Last Updated Jul 29, 2009 1:46 PM EDT
The first demon is slowing bookings, which essentially shows future revenues. Traditionally this has been a big measure in some areas like semiconductors, but hasn't been big in software. However, with the SaaS model, what you book today gives an idea of revenue base in the future, as companies work on an renewable lease model. According to Soleil Securities analyst Daniel Cummins, "booking growth is continuing to be 'choppy'" and profits won't be improving as he thought, according to Barron's Tech Trader Daily:
Analysts noted back in May that the company's bookings growth, a measure of future revenue, declined in the first quarter for the fifth quarter in the row. The company's forecast for bookings this year was below what most expected.That fact brings into question whether the common assumptions that the SaaS model is "booming", as many think. If it were so compelling, would Salesforce have created a free edition to entice potential customers? Granted, some software companies have been giving it away to ride the so-called freemium model, with some degree of success. But that's generally when they have incorporated the approach into their business from the beginning. Salesforce is clearly adding this on in an attempt to stem this diminution of bookings, which are ultimately more important than the "first quarter record" number of new customers that the company announced in May. After all, you can save your way into greater profits, but that only goes on for so long and eventually you need to increase revenue. But in that same quarterly announcement, Salesforce noted that its full year revenue outlook would be in the $1.25 to $1.27 billion range, not the $1.3 billion area that analysts had expected. That would represent a 17.9 percent revenue growth over fiscal year 2009, which had seen a 44 percent jump from the previous fiscal year.
My colleague Michael Hickins has said he's found in his reporting that it can take upwards of three years for a Salesforce customer to become profitable to the company. If that number is at all accurate, it should be alarming. Salesforce is going after a corporate clientele that would currently be suspicious of a three-year ROI on an investment. And while it's not unusual for a company to invest in customers and expect them to become profitable over time, that's a really long wait. When growth slows, it sets up an earnings problem down the line that can't easily be dimished.
The essential math seems to be tilting against Salesforce. Wonder what is happening at the other software companies focusing on a similar business model.