Salesforce: Newton’s Second Law

The end of another financial year draws to a close for Salesforce and, as usual, I am doing my post-game analysis. Unlike the previous quarter, Marc is being very consistent so, for people like me, looking for the patterns, they are easy to spot. Let us see how he fared.

The Numbers

As usual, the numbers come from Salesforce’s own website. They are the numbers reported to the US Securities and Exchange Commission using the ‘Generally Accepted Accounting Principles’ (GAAP). This is an accounting framework allowing analysts to compare companies on a level playing field. When giving press releases, these days, Marc shies away from GAAP and uses his own special brand of accounting which, not surprisingly, make the numbers look more favourable (referred to as Non-GAAP). This was not always the case. As can be seen in this Salesforce press release from 2009, Salesforce used to embrace GAAP reporting, until the truth got in the way of a good headline i.e. they stopped making a profit. I understand this from a public relations perspective but, from a business management perspective, I struggle to see the benefit.

	2014 Q4	2015 Q1	2015 Q2	2015 Q3	2015 Q4
Revenue	1,145,242	1,226,772	1,318,551	1,383,655	1,444,608
Subscription Revenue	1,075,001	1,147,306	1,232,587	1,288,513	1,345,358
Revenue Cost	273,530	292,305	307,831	333,211	355,923
Operating Cost	975,458	989,808	1,044,154	1,072,486	1,123,501
Salesforce Income	-116,623	-96,911	-61,088	-38,924	-65,765
Highest Transaction			2,037,819,946	2,502,030,346	2,872,068,400
Transaction Growth QoQ				23%	15%
Revenue Growth # YoY	310,561	334,139	361,457	307,621	299,366
Revenue Growth % YoY	37%	37%	38%	29%	26%
Revenue Growth % QoQ	6%	7%	7%	5%	4%
Total Cost % YoY	46%	37%	36%	20%	18%
Staff	13,312	14,239	15,145	15,458	16,227
Staff Growth (YoY)	36%	38%	20%	21%	22%
Margin	-10.18%	-7.90%	-4.63%	-2.81%	-4.55%
Growth Difference	-9%	1%	2%	9%	8%
Cash	781,635	827,891	774,725	846,325	908,117
Accounts Receivable	1,360,837	684,155	834,323	794,590	1,905,506
Cash/AR	57%	121%	93%	107%	48%

NB: I realised in writing this up that I had the wrong Salesforce income in place for 2014 Q4, being off by 13,000. It had no material impact on my analysis but I thought I would call it out before someone else did.

Apart from the staff and transaction numbers, all of the above are in the thousands. For the year, Salesforce generated around $5.4b in revenue and has made a big noise about being the fastest to five billion. As I have mentioned in the past, Salesforce is selling $10 notes for $9 which makes for strong sales but lousy profits.

Revenue growth is slowing (which I will look at later) but, thankfully, so are costs. As previously predicted a 20% year on year staff growth is now the new normal.

In terms of losses, for the full year, Salesforce lost around $260m

Cash has gone up but Accounts Receivable has skyrocketed. Again, I will look at this in more detail further in.

Revenue and Cost Growth

This is a good and bad news graph. Firstly the good news. Revenue growth is outpacing cost growth by 8%, about the same as last quarter. So while Salesforce is making a loss, this loss will reduce over time.

The bad news is growth is slowing. It is well and good to talk about Salesforce’s 26% year on year revenue growth (the first bullet point in their bold headline in the quarterly announcement) but what this fails to mention is this is the lowest it has been in almost five years. Compared to those Marc used to mock for their lack of cloud presence, Salesforce is slowing and is far from the triple figure growth of its competitors.

Margins

I am using a 12 period moving average to smooth out the variance. The advantage of the trending line is it is very difficult to glean insight from the numbers directly as they jump around so much. The trend graph suggests the deteriorating margins are slowing up and, if things continue, Salesforce will move towards profitability albeit slowly.

This is reinforced by the annual numbers. This year, Salesforce made an annual loss of around $260m, compared to $230m last financial year. In other words, they have increased their revenue by 33% but their loss has only increased by about one third of that. Perhaps this suggests there is a way for Salesforce to return to profitability through sheer size. It is very early days though and the loss would need to start decreasing year on year, rather than just growing slower than revenue for this to be realised.

Looking at the long term, other than when the IRS cashed in their tax credits, Salesforce has not turned a profit since 2012 Q1. The next quarter, using Salesforce’s terminology, is 2016 Q1. Therefore, if Salesforce fail to make a profit next quarter, it will literally have been four years since Salesforce made a buck from their operations.

Cash and Accounts Receivable

The purpose here is to consider the quality of Salesforce’s current assets (assets which, in theory, could be cashed in quickly, if needed). The two major components for Salesforce are Cash (literally cash sitting in a bank account) and Accounts Receivable (money owed to them). Cash is generally considered more desirable than Accounts Receivable if only because it is much easier to get money out of the bank than it is to get money out of people who are in your debt.

The part jumping out at me here is the regular spike in Accounts Receivable (the red line). However, it is completely predictable, based on the historical values. At the end of every financial year, Accounts Receivable jumps up and every year the jump seems to be increasing. What is the cause of this mysterious pulse?

The answer is a human one. At Salesforce, “every month is end of quarter” so imagine how important the end of financial year is. The Salesforce sales team want to earn their commission and end the year on a high. If there is a way to close a sale before the end of the financial year, they will. In this case it is signing the contract before they have the money in hand. Terms of credit are extended significantly in the final financial quarter. What this tells me is if you are looking to get a good deal on Salesforce’s CRM, January is the month to play hard ball.

I also feel it is time to revisit the cash flows of Salesforce. How is it, if they are generating losses for so long that they continue to stay in business. Part of the story is the selling of shares to prop up operating cash flow but there is a bigger story around the ‘deferred revenues’. I think I will cover this in another blog article in the next few weeks.

Subscribers

Based on the transactions, subscription growth has slowed from 23% to 15%. It is probably a bit early to say if this is a trend or an outlier but it is worth keeping an eye on.

The loss per user per month has gone up from about 75c to about $1.10, which is not great and defies a transition to profitability. Another one to keep an eye on.

Earnings Call Buzzword Bingo

	2014 Q4	2015 Q1	2015 Q2	2015 Q3	2015 Q4
Number of words	3700	2400	4731	3922	4017
Customers/Customer	25	22	38	34	23
Revenue	29	19	27	26	25
Cloud	14	15	22	47	32
ExactTarget	15	7	8	1	1
Platform(s)	12	10	13	27	18
Service	13	13	15	12	5
Sales	4	6	6	7	6
Growth	12	9	18	16	13
Marketing	11	5	10	8	4
Cash	16	10	11	9	10
Operating	10	11	11	8	20
Enterprise(s)	3	8	10	8	7
Salesforce1	11	6	7	7	3
Dreamforce			11	14	2
Analytics				14	11
Software					12

The rule is the words on the list have had ten or more mentions in the past five periods with the text used being the call transcript after the introduction and up to, but not including, questions.

As we can see, we say farewell to ‘Sales’. The origin of Salesforce as a sales force automation platform is now well and truly in the past, although the Sales Cloud is still the main part of the Salesforce revenue. We also say hello to the word ‘Software’. Salesforce’s catchcry used to be “No Software” so it is a little surprising that the word Salesforce used to rally against is now a key part of Marc’s quarterly speech. Marc, in the quarterly announcement, refers to Salesforce as a “software company” seven times, obviously embracing the term he once reviled.

In terms of words in danger, we have ExactTarget, the acquired marketing automation platform and Salesforce1 which Marc refers to as the “foundation of everything we do”. It may be the foundation but it is the cloud, revenue and the customers which are at the front of his mind.

Google Trends

The term “dynamics crm” continues to have more interest than “salesforce.com” globally. Moreover, while the term “dynamics crm” is the most popular it has ever been, the term “salesforce.com” is generating the least interest ever, with the graph going back ten years.

