Salesforce to Buy Mulesoft
I’m going to need help with this. Mulesoft, a small tech company with less than $300 million in revenues is being purchased for $6.5 billion by Salesforce.com. Salesforce offered $44.89 per share, a 36 percent premium over the market price. Others are already saying that the transaction price represents more the value than the actual price. I don’t know, I am not that smart.
What I do know is the Mulesoft is an integration platform that brings together data from other clouds and even legacy apps. That’s really important as companies all over the landscape race to build what I’m calling the information utility. For that to happen you can’t have data sitting outside of the utility because, presumably, it’s all important, and it is.
In fact we don’t have a clear idea of what the information utility will look like or do yet. Yes, we can see the broad shapes and yes, enabling apps everywhere to access and share data seems like a no brainer. That’s what a utility like this should do.
But now we have to take things a step further. In light of the blowback from the social network shenanigans associated with the 2016 election we’re beginning to see that Mark Zuckerberg and Sheryl Sandberg are doing a revival of “Home Alone”. Adults are not in the room and all heck is breaking loose in social media.
The social networks you see today are dinosaurs, kiss them good bye. It takes more effort to pull a plumbing permit to work on your new kitchen than it takes to get permission to mess with 50 million Facebook profiles. That’s wrong and unsustainable.
I can see a day in the near future when we’ll need Mulesoft to integrate social networks with encryption and storage systems that protect customer identity data. The systems that encrypt and secure identity aren’t around yet but might be coming to market in a year or two.
We’ll need those systems as governments in the EU and US ponder ways to enhance GDPR and lock down personal data in an effort to prevent future cyber war.
Here are some links to articles that flesh out my meaning:
Social Networking as a Utility
So, grudgingly, because $6.5 is a lot of money, I say the Mulesoft acquisition makes sense in a roundabout way. It speaks to a vision of the future at Salesforce that I can only speculate about as an outside analyst covering them. That said, I’ve been right about stuff like this before.
Oracle is becoming a growth company again
Oracle is in a legitimate exponential growth phase and not for the first time in its long career. Like a startup it is growing much faster than the organic growth rate of the economy or its primary market because it has some new products that are highly desirable including cloud offerings and a unique fully autonomous database. It is also growing quarter by quarter and year over year—this is not a one-time thing. But unlike a typical startup that must claw and fight for every new customer, Oracle has the opportunity to sell its new products into an existing customer base that is hungry for improvements in their price-performance ratios.
Yesterday co-CEO’s Safra Catz and Mark Hurd plus Chairman and CTO Larry Ellison broke down the numbers for the just completed quarter and they were impressive with most of the growth coming from cloud computing including infrastructure, applications and platform services.
Total cloud and conventional software revenues were $8 billion, and Catz gave a blizzard of other positive numbers including,
Cloud staff revenue for the quarter was $1.2 billion, up 21% on a GAAP basis from last year in constant currency with — on non GAAP basis with Fusion Cloud revenues up 52% in constant currency. Cloud PaaS and IaaS revenues for the quarter were $416 million, up 24% from last year in constant currency. Cloud PaaS and IaaS revenue, excluding legacy posting services, saw growth of 49% in constant currency and 56% in U.S dollars. As legacy hosting services become smaller part of total PaaS and IaaS, the underlying growth of PaaS and next generation IaaS will be more visible.
You can find the whole announcement here as well as a transcript of the call here
Here are my observations.
First, only about 15 percent of the customer base has even begun moving to the cloud products meaning that more good news will likely be coming in future quarters and for some time. Much of the momentum comes from net new sales.
Second, the revenue gains are likely to accelerate as the company builds out its infrastructure support. Oracle announced earlier this year a drive to deploy xxx new data centers to support its Infrastructure as a Service (IaaS) initiative. Without those data centers being deployed and ubiquitous it can’t sell much infrastructure though even there it generated $416 million last quarter gaining 24 percent year over year.
But more is to come, and, now, infrastructure is a potential throttle. For instance, as the company will soon be able to service more customers with the same hardware or as Hurd put it,
As we fully deploy database multi-tenancy in our staff, let’s say. We double our capacity without spending one penny on hardware. We can help twice as many customers, twice as many transactions, twice as many users without spending one dollar.
