Eight Eye-openers From Salesforce.com's Annual Report

CRM still accounts for "substantially all" of Salesforce.com's revenue

Last week, Salesforce.com reported its fourth-quarter and year-end fiscal 2014 results, announcing a major bump in revenue and even raising its guidance significantly. But the fast-growing cloud vendor is also continuing to post significant losses as it spends big on sales, marketing and acquisitions.

Salesforce.com's annual report, which was released this week, paints a fuller picture of the vendor's opportunities and challenges, while also revealing a series of eyebrow-raising facts. Here's a look at some of the highlights.

Core CRM is still king: While Salesforce.com has spent the past couple of years hyping its marketing automation capabilities, social analytics and most recently the new Salesforce1 development platform, the CRM (customer relationship management) software it was founded on remains the most lucrative component of its business. In fact, "we derive substantially all of our revenue from subscriptions to our CRM enterprise cloud computing application service, and we expect this will continue for the foreseeable future," Salesforce.com said.

Cutting down on customer churn: Since SaaS (software as a service) vendors such as Salesforce.com sell their products via subscription, it's crucial for them to get as many existing customers as possible to renew, given the substantial cost of acquiring new ones.

Salesforce.com is making progress on its customer attrition rate, which is also referred to as "churn" in the industry. As of Jan. 31, its attrition rates were in "the high single-digit percentage range," compared to a "low double-digit percent range" one year earlier, according to the report. Attrition rates, however, are expected to "decline slowly over time," Salesforce.com added. However, the company does not calculate the attrition rate for ExactTarget, the marketing automation vendor it acquired last year.

Goodwill hunting: Salesforce.com had some $3.5 billion in goodwill on its books as of Jan. 31. Goodwill refers to the amount of money a company pays for an acquisition over and above its book value, representing intangible assets such as a positive brand image. Goodwill accounted for $1.85 billion of the roughly $2.6 billion Salesforce.com paid for ExactTarget.

If an acquisition doesn't end up generating the value expected, companies are often compelled to write down goodwill. Hewlett-Packard took an $8.8 billion "impairment of goodwill" write-down in November 2012, attributing the charge partly to alleged accounting improprieties at Autonomy prior to HP's acquisition of the infrastructure software vendor.

Salesforce.com didn't write down any goodwill during its fiscal 2014, 2013 or 2012, according to the annual report. But goodwill now represents about 38 percent of Salesforce.com's total assets of $9.15 billion.

Mega-marketing: Much is made of Salesforce.com's rapid revenue growth but some analysts point out the company's lack of profit. In the fourth quarter of its fiscal 2014, the company posted a $117 million loss, even as revenue shot up 37 percent to $1.15 billion.

Salesforce.com has typically stressed it is focused on improving brand awareness and increasing top-line revenue for now. The company is putting plenty of money behind that goal. In its fiscal 2014, marketing and sales costs accounted for 53 percent of its total revenue, the same as in fiscal 2013, according to the annual report. Marketing and sales costs will "continue to represent a substantial portion of total revenues in the future," Salesforce.com said.

Innovation investments: Salesforce.com spent $623.8 million on research and development in its fiscal 2014. That works out to 15 percent of total revenue, a total that compares favorably to the likes of rival Oracle, which spent 14 percent of revenue or $1.27 billion on research and development in its quarter ended Nov. 30.

Headcount heats up: Salesforce.com had 13,300 employees as of Jan. 31, compared to 9,800 one year prior. That's a 36 percent increase.

Salesforce.com's number of customer support and professional services employees grew by 58 percent during its fiscal 2014, "to meet the higher demand for services from our customers, of which the majority was due to the acquisition of ExactTarget," according to the annual report. General increases in hiring for sales and marketing during the year also accounted for the growth.

Campus crunch: Salesforce.com bought 14 acres of undeveloped land in San Francisco in 2010 with plans to build a major new headquarters, but subsequently put the effort on ice. The land is now worth some $321.1 million as of Jan. 31, according to the annual report. But there's little indication that Salesforce.com will ramp up work again on the project.

In fact, it is continuing to "evaluate its future needs for office facilities space and its options for the undeveloped real estate, which may include selling a portion of or all the real estate holdings, or suspending pre-construction activity for several more years," the annual report states.

Disaster planning: While Salesforce.com has data centers in both the U.S. and other countries, and recently announced plans to open three more in Europe, for disaster recovery purposes. "Our production environment and all of our customers' data is currently replicated in near real-time in a facility located in the United States," according to the annual report.

Salesforce.com may find itself compelled to shift disaster-recovery efforts to foreign data centers, in order to appease non-U.S. customers with heightened concerns over data privacy following the revelations about U.S. National Security Agency domestic surveillance programs leaked by former NSA contractor Edward Snowden.

Chris Kanaracus covers enterprise software and general technology breaking news for The IDG News Service. Chris' email address is Chris_Kanaracus@idg.com

This story, "Eight Eye-openers From Salesforce.com's Annual Report" was originally published by IDG News Service Boston Bureau .

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