Saturday, November 24, 2012

Salesforce Third Quarter Results for 2012

Another quarter and despite it, again, being represented as a solid result, the fundamentals have deteriorated. As usual, I stick mainly to GAAP (Generally Accepted Accounting Principles) results which Salesforce presents to the Securities and Exchange Commission (SEC) rather than the non-standard results presented by Salesforce to the public. There will be one significant exception for this quarter which is a $149 million tax offset but we will get to that in a bit.

Earnings Call Buzzword Bingo

As we did last quarter, let us see what is on the minds on Benioff and Smith this quarter.

This Quarter’s Keywords (total words: 3000) Last Quarter’s Keywords (total words: 3200) Last Year’s Keywords (total words: 3400)
revenue (38 times) revenue (39 times) revenue (31 times)
cloud (20 times) social (21 times) social (23 times)
growth (17 times) cloud (20 times) cloud (15 times)
customers (13 times) growth (19 times) growth (14 times)
social (13 times) cash (17 times) enterprise (13 times)
marketing (10 times) operating (17 times) sales (12 times)
service (9 times) service (15 times) customers (9 times)
cash (9 times) enterprise (10 times) chatter (8 times)
sales (9 times) customers (9 times) expense (8 times)
customer (8 times) dreamforce (9 times) heroku (7 times)
enterprise (7 times) marketing (8 times) subscribers (6 times)
mobile (7 times) sales (8 times) service (6 times)

Key phrases (two words or more) for this quarter included:

  • deferred revenue (14 times)
  • cash flow (9 times)
  • revenue growth (6 times)

It is fair to say revenue and growth are the focus for the CEO and CFO, as they always have been. As usual other key financial measures, such as profitability did not rate. However indirectly, as we will see further on, Salesforce have clearly communicated what they consider their future prospects for profitability are.

New Topics

The only new topic on the list is ‘mobile’; a hot topic in CRM as people move beyond the laptop/PC.

Topics in Decline

As was the case last quarter, mentions of social are down about one half from last year. I speculated last time this was due to the backlash against 'Salesforce using the term ‘social enterprise’. Given that phrase was not said once this time around, in keeping with Benioff’s commitment to abandon the expression, this could be the reason.

Topics on the Rise

There is a focus on marketing, whereas this was not mentioned a year ago and is in keeping with their acquisitions of Radian6 and Buddy Media.

The Big Write-off

Before I get into the financials, there is something that must be addressed. If you look at the numbers, you will see Salesforce has put aside $157m for taxes (a number well outside of historical norms) and this has led to a quarterly loss of $220m and a financial year to date loss of about a quarter of a billion dollars. Given last year’s loss was $11m, there is something clearly out of the ordinary here.

This is how CFO Graham Smith described it:

“Our GAAP results this quarter include the impact of a onetime, noncash charge of $149 million to establish a valuation allowance against our federal and state deferred tax assets.”

“Deferred tax assets on the balance sheet represent the value of tax deductions and credits to offset future tax liabilities. These assets include net operating loss carry-forwards, R&D credits and book/tax timing differences, such as accrued liabilities. U.S. GAAP requires companies to regularly assess the realizability of deferred tax assets by evaluating certain criteria. These criteria include whether the company has a cumulative 3-year historical pre-tax GAAP loss, as well as the timing and likelihood of near-term GAAP profitability.

After performing this analysis in Q3, we determined that a valuation allowance was required as near-term realization of these assets is unlikely. But just to be clear, our deferred tax assets have expiry dates many years into the future. And so we do anticipate being able to use these assets at some point to offset perspective tax liabilities.”

If you are like me, you did not understand a word of it. The best article I can find on deferred tax assets is this one from the Motley Fool. This is my interpretation of the situation. If you make a loss as a company you get a tax credit with the idea being that when you finally make a profit, you can offset the tax you would normally pay with this credit. On the accounting books this tax credit is carried as an asset because, in some ways, it can be thought of as a bag of money standing by to use to pay taxes in the future.

However, what if a company never makes a profit? In this case the asset will never be realised i.e. the credit will never be used and having it on the books is misrepresenting the true value of the organisation. To keep the asset value of a company accurate, the government has put in place certain ‘triggers’ which mean a company must assess the likelihood that such an asset will be used, if one of these triggers goes off. In the case of Salesforce, the trigger was making a net loss over the past three years. Yes, despite all this awesome growth, Salesforce has lost more money than it has made over the last three years.