Third, the new edition of the core database product, which is fully autonomous, is now generally available offering a level of efficiency and security unparalleled in the industry. On the call Ellison said there’s more to come.
Over the next few months, we expect to deliver autonomous analytics, autonomous mobility, autonomous application development and autonomous integration services.
If anything, Ellison may be underselling the benefits of the autonomous database when he talks about the labor-saving aspects as money savers as when he said,
Our highly automated suite of autonomous PaaS services reduces cost by reducing human labor and improves reliability and security by reducing human error.
For enterprise users, labor is cheap and although reducing human error is important the speed with which the autonomous database acts to self-correct may be the more significant benefit. Ellison revealed at OpenWorld that his customers can take upwards of 13 months to install database patches leaving their systems unnecessarily exposed for that time. The autonomous database self-patches meaning that users can install fixes much faster. Almost any cost associated with upgrading to the new database when compared to reputational hits and law suits over compromised data are insignificant in comparison.
Fourth Oracle is buying back shares and has a war chest of $70 billion. In the last quarter Catz said the company bought back $4 billion in shares, a process that is ongoing. The implication is that revenue and earnings numbers that are measured on a per share basis will likely improve simply because there are fewer shares outstanding.
Also, with so much cash on hand Oracle can pay for important things like further IaaS deployment and marketing to further push its products into the marketplace.
My take
The notable difference between Oracle and a startup is that the company can afford to be its own venture capitalist. Another difference is that in addition to being able to attract net new customers, it has a huge installed base to bring current. They’ve previously said the process could take 10 years or more so it is still early days.
Unlike many other players in the market, Oracle has seen the need for greater security measures to combat the threats in the world today. Oracle is the logical player to deal with security since so many of the world’s applications are based on its technology infrastructure.
It will take some time before the technology diffuses through the industry and IT becomes a more secure environment. But it won’t take ten years. Plenty of companies will need to upgrade their applications independently of what Oracle does now that new tools are available. As it makes this turn to cloud computing Oracle is laying the foundations for a global information utility that can address today’s challenges.
But Oracle can’t do the job alone. Current news demonstrates that the Internet and social networks are no better at security than a screen door against a winter gale. The information utility will need more encryption and professionalization of its user class. In addition to having proficiency with the technology, users need to be easily identified, perhaps through license numbers, and certified in the ethical use of the technology.
You might not realize it but a plumber has to get a permit before working on your natural gas feed. It’s not an onerous process if the individual can demonstrate (via his or her license) the basic competence to do the job. We’re getting to that point in IT right now.
Zuora files for IPO
After the markets closed on Friday, Zuora announced it had filed paperwork for an initial public offering (IPO) with the Securities and Exchange Commission (SEC). Although the quantity and price of the class A common shares has not been set, the company intends to trade on the New York Stock Exchange with the symbol ZUO. According to a press release from the company,
Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC are acting as the joint lead bookrunners for the proposed offering. Allen & Company LLC and Jefferies LLC are acting as bookrunners. Canaccord Genuity LLC and Needham & Company, LLC are acting as co-managers.
Zuora is one of many companies to spin out of Salesforce.com. Although the product, a billing and financial system tailored to the needs of businesses that sell subscriptions instead of conventional products and services, is home grown, CEO Tien Tzuo is a former CMO at Salesforce. Tzuo was one of the earliest employees at Salesforce and in one of his many jobs there oversaw development of an in-house billing system for subscriptions. In the early 2000s, subscription businesses were gaining a foothold and scoring their first successes, but the problem of billing dogged the whole industry.
Briefly, in the early days just as today, subscribers paid a monthly fee for each user and the headcount could fluctuate each month along with other variables. So, unlike product companies, the billing for subscription vendors could vary from month to month, a condition that conventional billing systems could not accommodate, at least not easily. A lot of manual effort went into monthly billing.
Zuora made its reputation as a vendor that could turn an end-of-month billing problem into a routine process. That enabled emerging subscription companies to focus their resources on building products and serving customers. It also made revenues more predictable, something that CEOs and their boards valued.
For more than a decade Zuora has grown as a private company raising well over $100 million from investors. The company has been valued at over one billion dollars making it one of a select group of companies known as Unicorns in Silicon Valley and the investment world. Unicorns get their name because they are start-ups having valuations over one billion dollars and because such companies are as rare as, well, unicorns.