Google Trends could not generate the region trends so I cannot include these this quarter.

Insider and Institutional Sales

	2014 Q4	2015 Q1	2015 Q2	2015 Q3	2015 Q4
Insider Sales	0.50%	0.50%	0.40%	4.70%	4.60%
Institutional Sales	2.72%	2.71%	2.67%	3.20%	3.11%

The big sales we saw last quarter continue. In 2015, so far, Marc Benioff has sold off close to half a million shares worth about $27m. Here are all of the sales for this year, to date.

Insider	Value of Shares	Number of Shares
Marc Benioff	27,299,125	462,500
Parker Harris	3,631,752	75,408
Joe Allanson	26,384	418
Burke Norton	1,465,560	24,372
Maria Martinez	120,117	1,903
Craig Conway	59,865	1,000
Lawrence Tomlinson	379,528	6,400
Alexandre Dayon	142,857	2,500
Grand Total	33,125,188	574,501

To give some perspective the largest sales are by:

• Marc Benioff, Chairman and CEO
• Parker Harris, Co-Founder
• Burke Norton, Chief Legal Officer

Two of the co-founders are off-loading despite one of the analysts on the call likening the quarterly results to the Lego movie song “Everything is awesome”. For some reason Benioff and Harris no longer want to be ‘part of the team’.

Looking to the Future

Last quarter I predicted revenues of $1.46b-1.48b and an operations loss of around $20m. I was off on the revenue, which was $1.44b, by around 1%, which I am quite pleased about. For the operations loss, it was almost $65m so I was much less accurate. I thought the ship would be steering towards profitability a lot quicker than it is.

For next quarter, I predict revenues of $1.56b and a loss of around $50m.

Conclusions

Almost a year ago, I used Newton’s First law as an analogy to the lack of desire of Salesforce’s management to change direction. This time around I will use Newton’s Second Law which states that the force needed to accelerate an object is proportionate to the mass of the object. In other words Force equals = mass times acceleration. In this case, the ‘mass’ is the financial size of Salesforce and the acceleration is the growth of the organisation.

Warren Buffet talks in his annual reports about how it is very hard for him to generate the returns of the past because Berkshire Hathaway is now so large. The same is true for Salesforce. A number of indicators are suggesting a slowing of growth (revenue growth has slowed, staff number growth is slowing and transaction growth is possibly slowing). There is no mystery to why growth is slowing; what was once an untapped market is becoming crowded. New opportunities are harder to find and those that are available are being aggressively pursued by the competition. The effort required to grow the business (force) is now much larger because of their previous success (their mass).

As Salesforce becomes a mainstream “enterprise software company”, it begins to face the same challenges as its competitors. Ten years ago, Benioff famously said of his mainstream competitor Siebel “Even dinosaurs mate a few times before they die. It's the end of software.” Today, Salesforce is becoming one of those behemoths he once had disdain for. The big question is will Salesforce evolve into a bird and soar or will it become a lumbering carnivore doomed to be a collection of bones in the fossil record.

Why Do We Need CRM Systems?

I recently presented the “Conference Room Pilot” (sometimes reduced to the inauspicious acronym ‘CRP’) for a system we are implementing. In essence, a CRP is a review of the system before it is put through user acceptance testing (UAT), or more generally into production. The audience was about fifty people, from all levels of the organisation, many of which were unaware a new system was coming or why it was needed.

My job was to show them their new stakeholder management system but also put it into context and convince them this was not just another piece of technology coming in, to be replaced in 18 months. I needed to make the system relevant and generate a sense of urgency and excitement within the crowd. This got me thinking why we need CRM systems in the first place. What is it about the way we work that makes a CRM system indispensible? I had previously written about the ‘what’ but only touched on the ‘why’.

This is what I came with.

The Eternal Conflict

There is a battle waging in many organizations. The battle is between the end users and management. The end users come to work every day to do a good job. They sell the products and provide the services. They know the problems of the organisation, where the waste is and where attention needs to be focussed.