Salesforce has reviewed the likelihood that they will use this asset i.e. make a profit and determined that $149m of this tax credit will never be realised. This can also be seen in the balance sheet where ‘Deferred Income Taxes’ has gone from $165m down to $21m.

So to make this clear, when Graham says “near-term realization of these assets is unlikely” he is saying “we are not going to make a profit any time soon”. He then makes the plea that at “some point” they will use it but, frankly, if there was a reasonable prospect of using them, they would not take them out of their assets. You can stretch your optimism in an earnings call but the government require you to be practical.

Ultimately though this is a write-down and does not reflect their current business operations (more their future prospect of making a profit) and so I have removed the expense from my financial calculations below. We will see, even with this item eliminated, things are not rosy when we look beyond revenue growth.

Revenues and Costs

image

Green is cost growth year-on-year and red is revenue growth year-on-year. As Benioff mentioned, year-on-year revenue growth came in around 35%. What he did not mention was that to achieve this, they had to grow expenses by 42%. This is disappointing. In the previous four quarters they had successfully tempered cost growth and brought it back to the same rate as revenues. Unfortunately, it seems to be impossible for Salesforce to reduce the rate of growth of costs to below that of their revenue and therefore head towards profitability. We can see why they needed to write down their deferred tax asset.

image

In terms of absolute numbers, the only notable change is the larger loss. Excluding the write-off, the loss to the business for this quarter was $70m. This is a larger loss than the previous five quarter losses combined. The largest profit made by Salesforce in a quarter was $21m this time two years ago (and also back in 2009). So this quarter’s loss is more than three times the largest profit ever made in a quarter.

Margin

image

Some of you may remember my log scale graph from last year. While the shape is similar, the difference here is this is not a log scale. nothing is being stretched here. The fact of the matter is, even with the massive $149m write-off removed, margins are plummeting, down to –9% this quarter. In other words, for every dollar they spend on generating a sale, they return around 91c. we are now at a point where Salesforce is selling $10 notes for $9.

Staff Numbers

Marc mentioned that staff numbers were up 34% from this time last year, which is true. What he did not mention was this is the slowest rate of staff growth in two years. Around 40-50% year-on-year growth has been the norm for the last year or so. In other works, staff growth appears to be tailing off.

Conclusions

Despite a deterioration in profitability, this has not deterred Benioff on his focus on revenue growth at all costs, literally. My hope last quarter was that Salesforce would return to profitability but this is unlikely to be the case any time soon. This deterioration of position is confirmed in the declaration of the CFO that Salesforce will not be making a profit in the near future and the subsequent revaluation of their ‘tax credit’ asset.

As usual I hope Salesforce can turn things around as competition is a good thing. If not they will continue to bleed money and dig themselves a hole that it will become increasingly harder to get out of.

Monday, November 12, 2012

A Stellar Roadmap for Dynamics CRM?

The past six months have not been the steadiest of courses for Microsoft and their CRM product. Microsoft announced grand and exciting plans, as discussed last month. Dynamics CRM partners and MVPs were frothy at the mouth with the new things coming and many could not believe Microsoft had transitioned from their traditional three-year cadence to a six-monthly one and still managed to deliver such bounty.

As it turned out it was too good to be true and at the eleventh hour Microsoft pulled some of the more exciting features delaying them for six months.

After regrouping, Microsoft have released their new and improved roadmap for the upcoming December 2012 Service Update (called ‘Polaris’) and the one after this to come mid-year 2013 (called ‘Orion). I thought it would be a good time to see what they have planned for these two releases.

The November 2012 Statement of Direction

If you want to read the latest roadmap and read about Polaris, you can do it here. There is even a promotional video showing Microsoft’s Dynamics CRM / Windows 8 vision. These are my take-outs from the Statement of Direction.

The Charter

To make it absolutely clear that Microsoft has a set of guiding values and principles, they called out their CRM ‘Charter’.

image

I personally like it. There is nothing concrete here e.g. when specific functionality will be delivered and this is as it should be. These are simply the values which Microsoft are calling out as their criteria for including or excluding features in the product.

For example, the ‘Ubiquitous’ values make it clear that Microsoft will not go down a path of ‘lock in’ with Internet Explorer or design CRM to only work with a keyboard. If the use of Kinect as an interface becomes popular, this value also embraces that as a choice. If the business world starts using RaspberryPi devices, Microsoft has a clear charter to build CRM for these as well.

