chairman of Salesforce.com voices in an interview during Piper Jaffrey’s March, 2014 Media and Telecommunications Conference, on the enterprise business market for CRM solutions is the biggest sales imperative.

As Mark Murphy, a software analyst for Piper Jaffrey, notes at the start of this interview, Block brought to Salesforce.com 26 years of experience, exclusively with Oracle® Corporation. Prior to his time at Oracle, Block had spent his first 2 years of professional experience with Booz Allen Hamilton as a Senior Consultant. When he left Oracle he held the position of Executive Vice President, North America, for nearly 10 years straight. Murphy summed up Block’s tenure at Oracle as an opportunity ” . . . to run, arguably, the largest and most profitable enterprise software business in the world.”

So it’s by no means a stretch to sum up Block’s experience as a very deep involvement with the sale of complex solutions to enterprise businesses. One might ask, of what value would this type of experience set be to Salesforce.com, which is synonymous with the notion of “No Software”? The majority of its customer base is a cross section of small to medium sized businesses (SMBs).

Evidently, Salesforce.com has thoroughly tapped out its niche in the SMB market, and, now, needs to look to enterprise business for an altogether different type of revenue stream. Murphy moves the conversation in this direction with a big question:

” . . . let’s talk, for a minute, about profitability in the software industry. So Oracle is an earnings machine. There are nearly 50% operating margins for the past half decade, and, obviously, you were a part of that equation. But it is a perpetual license model with a very low growth trajectory. So there’s a big difference there [when compared to the very high growth trajectory at Salesforce.com]. I’m wondering in your mind, do you think over time, could it be possible for Salesforce, you know, with a subscription model, that does generate a ton of cash flow, already, to generate that type of profitability on the income statement?” (quoted from a webcast recording of an interview with Keith Block, a link to which has been provided above).

Block starts to answer the question with a caveat: He claims Oracle wasn’t always as profitable as it is, today. The key factor, for Block, is scale. As Oracle grew the scale of its business, the profitability followed. Therefore, he is comfortable with a notion of Salesforce achieving comparable profitability, as it adds comparable scale.

So the big question on the table is what Block means by scale? Anyone listening closely to this interview can find the answer in an important note made by Block: ” . . . as our deals get larger, there’s certainly an opportunity there. . . . one of the reasons Oracle could grow those margins was the deal size.” Block’s scale is synonomous with deal size.

If Block is going to head up Salesforce.com’s sales effort, then it’s reasonable to assume a much longer sales cycle on most new opportunities, a training and development curve for the sales force as they transition from a focus on SMBs to a focus on big ticket, complex sales to enterprise customers. Therefore, in my opinion, it’s reasonable Salesforce.com’s stock would have taken nearly a 16% hit from a high of $66.22 on February 22, 2014, to Friday’s closing price of $55.75.

Disclaimer: I have no position with Salesforce.com

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved