February, 2012

  • February 29, 2012
  • You may remember the subscription economy from previous posts.  It’s one way to make sense of cloud computing and the many new and very different ways of doing business on the Internet.  We’re most familiar with software as a service and how different it is from conventional licenses; so familiar in fact that I don’t need to describe it for you here.

    But subscriptions as a way of doing business are just about everywhere; they’re not just in tech anymore.  For instance, if you want you can get your clothing as a subscription, and not only that but men (who as a group are notoriously lazy shoppers) have sites dedicated just to them.  You know the trend has arrived when something like men’s clothing is available as a subscription.

    Nonetheless, we’ve more or less glossed over everything below the waterline in this new approach to business.  It’s taken over ten years to get the idea of the subscription economy into our noggins but we’ve barely started internalizing what it takes to support it and report on it as a business.

    This all came into sharp focus for me last week when I reviewed Salesforce.com’s Q4 and annual earnings call with Tien Tzou, CEO of Zuora, a company that specializes in what’s below the subscriptions waterline.  Tzuo is also an alumnus of Salesforce having been its CMO and chief strategy officer before starting Zuora.

    As you know, subscriptions operate through customer payments on a periodic basis.  The industry became known by its per seat per month pricing but that doesn’t happen much these days because monthly billing got to be a challenge with big deals.  Today customers sign contracts for a fixed length of time and vendors invoice periodically.  A typical example might be a three-year contract with annual or quarterly billing.  Here’s where it gets interesting.

    The financial analysts and other Wall Street types—whom I have absolutely nothing in common with—are very accustomed to companies selling products rather than subscriptions and collecting the money net 30 or whatever and moving on to the next opportunity.  Subscriptions have a mixed bag of revenue recognition ideas that challenge the status quo (which has very well defined ways of recognizing revenue) significantly.  Product companies don’t have much when it comes to reliably forecasting future revenue streams but subscription companies are just bristling with information.

    Take the Salesforce revenue numbers from last week’s earnings call as an example, and here is where I am indebted to Tzuo for his insights:

    • Quarterly Revenue of $632 Million, up 38% Year-Over-Year
    • Full Year Revenue of $2.27 Billion, up 37% Year-Over-Year
    • Deferred Revenue of $1.38 Billion, up 48% Year-Over-Year
    • Unbilled Deferred Revenue of $2.2 Billion, up from $1.5 Billion Year-Over-Year

    If you are reading this (thank you very much) you have at least an intuitive understanding of revenue but deferred and deferred and unbilled revenue deserve explanation because who really cares about unbilled deferred revenue—isn’t that complete vapor?

    As Tien Tzuo said to me, think of it this way.  You do a deal with a company in which you agree to supply your service for three years for $36k or one thousand dollars per month and you agree to invoice once annually, in advance, for $12k.  At the very beginning then you have $24k in unbilled deferred revenue and, since you bill in advance, you also have $11k in deferred revenue and $1k in real live revenue which you can recognize.

    This $1k is also known as MRR or monthly recurring revenue.  Theoretically, if you add up all the MRRs on the books you can get very close to the forecast for the quarter.  But there’s also an upside possibility that you’ll sell something else.  If you do and you invoice for it, you’ll add to that pile of money.  Unfortunately, there is also a possibility that some of your MRR will go away either because the customer quit or because they didn’t renew or whatever.  We know this as churn so you really need to discount the MRR by the churn rate to get a better sense.  Life would be simpler if we could all agree on using a metric called the annual recurring revenue but, curiously, ARR doesn’t exist yet.

    So, all this has the potential to drive Wall Street types nuts.  They’re good with the $1k in MRR and they can tolerate the $11k in deferred revenue because it’s in hand, and the $24k in unbilled deferred revenue is sort of OK (but not really) because there’s a contract in place that defines the annual billings.  But this does have one effect that many financial types like—it smoothes out the revenue stream for months in advance.  Bookings might fluctuate but the monthly revenue stream should be rather predictable.

    Nevertheless, it’s bookings that have recently made some people skittish.  Sales has always been a lumpy affair.  Some months many deals get booked and other months not so much.  Early on the software industry trained its customers to wait until the end of the quarter to make purchases because that’s when they had leverage.  Finance guys didn’t like this but they got used to it.

    Today, the quarterly incentive is largely gone due to monthly recurring revenue but people still obsess over bookings.  What if bookings go down for a few months?  The logical answer is that future revenue would eventually feel it but it’s equally true that bookings could recover before real revenue took a hit in which case the fluctuation in bookings would not be seen.  Call it seasonality.

    Let’s summarize all this.  Salesforce has $1.38 billion in deferred revenue, which I presume will be realized in the next 12 months.  During that time they are advising us that the company will have revenues of between $2.92 and $2.95 billion.  This means that they have about 47 percent of next year in the bank.  They also have $2.2 billion under contract to be invoiced (unbilled and deferred) and some of this invoicing will be done at some point beyond the next year.  In the last quarter Salesforce had $632 million in revenue which grew at 38% year over year.  At some point in the next twelve months Salesforce could have a quarter in which it books revenue of $750 million which would give it a forward looking run rate of $3 billion.

    It’s still an uphill battle explaining revenue recognition and the difference between conventional companies and subscription companies but at least there’s a lot of black ink to do it with.

    Published: 12 years ago


    It’s been almost thirty years since Steve Jobs visited Xerox PARC and saw the prototype for the GUI.  That paradigm worked so well that it has been around ever since succeeding numerous generations of hardware and graphics processors.

    Perhaps the main reason that today’s GUI has had such staying power is that it works but also, there has been little demand for radical change because our business processes have stayed relatively unchanged.  But if you wait long enough change happens.  In this case, the demand for what a GUI does is changing and may at some future date make it irrelevant.

    A GUI works well in a decent size screen environment where you have access to pointing and positioning devices, but what happens when everything compresses as it does with mobile devices?

    Many of us have some experience with thumb typing and other efforts to use the micro screen like it was a computer.  It’s not pretty.  Apple realized this a while ago when it incorporated voice processing into its iPhone and who knows where that will go?

    Perhaps voice recognition is another example of the personalization of IT.  Voice interfaces have been around for decades but they’ve been clunky and not always reliable.  For the best results many also need training and that means, the voice recognition becomes the computer equivalent of a one man dog.  That’s all slowly changing.

    Today two companies, EasyAsk and BrainSell announced an agreement to deliver EasyAsk Business Edition for SugarCRM with a voice interface.  So in the not too distant future you might see road warriors and C-types talking to their mobile devices like Dick Tracy.

    Don’t laugh.  The iPod form factor could support a wrist watch-like device format.  But wrist watches are not good at supporting GUIs and holograms (as long as we’re speculating) have their own drawbacks for pointing and clicking.  Voice recognition makes sense as an important piece of a future puzzle, if you ask me. To get all the details visit this link.

    The PR makes reference to the IBM Watson-like natural language interface used by the all time Jeopardy! winning computer.  IBM has been knocking at the front door of the front office lately and it would not surprise me if there’s more to come.  And with a good natural language interface, the company might have quite a differentiator.

    *NOTE: The Dave reference is to 2001 A Space Odyssey. Some times I am too obscure.

    Published: 12 years ago


    On April 23, 1516 in the duchy of Bavaria (thank you Wikipedia), the Germans put a law on the books governing the purity of beer.  The Reinheitsgebot stipulated that beer could be made of only three ingredients: water, malted barley and hops.  That may have been the highpoint of European tinkering with technology through government fiat.

    The low point for government technology tinkering might be another German law enacted in the last few years Verpixelungsrecht or the right to be pixilated.  I got this nugget from Public Parts a book that takes on our various ideas about privacy in the modern world by Jeff Jarvis published last year by Simon and Schuster.

    The right to be pixilated stems from Google’s efforts to map streets all over the world using cameras so that you can Google-up a street and see it.  How cool?  But the Germans have this thing about privacy and didn’t want anyone’s face captured for all posterity.  So they came up with the right to be pixilated.  What’s interesting, and what Jarvis makes very entertaining, is the contrast: the Germans’ favorite indoor sport, the sauna.  Naked.  Co-ed.  Sauna.  Go figure.  At least no one gets pixilated.

    All this is brought into sharp focus by the latest effort at hemming in Google and other Web properties for their privacy practices.  In an article in today’s New York Times, it appears that Google’s upcoming changes to privacy rules are not up to snuff for the French, of all people!  The French are not known for their saunas but…oh never mind.

    According to the Times:

    “… the French privacy agency, the National Commission for Computing and Civil Liberties, said in a letter to Larry Page, Google’s co-founder and chief executive, that the proposed policy was murky in the details of how the company would use private data.”

    Privacy agency?

    If I understand this right, Google takes a zillion pieces of data, strips out the identifying characteristics (let’s say they pixilate it, ok?) and then use analytics to look for patterns so that when you browse a page they can suggest ads.

    Isn’t this just a big focus group masquerading as a science project masquerading as real work for politicians who can’t get their economy moving because they’re wedded to draconian economic ideas that were last tried by Diocletian?

    Look, my name is Denis.  For the first forty-odd years of my life, before people met me they assumed I was a girl because Dennis is the ‘correct’ spelling of my name.  Every year the first day of school had a predictable little drama when the teacher read the roll.  Let’s not go there.

    Sometime in the late twentieth century something changed.  Writers and actors (Lehane, Leary) with my spelling made enough of a dent in the culture to make having a single ‘n’ acceptable.  Perhaps more importantly, we all began collecting and crunching enough data that even those who try to market on autopilot realized that I might like beer over white wine or whatever.

    Let’s be clear.  There is a big brother threat from all sorts of things in our culture, some driven by computer.  For example, bank foreclosures accelerated by robo-signings and lost paper work, but no one thinks about this in a big brotherly fashion.  Why?  Just as Ayn Rand’s economics is fictional, so is Big Brother.  We’re going to have to work harder to find those excessive intrusions on our privacy than reflexively flogging Google and Facebook.

    So, all you Europeans in the sauna, if you want privacy, put your pants back on.

    Published: 12 years ago


    Beagle Research Group is pleased to announce the winners of the 2012 Short Tale Awards for excellence in the use of short video in front office sales, marketing and service.

    Video is a superior medium for delivering complete information to customers, employees and partners.  In the hands of experts video can communicate far more effectively that other forms of media that businesses have relied on for many years.  Unlike, written documents that can take longer to absorb or slide presentations that can be cryptic, video combines visual, audio and even music to deliver a rich experience that is informationally complete.  This award shows that it does not take big budgets or expensive outside assistance to generate great video.  Most of these winning videos were developed in-house.

    Created in 2011, the Beagle Research Group Short Tale Award was designed to showcase some of the best efforts in short video created by front office software companies in the year just ended.  The awards process is open to companies of all sizes and entries are limited to five minutes or less.  Pleasee visit BeagleResearch.com for the full report.

    The 2012 award winners include the following:

    Category

    Title

    Grand Prize—RightNow Technologies  “The Future of CX”
    Best Series (Multiple Videos On Same Subject)—Salesforce.com Social Enterprise videos
    Best Sales Video—Salesforce.com “NBC”
    Best Marketing Video—Salesforce.com “Burberry’s”
    Best Customer Service Video—Salesforce.com “Comcast”
    Best Use Of A Character—CRM Search “Amazing Mikey”
    Best Story Telling—RightNow Technologies “The Future of CX”
    Best Animation—CRM Search “Social CRM”
    Best Video Made Exclusively From Graphics—Oracle “What Do You See When You Look at a Cloud?”
    Best Video For Explaining A New Concept—Crowd Factory “CRM Idol Finalist Video”
    Best Video Under One Minute—Marketo “I’ll Have What He’s Having”
    Best Customer Testimonial—Brainshark “Brainshark: Con-way Customer Testimonial”
    Cutting Edge Award—Get Satisfaction “CRM Idol Finalist Video”
    Published: 12 years ago


    Salesforce announced it was holding off on the grand corporate office park it had been envisioning at Mission Bay in San Francisco.  It was a wise move by a company that should be focused on growth.

    In reading the Steve Jobs biography I was amused to see that he loved design so much that when he was given unfettered control he built some really, really nice corporate offices.  Sometimes it all worked out fine, as it did at Pixar, and sometimes it simply burned through cash as it did at NExT.

    Salesforce might have been wise to hold off on the massive building project for at least a couple of reasons.  Cash leads the list of course.  The company already spent over $100 million purchasing the 14 acre plot and not a shovelful of earth was moved.  Building the place was only going to turn the land into a money pit, so I applaud the decision.

    But the other reason is more dog food related.  Salesforce is pioneering the social enterprise, a strategy driven by its software that unites people in a company regardless of location, to improve corporate performance and customer delight.  So, you could easily say that Salesforce is its own test tube.  It is innovating on itself and expecting to share its findings with its social enterprise brethren.  How better to do this than by making do linking multiple floors and locations around San Francisco?

    It might not be ideal and it might not be fun (building things is great fun) but the company ought to be focused on cracking the Fortune 500 at this point—they’re so close—and a major building project might be defocusing.

    Back to the skunk works.

    Published: 12 years ago