In terms of exclusion, the ‘Productive’ values make it clear the plan is to bring further integration between Dynamics CRM and ‘the stack’ (other Microsoft products). This means that products like Lync and SharePoint will become more intimately entwined and, while there will be ‘hooks’ available for alternatives, this will not be an area of strong investment.

Investment Areas (Polaris)

Both the Statement of Direction and Release Preview guide talk at the areas of investment for the upcoming releases. These are broken down into:

  • Applications (sporting a picture of a Windows Phone with ‘apps’ icons)
  • Experiences (showing someone operating their Windows Phone and slate)
  • Platforms (showing an oil rig platform. Seriously, what?!?)

The Polaris summary graphic gives the highlights:

image

Here are some of the major call-outs:

  • Applications
    • Configurable sales and service processes: Think Solution Selling or at least a Microsoft version of it
  • Experiences
    • A UX to match the process changes

image

    • Yammer integration: While the Record Wall was nice, now we have a true Chatter contender. Security management will be interesting
    • Multi-browser support: IE, Chrome and Firefox on Windows, Firefox and Safari on Macintosh
    • iPad support (although they are saying only for the sales process)
  • Platform
    • Skype built in: I imagine this will be click to call, like the free Skype add-in for Dynamics CRM 2011, but will not pop up boxes for incoming calls. I hope I am proven wrong
    • New bulk data API: This means we should be able to get imports at rates higher than 50 records/second. That is fantastic news for projects with big data sets to import
    • Custom workflow assemblies for CRM Online: Bringing it in line with On-Premise deployments

Investment Areas (Orion)

Thanks to the CRM User Group (CRMUG) and new CRM MVP recruit Chris Cognetta we have the Orion summary graphic:

image

Given Chris assures me this has been presented at CRMUG, it should not be in violation of my MVP NDA but, if it is, I am sure Microsoft will let me know and I will take it down.

Interesting items mentioned here are:

  • Exchange server synchronisation: This used to be in v1.0/1.2 but was abandoned all those years ago. It looks like it is back
  • OWA and MOWA support: So many times I get asked if CRM works with the Outlook Web App (OWA) and have to say no. In six months this may not be the case
  • Integrated marketing management: Given Microsoft just acquired MarketingPilot, which appears to be quite a comprehensive little package, this could be what they are referring to here. If so Core Motives, Click Dimensions and Exact Target must be very nervous

Other Stuff Hinted At

Things mentioned in the Statement of Direction but not explicitly called out for the Polaris or Orion release are:

  • A new ‘agent desktop experience’ for Service: I am wondering if this is an overhaul of the old Customer Care Accelerator
  • Centralised administration for CRM and Office 365: Unfortunately this is unlikely to be case in the short term for Australia due to third line reseller entanglements
  • Lync integration: Likely to be similar to the Skype in that is will be call out but not inbound pop-up enabled for CRM (again, happy to be proven wrong)

Conclusions

One thing which interests me is the clear shift from creating a ‘process platform’ to a sales/service tool with configuration capabilities. From a marketing perspective this makes sense as it is much easier to show a tangible sales process than a set of configurable tools to match any work process. Whether the xRM capability of the platform will be compromised by this is yet to be seen.

On a more positive note, to be honest, this is the first time in a while I have confidence that Microsoft have a clear direction dictated internally and not by the competition. Microsoft are defining a clear path, separating them from the competition, rather than saying “Us too!”. Microsoft are not pleading their cloud credentials or trying to tell us how social they are. They are simply stating the values driving them and the features they are bringing to their product to support these values. I applaud the new approach and wait eagerly for Santa Ballmer to deliver his goodies.

Sunday, November 4, 2012

50 Shades of CRM: The True Story of the CRM Field Guide

This is the history (and a bit of a book review) of the CRM Field Guide (http://www.crmfieldguide.com). To paraphrase a much greater tome, to tell the story of the book it is best to tell the story of some of the minds behind it.

History

On the 9 December, 2009 George Doubinski, a CRM MVP whose generosity is only matched by his dry Russian wit, wrote:

“Hi MVPs,

I’m probably one of the least qualified people on the subject yet for some inexplicable reasons I’ve been approached by one of the publishers about writing a book about new version of CRM. Writing a book, as some of you will vouch, is a tedious and time-consuming exercise. If you are looking for a return on investment, your time will be better spent flipping burgers. Genuine love of writing,  glory (albeit, a minimal one) and vanity are the only true reasons to even contemplate writing anything.

