Wall St. Leaves Money on Table for Subscription Companies
Look, we know the old truism that if you don’t have customers and profits you don’t have a business, you have a hobby. But could we please get a little balance on the profit idea?
Emerging companies typically don’t declare profits because they use excess cash to fuel growth. Anything left over is plowed back into the business. If the company is public, its stock price rises not because of some magical ratio of earnings or dividends to share price, but because the money the company invests in its people, processes, technologies, research and development and products make it a more valuable entity to anyone looking at its future. The mini-computer makers were famous for this. I recall Digital rising to $199.50 per share with never a dividend. It’s a good model.
This is the basis for my argument that subscription companies are being given short shrift by Wall Street analysts because they apply metrics more in tune with the manufacturing era than the information age. You might disagree because companies like Salesforce, NetSuite and many others not yet public get plenty of attention. But that misses the mark.
Because the analysts don’t track things like unbilled deferred revenue, a measure of how much money is under contract but not yet on the books, they don’t get a realistic view of a subscription company’s health. And since the analysts influence who buys what stocks and at what price, the market pricing mechanism in the stock markets may not be giving subscription companies — or investors —a fair shake.
I caught up with Tien Tzuo last week to discuss this. Tzuo, you may recall was CMO and chief strategy officer at Salesforce before co-founding Zuora, the subscription billing and finance company. Say what you want about Tzuo but he isn’t shy when it comes to expressing his ideas about subscriptions. Last week he was seen speaking on CNBC and wrote an article for All Things D on subscriptions with NetFlix’s recent stunning 40% appreciation in the background. He believes some companies’ meteoric growth spurts are directly attributable to eschewing conventional Wall Street wisdom regarding profits and earnings. The examples he gave me say a lot.
“Salesforce vs. WebEx. For years, WebEx was on a growth path that was 6 months ahead of Salesforce’s. Then they went public, and listened to Wall Street’s insistence on earnings. Wrong move. Salesforce ignored it, overtook WebEx within 6 months after WebEx went public, and went on to soar to much greater heights.
“Successfactors vs. Taleo. Same thing, Taleo cared about earnings, SFSF went contrarian and said, ‘Hey not only are we not going to show earnings, we’re going to spend all our IPO money on growth, and show losses for years.’ SFSF started off a fraction of Taleo’s size, overtook them, and wound up with a $3.4 billion exit [SAP bought SFSF in 2012] which was almost two times greater than Taleo’s [Oracle bought Taleo for $1.9 billion in 2012].
“And finally, to bring it back to current events, Netflix. They didn’t listen to Wall Street (they never have); they knew their strategy was focusing on customers, and customers more and more want movies anywhere, on any devices, not just on DVDs, and they followed their customers’ lead. This week when the stock soared 40% higher was a big vindication for them.
Tzuo has a point and essays like his and speaking out are ways that the establishment eventually changes. Of course this isn’t a statistically valid study though I am sure such things exist but it does raise some important questions. If Wall Street is not valuing subscription companies correctly it is causing a lot of money to be left on the table.
Traditionally, it takes the establishment some time to come around on a shift this fundamental. After all, we wouldn’t want standards and controls to change so frequently that they failed in their primary mission. But at the same time, as a wise man once told me, no one should have to be hit over the head with an old tire tool to see what’s so plainly obvious.
All this affects CRM because the financial analysts have a great deal of influence. But too much influence can inhibit companies developing the next great application by preventing capital formation where it’s needed. Given how much of CRM and social are delivered as subscription applications by emerging companies today, it’s a concern. So Wall Street really does need to kick it up a notch or two.
Filling Up The Cloud
Last week Oracle bought the HR SaaS company, Teleo for $1.9 billion, which to me means it’s time to do you-know-what to the fire and call in the dogs. This hunt is officially over and out.
The hunt in question is for legitimacy and primacy of the SaaS and cloud computing model. Many people would argue that legitimacy happened when Salesforce had its first billion dollar year—heck its first $100 million would do just as well. But primacy has always been a wee bit dodgy.
There’s been a see-saw battle between the on premise and cloud communities for many years which culminated with all the major software companies finally adopting and promoting some version of their own cloud computing architecture in the last two years. Microsoft famously thinks the Web needs an operating system, Oracle announced its cloud, driven by its ultra husky next generation servers last fall at OpenWorld and SAP has been trying its hand at multiple iterations of cloud computing.
More importantly a raft of small entrepreneurial companies are offering hosting facilities much like when this business got started with ASPs or application service providers. It’s tough to make a living selling commodity infrastructure but the advances made by companies like Salesforce.com—such as the application in a browser rather than client-server—make selling infrastructure possible.
The Taleo announcement was so important that I had people emailing me to offer their thoughts. For instance, Tien Tzuo, one of the early employees at Salesforce and now the CEO of Zuora and billing and payments solution provider for subscription businesses, had this to say:
“This is the tipping point for the cloud. RightNow [bought by Oracle], SuccessFactors [bought by SAP] and now Taleo. The big old school enterprise players have just validated the cloud as the future and signaled the end of their reign.” I agree and it is reminiscent of Clay Christensen’s Innovator’s Dilemma, but Tzuo takes this theme even further.
“We’ve seen this before,” he says. “Siebel acquired Upshot trying to look more SaaS-like and apparently to box salesforce.com into a corner. Instead it backfired. That one deal validated the SaaS model to CRM buyers. And almost overnight Salesforce went from up-and-comer to leader.”
Yup, I was there too. But I think what’s happening now is the incumbents are accelerating their efforts to catch up. With each vendor articulating a cloud strategy we’re seeing mostly closed strategies, which means things might not change very much for their customers. Some vendors are trying to have it both ways, clouds plus customer lock-in.
Closed strategies limit choices and options and at least in some situations we’ll continue to see higher than necessary costs for things like management and development or maintenance. What many of the clouds offer is a trimming of the cost of infrastructure, period. I think that’s what Marc Benioff means when he says beware of the false cloud.
To put a final point on it Tzuo says, “All these cloud acquisitions won’t help ERP one bit. Acquiring cloud companies doesn’t make you a cloud company….It’s an attempt to distract customers and hope they will forget about the boat anchor they’re stuck with.”
Tzuo is not the only skeptic. Echoing Tzuo, Ted Elliott, CEO at Jobscience, an HR solutions company based on the Force.com platform and so a Teleo competitor said, “This really represents a capitulation by Oracle regarding the cloud. Unfortunately this would have been great in 2004, but in 2012 we are transforming towards social; a server company that builds databases is transaction oriented and social is about relationships, people not numbers”
Elliott’s got a point and so does Tzuo and perhaps the Teleo acquisition says a lot about a conventional software company trying to make the cloud conventional. But at this point the cloud is conventional, it’s just not conventional in that way. So a paradigm has been shifted.
Perhaps most importantly, all this hoopla about clouds and rather conventional application areas means that many big vendors are not giving the attention they ought to be giving (in my opinion) to social media companies. They are proving to be a generation behind. Well beyond darlings like Facebook and Twitter, there are fascinating companies like Get Satisfaction, Studentforce and Crowd Factory—just to pick a few of names out of a hat—that are rocking their worlds and causing the next disruptions.
That’s where Salesforce has focused its energies. They still talk a lot about the cloud and its centrality but they’re also onto a new vision—the social enterprise. The cloud is increasingly about plumbing, the social enterprise is about putting the plumbing to work.
