Last week I went to a Princes Trust Technology Leadership Group lunch with Steve Garnett i/c EMEA at Salesforce.com. Steve gave a great speech but my question to him was all about margins on SaaS businesses. Steve replied that if you concentrated on revenue growth the profits would take care of themselves. That Salesforce.com was all about revenue growth right now and that it could turn on the profits ‘at will’ by just cutting sales costs and ‘enjoying’ the already contracted revenues. (I heard the same views from Paul Pindar at Capita many years ago) There was much conversation about this amongst the CEOs present afterwards with most believing that profits were rather more important to them than Steve had indicated!
Salesforce.com’s results last night neatly illustrated this with a superb 36% increase in Q1 revenues but a near wipe out of the $17.7m profits it reported this time last year. Salesforce added 5,400 customers in the quarter – now up 26% to 97,000. Attrition was also reduced. On top of this they upped the outlook to $2.17b revenue for the current FY. As a result shares were up 7.5% in after-hours trading.
Garnett has had a superb career – but his previous high level roles were at on-premise/up-front license software companies like Oracle and Siebel. Companies that would make really tasty 30-40% operating margins as a matter of course. We suspect that margins in SaaS will be much closer to the c6% margins at IT services companies. So far in its long history, Salesforce has rarely come close to even that margin. And many other cloud companies – like Netsuite – are still loss-making. I suspect there will be increased attention to profits in future.