Having considered that, I still think that “MVP Cookbook on Microsoft Dynamics CRM 5” is not such a bad idea. Collection of recipes coming from people who do know their stuff.

I’m sure some of you have already been approached in the past and may have refused the offer of writing a book but a contribution of just one or two chapters is a significantly smaller effort and might just work. So if you believe that it’s not a scheme heading for an absolute disaster, please get in touch with me off the list.

Note that you will have to have access to CRM5 TAP with a signed NDA, of course.

Thanks

George”

Despite many positive responses, essentially nothing happened for about a year. Then on 13 August 2010 when, undeterred by the apathy of his comrades, George wrote:

“If you recall I floated idea for MVP cookbook some time ago after being one of the many approached by the same publisher… A few of you have responded and expressed the interest to participate and believe me, I have not forgot, simply was running inside the hamster wheel for a while. And with 2011 upon us, we probably need to re-group anyway.”

At this point I, and others, jumped on the book bandwagon. I wrote a chapter on workflows and dialogs and others threw in their bits and pieces.

Unfortunately the progress of others was slow and after yet another year all we had was three chapters (including mine) totalling about 150 pages of unedited content. The vision of an MVP-written book on CRM was fading.

By the end of 2011, CRM MVP Donna Edwards made one last-ditch attempt to restart the MVP book engine. Here is an abridged version of her email:

“As most in this email thread are aware, we kicked off a CRM MVP book project about a year ago.  We hit some bumps in the road and stumbled a bit but the good news is we are back on track with a stellar group of contributors.  If you are included in the To: line above, then you agreed to contribute one or more chapters to the CRM MVP book.  What an awesome bunch of individuals and I am thrilled to have each of you onboard!

Below is the list of book sections, chapters and authors.  As you will see, we have a great lineup and I think a good matching skillset for each chapter.  I hope you are all happy with the identified content.  Please contact me if you think we’ve missed something critical or have another chapter you’d like us to consider including.  As it stands now, the book should come in at over 600 pages”.

With Donna and Julie at the whip, not only did 19 CRM MVPs produce a book but it managed to overtake the 600 pages, eventually coming in at 940 pages.

Content

Despite my hideous bias, I think it is fair to say the book is comprehensive in its coverage. Topics include:

  • Server/Client installation
  • Security setup
  • Report development
  • Integration
  • Configuring CRM and packaging configurations in solutions
  • Data management
  • User adoption strategies and tips from the trenches

It is also fair to say that, given the broad scope, there are areas where it is shallow in depth. For example, there is little code in the book (however the chapter on solutions is, by any measure, comprehensive). Similarly, my chapter of processes covers the essentials but, in terms of using processes you could write a whole book (and Richard has).

Review

Obviously, given I wrote a chapter, count most of the authors as friends and receive a cut of the sales, it is difficult for me to review the book without some conflict of interest. However, I do believe there is something for everyone. If you or your team need to have a broad range of skills, in regards to Dynamics CRM, this is a great pdf to add to your reader. If, in reading the field guide, you determine there is an area you need to dive deeper, you can select one of the more focussed books in the market.

In terms of the quality of the content, it is difficult to argue against the pedigree of the authors, given they are all CRM MVPs and, moreover, we all got to pick the CRM topic we are passionate about or have strong knowledge of. In my case, I have a passion for processes in CRM, if only because they give me the power to make CRM do things only possible otherwise through code. However, I know precious little about the email router whereas Giorgio had written extensively on the router prior to the book and therefore was in a perfect position to create an informative, quality chapter.

Conclusions

While the book has literally been over 1000 days in the making, I believe the wait has been worthwhile. The book is the distilled wisdom of about 1/3 of the world’s CRM MVPs and from http://www.crmfieldguide.com is only $49.99. It is fair to say even MVPs will learn something from this book (and I intend to).

If you want to try before you buy, I do run the CRM MVP Gospel twitter feed (@CRMMVPGospel) which quotes a line from a random page in the book each week. While the feed may not change your world, it will give you an idea of the subjects covered in the book and who wrote them.

Once you have sampled its wares, head to http://www.crmfieldguide.com and get yourself a copy. I doubt it will be as popular as “50 Shades” but, unlike that novel, the vast amounts you learn from it you can employ in the workplace without fear of permanent injury or scarring.