Management want to do everything in their power to make the end users and, by extension, the organization successful. Usually their success is directly linked to it. They are not as close to the clients as the end users, or the products and services the organization provides, so they rely on feedback from their various systems to guide the business.

This is where the problem often lies. The end users, deprived of the resources they need to service their customers, do the best they can. Time poor, they do not have the time to dot the internal ‘i’s and cross the internal ‘t’s. Information systems, when they exist, are filled in poorly or, worse, circumvented. Management, with limited and incomplete information make the best guess they can as to the issues within the business and where the resources should be best deployed. And so the cycle repeats.

Aligning People, Processes and Technology

The idea of aligning people, process and technology is a topic I have touched on in the past. The solution here is to consider all three elements and how they can work together to improve communication between the end users and management. Starting with the technology,the information systems must be simple to use (so they do not get in the way of the end users), aligned to the business process (and vice versa) so they do not hinder efficiency, and capture the essential information required to deliver great service to the clients and communicate with management the health of the business. For example, knowing how long a service call takes and the waiting times for callers is irrelevant to addressing a client’s immediate problem but is essential in setting appropriate staff levels.

Where practical, the system should be a ‘one-stop shop’ for a given end user. There is no value in having an end user jump from system to system when servicing a client or when they are ticking the internal boxes. It is inevitable that multiple systems are used within a business (for example, CRM systems make for lousy ERP systems) but as long as each end user uses as few systems as possible to do their job, this will minimise the frustration of constantly jumping from one system to the next.

Finally our system needs to have reporting tools so that, assuming it is aligned to the business’ processes and it is not getting in the way of the end users, management can extract insights into the business and deploy resources accordingly. For example, if support consistently answer questions on a specific topic, perhaps this topic should be covered on the business’ FAQ, or if a particular product consistently shows a specific defect, this can be the focus of future research and development.

The Right System For The Job

The system I am describing is, of course, a CRM system. While traditionally focused on managing sales processes, CRM systems have come a long way and are consistently used to manage all manner of processes within a business. In the case of Dynamics CRM, the tight integration with Outlook, reporting tools, and a workflow engine to automate repetitive tasks and manage escalations make it ideal for the system I am describing.

Responsibilities

With the right people in place, efficient business process and a CRM system to help them do their job and capture the key ‘levers’ of the business, it is then the responsibility of the end users to use CRM appropriately. When they do so, management can use the reporting tools to better understand the business and their clients, and they can then deploy resources appropriately to further improve operations. The end users get the resources and system to help them do their job and the business thrives.

The Circle of ‘Business’ Life

If we now revisit our diagram, it takes on a new paradigm. Rather than describing conflict in the business, it describes a self-reinforcing process for improvement, with all elements of the business working together, rather than against one another.

Conclusions

A common complaint with CRM systems is that they increase end user workload or that they are ‘Big Brother’. While CRM systems do require effort to use and are a monitoring tool for the business, these criticisms need to be considered in a larger context. With centralised, consolidated information, visibility of the business is gained and the system, rather than keeping end users and management apart, bring them together and aligns them so they both work together for the business and, most importantly for the clients. This is the reason CRM systems are so important and are essential if a business is to succeed.

Setting up Handy Links in Dynamics CRM 2013/2015

Something which is often requested by client, but which has been difficult to do is set up handy URL links on a CRM form. Before CRM 2013, the best you could do (without code) was add web links in as reports. While this worked, it was not obvious that the link was there. Also, it did not allow us to add dynamic URLs to our record.

Using a few of the new features of CRM 2013/2015, it is now possible to add default web links directly to the page.

How To Do It

Firstly, we need to set up the fields to hold the URL. The trick here is to make sure we tell CRM to make them URL fields. This is done by setting the format of the Text Field to URL. Make sure you do this at creation though as once it is set, you cannot change it.

Now we add these fields to the form and make them read only.

Finally, we need to insert a web link, which we do with the new Business Rules, found on the form. As I mentioned in my previous post, Business Rules are a nice way to do some things without JavaScript. In our case, the Business Rule looks like this.