Zuora’s valuation was helped by its understanding of subscription business tactics such as identifying and aggressively addressing potential customer churn and managing billings for future services. Customers might sign long term contracts and pay up front with an understanding that the payment would be drawn down over the term of a contract.
Having this unrecognized money in the bank or at least on the books made Zuora and other subscription companies’ future revenues easier to evaluate and predict and thus establish them as unicorns.
The market for subscriptions has grown with Zuora. Subscriptions are essentially a way to commoditize products enabling vendors to sell them in more bite-sized quantities. This in turn enables vendors to enlarge their markets without slashing core pricing. For example, earth moving equipment producers have started subscription businesses by providing a service of earth moving without requiring the purchase of heavy equipment. Depending on the job they might bill for cubic yards of material moved per day or tonnage. Regardless, the customer signs up for moved earth not bulldozers and the cost difference is considerable.
The subscription business model has been the wind in Zuora’s sails and there is little sign that the breeze is slacking. In fact, it is just beginning in many industries. Many vendors now find they have multiple channels to market that include traditional sales as well as subscription services. At the same time, they learn that the way that subscription billing, collections, and fiscal management occur differ. Zuora has become one of a few companies that can do the subscription billing work up front and then contribute financial information to the company’s traditional financial systems in ways that are intelligible to legacy accounting systems. It can thus function as the business’ system of record for subscriptions making it indispensable for many of them.
Look for the IPO to occur in the second quarter, most likely. There will be a quiet period before the event which is standard procedure. We’ll have to wait for the underwriters and the market to set the market value to understand how this unicorn’s billion-dollar valuation fares.
Customer experience and Interaction Studio
A couple of books ago I wrote about customer loyalty and how to get and keep it. The book was slightly ahead of its time, mostly because it’s easier to write books than code but also because a fair amount of research needs to happen before you write the right code.
My research convincingly showed that a customer’s experience drives engagement which in turn drives loyalty. There were examples of companies and their executives who tried to shortcut the process but found they couldn’t do that and get the desired results. Their idea was to ask customers to prove their loyalty by endorsing a product or brand prematurely via the net promoter score (NPS). The obvious problem was that no one in their right mind would do that. Nevertheless, some people performed as asked but in such small numbers it didn’t matter. In the process they managed to trash the reputation of the NPS which helped exactly no one.
One of the findings that I am most fond of is that customers highly value good execution on the bread and butter, run-of-the-mill, quotidian tasks. The data blows away the myth that customer experience must be something that wows customers. In truth, they don’t often get wowed; your ability to hang on to them stems from not wasting their time.
A great takeaway from this finding is that if we can systematize and regularize our interactions with customers making them efficient and reliable that’s often all it takes. And loyalty? That’s demonstrated when customers say nice things about you in your community or elsewhere or help others with questions, not necessarily when they buy more stuff because of the points they get.
Remember I mentioned writing the right software? Armed with this knowledge we can make software that handles the efficiency and reliability and sure enough, customer interaction software is becoming the next battleground among CRM vendors.
Spoiler alert, customer interaction software won’t get you to nirvana because there are other niches opening like customer identity. I’m working on a white paper to address this but for now let’s take a look at interaction.
Regularizing the customer experience is a good place to start for without that nothing else makes sense. You couldn’t collect and analyze data on wildly different experiences hoping to glean anything predictive from it. Jobs number 2 and 3 involve bringing disparate things together. First you need to provide omni channel communication, being able to address customers on the channels they on which they approach and then you need to bring together data that might be siloed in different systems.
In many ways these are three things we’ve been striving for in CRM for about a decade the difference now is that each now connects for a higher purpose. With all of this it’s possible to track customers across channels and lifecycles and make on-target offers by relying on a better understanding of customer journeys.
I was briefed recently on Salesforce’s Interaction Studio which combines these capabilities and came away impressed with the centrality of Journey Builder in coordinating all of this. Defining customer journeys, whether for sales or service, is elemental to standardizing and regularizing customer experiences but it’s not enough. You still need to connect what you know about the customer (your data and information produced by analytics) with your communications channels so that you can address customers (saving wear and tear on the customer) in the channels they decide are best.
