Salesforce.com’s remarkable growth continues, but 2014 will be more challenging

Jeremy Cox, Principal Analyst, Customer Engagement, Madan Shaina, Lead Analyst, Information Management Software

Salesforce.com grew by 33% year-on-year in its fiscal year 2014, breaking the $4bn mark. It was involved in larger transactions, several of which broke the $10m ceiling. At the earnings call in February 2014, the company’s chairman and CEO, Marc Benioff, was clearly feeling bullish about the immediate future; he delivered a forecast that the company would grow by approximately 30% to $5.3bn over the coming year.

No other software company of this magnitude is growing as fast, but there are concerns around profitability and the increasingly competitive environment, as major vendors flesh out their cloud-based offerings.

Salesforce.com’s evangelism about the “Internet of Customers” pays off

As Salesforce.com continues to fund its growth at the expense of short-term profits, Marc Benioff’s evangelism about the “customer company” and Salesforce1 as the hub through which to connect to the “Internet of Customers” is paying off. The final quarter showed an increase of 37% over the previous year, to $1.15bn. Benioff pointed to the growing number of high-value sales, with 200 in the quarter above $1m and more than 10 above $10m; these figures indicate larger enterprise interest and a broader scope than the traditional CRM sale, which Salesforce1 supports.

The growing ecosystem of ISVs increases Salesforce.com’s relevance

Benioff also reported that more than 250 independent software vendors (ISVs) are developing apps for the Salesforce1 platform – Evernote, Dropbox, LinkedIn, and HP already have apps available. Across the entire Salesforce.com portfolio there are now 1.5 million app developers, which is an increase of 50% on the previous year. As Ovum argued in the opinion “Salesforce unveils platform to connect companies, customers, partners, and products,” Salesforce.com’s burgeoning AppExchange is one of its key growth engines and competitive strengths.

Sensing capabilities play a vital part in connecting with customers

We continue to see rapid growth in analytics, and Salesforce.com needs to catch up in this space. Simply connecting with customers through multiple channels is not enough – enterprises need to do so consistently and in a timely manner. Sensing the current and anticipated needs of customers will be a critical factor in their effective engagement and retention, and doing so hinges on quick and scalable analytics.

Customer data is the pivotal source for most business analytics today, and many companies already have the capability (data privacy issues notwithstanding) to capture a wealth of rich information about their customers. Equally, a number of Big and Fast Data analytics platforms and architectures are providing deep mining of customer data in realtime.

Ovum therefore finds it surprising that Salesforce.com’s analytics strategy has yet to take off, with the company preferring to hand the function off to selected partners. Until it gets serious about Big Data analytics, Salesforce is effectively foregoing an opportunity to advance its CRM platform’s value proposition and to create a potentially lucrative new revenue stream.

Although the new Salesforce1 mobile analytics on tablet and phone are compelling evidence of the value of the new platform, Ovum remains convinced that the company must offer a Big Data and analytics solution.

Ovum believes that 2014–15 will be a defining year for Salesforce.com

Financial analysts had a mixed reaction to the earnings call. Some questioned the firm’s ability to keep growing at the expense of profits, while others saw greater investment in R&D and extending the firm’s reach and market coverage through direct and indirect channels as a price worth paying to maintain the high growth momentum. Ovum’s view is that making it easier to connect and engage with customers in ways that are more informed and add more value across all channels is a trend that is gathering momentum.

Go back 10 years and the integration efforts alone made this prohibitively expensive for all but the richest or most farsighted organizations. Today it is much simpler, and the rising store of APIs in Salesforce.com’s portfolio, coupled with Salesforce1 providing the membrane to connect companies and customers, is a positive sign.

Another positive sign is that Salesforce’s growth in Europe reached 41% over the last fiscal year. European companies are migrating from on-premise to cloud-based offerings, with the aim of reducing capital expenditure and increasing flexibility. Given that Europe’s economies have been flagging over the past 12 months, this level of growth is a remarkable achievement.

To cement its position, and to overcome issues of data privacy and European concerns about the USA Patriot Act, Salesforce.com will open its first European data center in the UK in August 2014, followed by two more in France and Germany. The company will be able to grow its public sector business in the UK, where the government has a cloud-first strategy and is seeking to reduce costs and engage more deeply with citizens. This will open new opportunities for Salesforce.com that will accelerate as the German and French data centers come on stream.

Salesforce.com’s major competitors – Microsoft, SAP, Oracle, and IBM – have all been busy reinvigorating their customer engagement offerings, as well as their cloud and mobile solutions. More aggressive pricing is likely to negatively impact margins, meaning that, while growth targets may be realized as the shift to cloud-based platforms continues, getting profit margins under control – one of Benioff’s targets for this year – will be even tougher. Ovum expects 2014 to be a defining year for Salesforce.com.

Related Stories

Leave a comment

Alternatively

This will only be used to quickly provide signup information and will not allow us to post to your account or appear on your timeline.