The net result is a bunch of clickable web links on our form which, when the record is saved, get auto-created. It is that easy!

Dynamic URLs

This is a nice way to add a static URL to a field and display it on the form. If you need a dynamic URL, our friend the real-time workflow comes to our aid.

In this case we construct the URL by using the ‘Append With’ Operator

In the above we append the Account name to the web string. Using this with successive Update steps we can make the URL read whatever we like.

Conclusions

There are always web links to applications which are useful to the CRM user but which are not worth fully integrating. This is a quick and simple way of giving access to them without code and without a lot of expense.

Faking JavaScript Codelessly

I am quite a fan of not using code where possible and where practical. However, there is no point sacrificing code if the user experience makes the system unusable. CRM 2013/2015 gives us a few tools in our kitbag for avoiding using code without sacrificing experience. I thought I would explore them.

Real-Time Workflows

I am so pleased to see real-time workflows in CRM. In the old days, workflows could only run in the back end. The problem with this is while you could make them do lots of interesting things (Auto-numbering, Lead Assignment and Counters, for example), the user experience was sub-par. The main problem was that while the workflow did everything you wanted it to, the user did not know what was happening because it was all on the server and not on the form. This has now changed with real-time workflows.

Any workflow can be converted to run in real-time by deactivating it and hitting the ‘Convert to a real-time workflow’ button at the top of the form.

I made of use of real-time workflows in my address finder article. The experience in that case was, once the location was set, the other fields appeared updated on the save of the record. In other words, if you are looking for something which behaves in a similar way to the OnSave event, a real-time workflow gets us close.

So what other events can JavaScript trigger off? You will remember from my Developer Essentials article that JavaScript triggers off of four events:

• OnSave (saving of the form)
• OnLoad (when the form opens on the screen)
• OnChange (when the value in a field changes)
• TabStateChange (opening and closing of Tabs)

So we have covered off the first one. What about the others? For these we will need Business Rules.

Business Rules

Another new function for CRM 2013/2015, Business Rules allow us to configure form behaviours. I mentioned Business Rules in my updated Auto-Number post from last year. Business Rules are configured on the form and here is a simple one I set up to test the behaviour. In this case, when the Main Phone is populated, the value is copied to the Other Phone field.

When activated, it becomes clear Business Rules run on both the OnLoad event (on loading the form, if the Main Phone had a value and the Other Phone did not, the value was copied) and OnChange event (if I changed the Main Phone value and tabbed out of the field, it was immediately copied to the Other Phone field). Please note that, with Business Rules, synchronous plugins run first and then the Business Rules fire in the order they were activated (oldest to newest). Also, in 2015, Business Rules were changed to fire server side, not client side (as they did for 2013). This means if a value changes in the back end (via integration, for example) the rule will fire without the need for opening the record. From a user’s perspective, it still appears as if the rule is firing OnLoad and OnChange.

Tab State Changes and Other Stuff

There are no codeless equivalents for triggering off the opening or closing of a Tab and there are plenty of other things you may need to do which simply cannot be done with the limited actions available for Workflows and Business Rules. In these cases you will still need Javascript.

Also, as a word of warning, with the many ways to emulate JavaScript-like behaviour, it can be difficult to determine exactly how a form does what it does. For this reason I know of a few senior developers who prefer to use JavaScript in all cases, even though the codeless alternatives may be quicker and as effective. In their case they are considering the future administration of the form. If everything, or nearly everything can be contained in one place, it is easier for an administrator; no rifling through numerous places trying to find the right thing to change.

Conclusions

If you are upgrading and have a system with lots of code, there is plenty of opportunity with the improved functionality of CRM 2013/2015 to remove some of that code and replace it with configuration (especially if it is breaking in going from CRM 2011). Similarly if, like me, your coding days are a bit of a distant memory, the new functionality gives you something to impress clients and potential clients with when showing off what is possible with CRM forms and making them user friendly. Try them out and see how easy it is to configure what used to be coded.