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Salesforce.com strikes the right balance

The balance between the subscription and support sides of the business seems to be well balanced at Salesforce.com argues Billy MacInnes

Salesforce.com CEO Marc Benioff was in fine fettle after the company announced better than expected results for its second quarter and revised revenue and profit forecasts for the full year upwards.

In a conference call, he predicted Salesforce.com would “go from being the sixth largest software company in the world to the fourth largest next year”. Benioff also bragged the company had “blown past the $6.5bn annual revenue run rate faster than any other enterprise software company” and was “on pace to reach a $7bn run rate later this year, and our goal is to be the fastest to reach $10bn in annual revenue”.

The figures for the second quarter revealed that revenues were up 24%, with subscription and support accounting for 93% of total revenues and professional services and other making up the rest. Subscription and support revenues increased 23% compared to the previous year while professional services and other rose by 32%.

The figures also revealed that the cost of revenue for subscription and support increased by just under 34% and the cost of revenue for professional services and other rose by 27%. While cost of revenues was only 19% of the total revenue for subscription and support, it was much much higher for professional services and other at just under 99.4%. In fact, for the first half of 2015, the cost of revenues for professional services was marginally higher than the revenue.

Judging by those results, Salesforce.com appears to have got the subscription and support model right. But it’s also clear that professional services are very expensive to provide.

The company’s operating expenses are still high at 74% of total revenues with marketing and sales costs equivalent to around 49% of total revenues, but they are an improvement on the same period in 2014 where operating expenses were 79% of total revenues and marketing and sales costs were almost 51%.

Despite all the positive news about growth, the company reported a fairly meagre pre-tax profit of just under $7m, although that was a significant improvement on the loss of almost $53m in the second quarter last year. For the first six months, pre-tax profit was $25m, compared to a loss of $137.7m in 2014.

Overall, the underlying figures show some improvement from last year. You would expect that if revenues continue to grow as aggressively as Benioff expects, Salesforce.com could be in a good position to reap more rewards as the cost of sales decreases. The company appears to have a balanced subscription and support model. Even if it doesn’t make a profit from professional services, if it can keep them at break-even, it then becomes a question of if, or when, Salesforce.com matures to the point where it can start to make further reductions in its marketing and sales costs.

This was last published in September 2015

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