Salesforce.com Leaps Into Cloud Computing

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Cut to the annual Dreamforce conference on Nov. 3, when Salesforce.com unveils its new software, Force.com Sites. It offers tools that will let companies such as Starbucks (SBUX) and Dell (DELL) build Web sites that solicit feedback from customers on pages served by Salesforce's computers. Force.com represents a foray into cloud computing, which lets customers pay someone else to house the ever-rising mountains of data and computing power needed to deliver information on the Internet.

Thickening Skies in Cloud Computing

Customers will pay Force.com according to how many page views are served up through the company's Web site. Salesforce will also announce a deal with social networking site Facebook, allowing applications written with the new software to run as Facebook widgets.

As booming a business as cloud computing has become, it's also crowded. Google (GOOG), Amazon.com (AMZN), and Facebook all have ambitions in the field, and Microsoft on Oct. 27 announced upcoming software (BusinessWeek.com, 10/28/08) called Windows Azure, which would let companies build cloud applications that Microsoft runs on their behalf.

Benioff isn't one to shy away from competition. But even as he ventures into new territory, he needs to prove that the model for on-demand business software—an area he pioneered—can work as well in bad times as it did in good. Benioff says there's been no material change in prices or customers' ability to pay their bills. "There is no better model than ours for times like this," he says.

A List of Big Potential Buyers

Yet Salesforce's deferred revenues—an indicator of new business signed per quarter—have fallen short of expectations, causing consternation for investors. "Their business model is great, because I never worry about them missing their revenues or earnings, but that's not what they get judged on by the Street," says Heather Bellini, an analyst at UBS (UBS), who has a "sell" rating on Salesforce. "They're judged on deferred revenues, and the last two quarters they've been disappointing. If [Benioff] doesn't get it to be more than a CRM company, what goes through my mind is: 'Could he have the same fate as Tom Siebel?'" That was the former CEO of Siebel Systems, whose company was bought by Oracle after its performance tanked during the last tech bust—in no small part because Salesforce ate its lunch.

There's speculation on Wall Street that Salesforce could be an acquisition target. Oracle, Microsoft, Google, SAP, and Cisco (CSCO) are potential acquirers, according to analysts and industry executives. Salesforce has always been considered attractive, but expensive. Now, "you have more possibility of some kind of transaction when the stock's at 30 than at 70," says Brendan Barnicle, an analyst at Pacific Crest Securities, who rates Salesforce stock "outperform," but slashed his price target for the company to $30 from $80 on Oct. 27.

Analysts also wonder whether Salesforce, scheduled to report third-quarter results in mid-November, is entering a period of slower growth. Wall Street expects sales to increase 43% for the 2009 fiscal year that ends in January, but to gain only 28% in 2010. If Benioff were to tap the brakes on hiring and restrain sales and marketing costs—currently 50% of revenue—the company could drop more revenue to the bottom line. By the same token, if Salesforce keeps spending to acquire new customers the way it did when times were flush and customers kept needing to buy additional seats of its software for newly hired workers, any demand slump could hit hard. "The bear case is they're going to hit the wall at 60 m.p.h.," Walravens says.

On-Demand software under pressure

To be sure, Salesforce's business remains strong. It signed up a net of 4,100 new subscribers last quarter and profit keeps growing as a percentage of revenue.

But the very appeal of on-demand software could turn out to be the company's Achilles Heel. The software has proven itself by freeing vendors—and their customers—from pressure to close big deals at quarterly endings, locked-in investments to install and customize programs, and the pain of maintaining numerous versions of applications in the field (which came to plague Siebel and other traditional business software vendors). But the on-demand world, with its lower prices and lack of high-margin maintenance fees (BusinessWeek.com, 7/18/08), also means vendors need to fight for every dollar.

Salesforce competitor NetSuite (N) has been struggling. SAP has run into problems finding customers for a suite of on-demand business applications called Business By Design. "The biggest question is how [on-demand] companies fare in a recession," says Pacific Crest's Barnicle.

That's why investors who've bet on the category—and on Salesforce—may welcome a new look from Benioff and the company he built.

Ricadela is a writer for BusinessWeek in Silicon Valley.