Reaction to Salesforce.com's quarterly earnings

Posted by Mike Snyder on August 18, 2007  |  Comments (3)

Salesforce.com released their Q2 FY08 earnings last Wednesday, and I spent some time reading up on people's reactions to the news. Overall, it seems like there was both good and bad news and I'll try my best to summarize:

Good News

• Earnings of $0.03 per share beat estimates of $0.02 per share
• Salesforce.com reported some impressive enterprise customers, including one customer with more than 30,000 subscribers.
• They increased their earnings forecast to $0.08 to $0.10 per share for the rest of FY08.
• Salesforce.com reported a total of 35,300 customers and over 800,000 subscribers.

Bad News

• Cantor Fitzgerald analyst Mark Verbeck, said that Salesforce.com's profit in the quarter was goosed by "a lower than expected tax rate."
• Pacific Crest Securities analyst Brendan Barnicle said in a note that Salesforce.com's cash flow in the quarter was disappointing, and fell below his expectations for the third quarter in a row.
• Revenue growth is slowing from 84% in Q1 2006 to 55% in Q1 2008.
• The company is still barely profitable at $0.03 earnings per share.
• Principal Accounting Officer William Dewes recently resigned, despite the fact he was promoted from his previous post as "Chief Accounting Officer" just 3 months ago (back in May 2007)
• Insiders are busy selling off 91.4% of their salesforce.com shares (over the last six months).

I am not a professional investor but I did kick around some additional numbers that I found interesting. Page 4 of Salesforce.com detailed financials lists their customer and subscriber growth by quarter. You'll notice that they didn't report subscriber numbers last quarter and it just said 800,000+ subscribers for this quarter. Out of curiosity, I did some quick math in Excel to try and determine two things:

1. What is their average deal size?
2. How many subscribers did they add each quarter?

Since Salesforce.com withheld subscriber details in Q1 FY08, I had to make some assumptions (red italic numbers in the table) around their performance. Again, the numbers in black are from their financial reports so they are accurate. I also just assumed 800,000 total subscribers for Q2 FY08 even though their report actually says ">800,000"...we're just ballparking anyway.

Looking at this chart, two things jumped out at me:

1. It appears that Salesforce.com probably had a significant dip of subscriber adds in Q1 FY08 since by my guess they only added approximately 71,000 subscribers.  I wonder if this apparent decrease had anything to do with the fact they decided to not report the number of subscribers that quarter. :) As a reminder, Microsoft reported that they added more than 85,000 Microsoft CRM users last quarter so we're running stride for stride with Salesforce.com in subscriber adds.
2. They did a good job of increasing their average deal size to 22.7 subscribers per customer, which is an 18% increase compared to their 19.3 subscribers per customer in Q1 FY07.

Impressed with this increase in average number of subscribers, I started thinking about those large enterprise deals that they reported this quarter. They mentioned the following customers:

• Two customers have more than 30,000 subscribers each
• Four customers have 20,000 subscribers each
• Five have more than 10,000 subscribers each
• 68 customers have more than 1,000 subscribers each

Doing some calculations on these numbers, 79 customers are responsible for at least 258,000 subscribers. That means just 0.2% of Salesforce.com's 35,300 customers account for 32% of their 800,000 subscribers! Even worse, just 0.03% of their customers (the largest 11 customers) represent almost 25% of their entire subscriber base! Holy cow. Talk about putting all your eggs in one basket. I don't know if this is typical or not but those numbers seem shocking to me. If we exclude those 79 largest customers and re-calculate the average number of subscribers per quarter we get just 15.4...significantly less than their 22.7 overall average. Considering that Microsoft announced that their CRM Live pricing will be about 50% of the Salesforce.com pricing and the product functionality is nearly identical, I guess that Salesforce.com is sweating bullets about the possibility of losing those top 11 accounts. By my math, I figure those top 11 Salesforce.com customers would probably save millions of dollars in subscriber fees EVERY year by switching to Microsoft CRM Live from Salesforce.com.

Unfortunately, Microsoft doesn't provide quarter by quarter updates on user counts so we can't run a similar analysis on Microsoft CRM...but I had fun digging into these Salesforce.com numbers. Don't get me wrong though, Salesforce.com is a very serious competitor but I still like Microsoft's chances of a runaway success with CRM Live.