That’s what the product is designed for. Standardizing journeys across channels and delivering useful information. All of this combines to enable a business to make good on its bread and butter promises. In the process customers feel well served, not spammed. There’s also much greater likelihood that the positive experience engages customers as they wish to be and that completes the engagement cycle. If engagement drives loyalty, then the heavy lifting is over for now at least.
My two bits
It’s nice to see experience and engagement realized through CRM. A lot of credit goes to the analytics engine in the background that acts on customer data as well as the machine learning algorithms that enable correct next best recommendations. All of that wouldn’t be possible without journey mapping to standardize processes.
It has taken a while to get all these moving parts in synch, but we’re not done. Time to start looking into how to protect identity so that suggestions and offers only go to customers when they’re wanted. This will build on the not wasting time issue. For this we might need a third party to manage personal data. Historically we haven’t done much in identity but it’s time to reconsider.
We can’t really expect the individual social network vendors to do that because they’re closed systems and it would result in either massive redundancy or chaos from competing systems and possibly both. There are also bigger issues involved like who pays to maintain data and how do we keep it safe? That’s why interaction and identity are some of the leading issues of our time.
Driving innovation with Salesforce Essentials
The software industry has changed materially since the introduction of cloud computing at the turn of the century in ways that we might too easily forget. Fundamentally, for all its promise, software was once an impediment to business and that began to change after Y2K. You need only recall the great difficulty the business world went through to enable systems to capture four-digit years at the turn of the century. The changeover imperiled more than one large corporation and made many skeptical of big software projects.
Nearly 20 years ago when you bought software, it was far less flexible than today. I once knew a CRM company that had three products for various stages of the company lifecycle and none of the products was interchangeable. A small company with visions of becoming large had to make a Hobson’s choice. It could buy a lower capacity product because that it could afford with an inevitable upgrade later. Or it could buy more software than needed and hope to into it. The upgrade almost always involved ripping and replacing software, converting data, and retraining users.
Today, because software is available by the seat-month, it’s no trouble to start small and grow organically even adding functionality as the need arises, a big difference that saves time and effort as well as costs.
Salesforce revealed The latest example of this enhanced scalability today. First announced at Dreamforce, the new Salesforce Essentials is a scalable set of sales and service solutions aimed at the SMB market. But it’s not a stripped-down version or a unique solution that you’ll someday have to throw away when your needs change. The Essentials solutions are built on the Salesforce Lightning Platform just like the rest of the Salesforce offering. So as needs change, users can simply add functionality and here’s also no need to convert data.
Designed for high usability with key features like Einstein AI built in, Essentials is both a complete and an expandable one. With Einstein users can get insights from their data in the same way as users of the rest of the Salesforce suite. The AppExchange, with its thousands of platform native applications, is also accessible making it possible to fine tune even a small instance of Essentials.
This approach is a good bet for two kinds of businesses, small businesses and boutiques, each has different software needs that essentials can help with. True small businesses may need few functions and record keeping is a big deal. Giving employees a way to understand the sales team’s relationship with the customer is critical to enabling the support group to do its job professionally and efficiently.
Many boutique businesses may have small headcount but they still have sophisticated business processes involving many millions of dollars’ worth of activity. For example, independent financial advisors might only need a few seats, but they still have sophisticated processes to administer and they sometimes need integration with a variety of applications from other providers in the industry. They may also wish to augment their Salesforce instances with applications from the Small Business Hub, part of the AppExchange to fully support their customers. Salesforce Essentials gives them a path for doing all of this without costing a fortune or spending many months knitting systems together. Finally, Trailhead, the Salesforce’s interactive learning environment helps guide users through setup and first use.
My two bits
Today’s Salesforce announcement is certainly interesting from a product perspective. But it’s also a clear demonstration that over time, software technology has become more automated, less costly, and more attuned to business. I haven’t seen any economic analyses, but it seems logical that the maturation of software over the last two decades plays some role in our global ability to innovate and bring new businesses to market in a fraction of the time and at a fraction of the cost of the older paradigm. It takes less capital to spin up a business today than ever before and software efficiencies are a major cause.
Of course, many businesses will fail for a variety of reasons; that happens all the time. But the cost and complexity of technology is no longer a gating factor in business development and that’s a profound improvement.
