Salesforce.com Inc.'s Thursday filing for a public offering some time next year is likely to further raise the profile of hosted application services as an alternative to traditional business software deployment models, according to analysts and other companies in the closely watched market.

Founded in early 1999, Salesforce.com is the largest and most visible among a pack of companies evangelizing subscription-based managed services as a faster, cheaper alternative to purchasing complex CRM (customer relationship management) and ERP (enterprise resource planning) software systems. Whereas software from business application leaders such as SAP AG, PeopleSoft Inc. and Siebel Systems Inc. usually costs millions up front and involves time-consuming customizations, ASPs (application service providers) such as San Francisco-based Salesforce.com offer their services at rates generally starting around US$70 per user, per month.

The ASP market's strong growth in an otherwise stagnant climate for enterprise software sales has drawn the attention of analysts and customers, but because most of the companies in the market are small and privately held, little verifiable information has been available on the companies' sales and customer bases.

In its IPO (initial public offering) filing with the U.S. Securities and Exchange Commission, Salesforce.com claims a customer base of 8,000 companies, with 110,000 subscribing end-users in 70 countries.

The company reported a net loss of $9.3 million on revenue of $51 million in its last fiscal year, ended Jan. 31. For the nine-month period ended Oct. 31, it showed income of $4.7 million on revenue of $66 million. However, $4.3 million of that profit came from a one-time non-cash gain of $4.3 million, a recovery related to a $7.7 million non-cash charge Salesforce.com took in its 2002 fiscal year to cover costs associated with abandoned office space.

Chairman and Chief Executive Officer (CEO) Marc Benioff has previously projected the company will bring in $100 million this year. Salesforce.com has cash reserves of about $30 million and an accumulated debt of $71 million. It hopes to raise up to $115 million in its IPO, likely to occur early next year.

Aberdeen Group Inc. analyst Denis Pombriant said he's pleased to see Salesforce.com officially file for its long-planned public offering and believes the move could lead others in the ASP market to follow suit.

"Importantly, this really validates the concept," he said. "It was only about a year to 18 months ago that everybody was leaving hosting for dead. What's been really interesting to watch is the steady growth of Salesforce.com as they got their message to the market, and the market believed in it and started buying."

Aberdeen conducted a customer study this year that asked respondents if they would consider a hosted service for their CRM needs. In the survey's first round, in early 2003, about half of the respondents said they would. A second round, in the second half of the year, showed the "yes" responses climbing to 85 percent, Pombriant said.

"That's classic tipping-point behavior," he said.

Yankee Group Inc. analyst Sheryl Kingstone said the transition from private to public ownership is challenging for every company, particularly when the economy is slumping, but that Salesforce.com has the advantage of a strong management team and customer base.

"Salesforce has the momentum to pull it off, and they have a real business model," she said.

Even the company's rivals, usually quick to criticize Salesforce.com, said they wish the company luck and anticipate positive effects from the IPO.

"For all the ASPs that are doing well, it will be great to have somebody out there testing the public waters," said Zach Nelson, CEO of San Mateo, California-based NetSuite Inc. With 7,000 customers and 50,000 subscribers, ERP-focused NetSuite is generally considered the business applications ASP market's number two company. Nelson said his company is likely to pursue its own IPO in late 2004.

Also considering tossing its chips on the table is Salesnet Inc., a Boston company that vies with Salesforce.com for hosted CRM business. Salesnet does not disclose the size of its customer base.

"We're going to closely watch how they do," Salesnet CEO Mike Doyle said. "If Marc and his group can get the valuation we think he can get, it will do everybody a great service."

The apparent success of companies like Salesnet has recently prompted competitive responses from the far larger stalwarts in the business applications market. Siebel, which helped create the CRM market it now leads, this month will launch a hosted offering dubbed Siebel CRM OnDemand. It will be the first product from a major company to compete directly with the startup ASPs for a share of the low-cost-of-entry monthly subscription business. Siebel CEO Tom Siebel predicts his company's service will have more users than Salesforce.com's by the end of 2004.

Still, while ASPs have won enough customers to prove that a market exists for their services, the growth potential of that market remains an open question.

Among the risk factors Salesforce.com lists in its IPO filing is its historical reliance on sales to small businesses, which are the customers most likely to churn. Salesforce.com doesn't list in its filing its renewal rate, and a spokeswoman declined to comment. The company is looking to address that weakness by increasing its sales to larger organizations, but those sales, the company said, involve higher costs and longer sales cycles -- factors that could eat up its already tenuous profitability.

"It's a significant risk factor if they have any problem with customer churn," analyst Kingstone said. "They need to have a solid base and build on that. Still, they have every incentive to do that, and the fact that they are consistently targeting larger players should help."

» posted by abennett

IDG News Service

• Email
• Print
• Share
  • Slashdot
  • Digg
  • Stumble
  • Reddit
  • Newsvine