Sunday, May 25, 2014

Salesforce: Newton’s First Law

I thought I would test my own mettle this time around and predict the financial results of this quarter before they were announced. Let us see how I fared and how Salesforce fared.

The Numbers

As usual, all numbers are taken from Salesforce’s web site or, in the case of historical cash and accounts payable numbers, from the official filings of Salesforce to the SEC.

 

2014 Q1

2014 Q2

2014 Q3

2014 Q4

2015 Q1

Revenue

892,633

957,094

1,076,034

1,145,242

1,226,772

Subscription Revenue

842,221

902,844

1,004,476

1,075,001

1,147,306

Revenue Cost

208,994

217,717

268,187

273,530

292,305

Operating Cost

728,179

779,234

905,778

975,458

989,808

Salesforce Income

-67,721

76,603

-124,434

-103,746

-96,911

Revenue Growth # yoy

197,166

225,445

287,636

310,561

334,139

Revenue Growth % yoy

28%

31%

36%

37%

37%

Revenue Growth % mom

7%

7%

12%

6%

7%

Total Cost % yoy

31%

34%

39%

46%

37%

Staff

10,283

12,571

12,770

13,312

14,239

Staff Growth (yoy)

23%

43%

37%

36%

38%

Margin

-7.59%

8.00%

-11.56%

-9.06%

-7.90%

Growth Difference

-2%

-3%

-3%

-9%

1%

Cash

1,927,990

579,881

651,750

781,635

827,891

Accounts Receivable

502,609

599,543

604,045

1,360,837

684,155

The standout for me is the comparison of the Revenue Growth, year on year and the Total Cost, year on year. For the past four years, every quarter, costs have grown quicker than revenue, except for one quarter where revenue edged ahead by 1%. So, for both to be at 37% is progress. I want to see this happen for three quarters before I pop the champagne corks but it is a good sign.

Another positive sign is that cash is higher than the previous quarter and that money owed to them (Accounts Receivable) has significantly decreased. More of this later.

Unfortunately, before we get too carried away, they did make a loss of 97 million dollars this quarter, 44% of the loss for the entire previous year or, just shy of half the amount; they managed to lose in one quarter what took half a year, last year.

My Predictions

The day before announcement, I predicted, via twitter, the following numbers:

  • Revenue: $1.2-1.25b (at $1.23b, I was right on the money)
  • Operating Costs: $1b (about 1% off)
  • Revenue Costs: $280m (about 4% off)
  • Profit: -$100m (about 3% off)
  • Staff: 14k (about 2% off)

Overall, I am quite happy with my efforts. For the next quarter, I predict:

  • Revenue: $1.28b
  • Operating Costs: $1.06b
  • Revenue Costs: $310m
  • Profit: -$50m
  • Staff: 17k

Looking To The Future

For the next quarter, Salesforce predict revenue of between $1.285b and $1.290b (more optimistic than I am). GAAP loss per share is expected to be -$0.12 to -$0.13 per share on 618 million shares. Multiplying together, this gives a loss of -$77m. I am a little more optimistic for the loss, but it is hard to predict.

For the year, Salesforce expects revenue to be $5.30b to $5.34b and loss is expected to be between -$0.47 and -$0.49 per share on 622 million shares, giving us a total loss of just shy $300m. Their total loss for last year was a bit over $200m so profits are still heading in the wrong direction, according to their prediction.

Revenue and Cost Growth

This is a similar story to the previous results but costs have been tempered to be equal to revenue growth.

Cost growth is the green line, revenue growth is the red line. For increasing profits (or, in our case, decreasing losses) the red line needs to be above the green line which, in recent years, has been rare indeed and really has not happened in the past four years.

This quarter, the two lines have come together at 37% year on year growth. This has happened before and the green line has ‘bounced’ rather than break through the red but perhaps next quarter will be different. Based on Salesforce’s predictions for the end of the year though, I am guessing not.

Cash and Accounts Receivable

In the previous quarter, I was concerned with what appeared to be a blowout in Accounts Receivable (money owed to Salesforce from customers). Fortunately, this has come down and cash (reserves for a rainy day) have increased slightly. Overall, total current assets are about the same as the previous quarter. Using the filings by Salesforce to the SEC, let us look at the historical values for cash and accounts receivable.

Not surprisingly, Accounts Receivable has little bumps towards the end of the year, which coincides with the US financial year. My guess is credit terms become a little more generous as the year ends to close a few extra deals before the Christmas break. The ‘blowout’ in the previous quarter was simply the latest end of year bump.

A trend which interests me is, up until 2012 Q4, cash was always above accounts receivable. After that time, the two seem to be running side by side. Cash, in my opinion, is a better asset to have than customer credit (accounts receivable) so it will be interesting to see how these two trend in the future.

Earnings Call Buzzword Bingo

As before, the rule is the words on the list have had 10 or more mentions in the past five periods. No words added to the list but ‘Enterprise’ has dropped off.

  2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1
Number of words 2800 3500 3700 3700 2400
Customers/Customer 32 40 39 25 22
Revenue 32 37 37 29 19
Cloud 16 23 31 14 15
ExactTarget 0 24 21 15 7
Platform(s) 12 19 21 12 10
Service 12 14 19 13 13
Sales 9 14 16 4 6
Growth 13 12 14 12 9
Marketing 0 12 12 11 5
Cash 10 10 10 16 10
Mobile 16 11 7 5 2
Operating 9 9 7 10 11
Social 10 9 6 3 2
EPS 7 10 5 6 6
Salesforce1 0 0 0 11 6

The transcript used is the portion before questions and the Salesforce team were less verbose this time going from around 3700 words right down to 2400 words.

Customer(s) and Revenue still top the list and, Mobile and Social continue to drop.

No words are significantly more prominent but a few are getting less attention. Marketing seems to be of less interest, along with product plugs (ExactTarget and Salesforce1). There was a direct question asked during the call about how profitable ExactTarget had been in the quarter but the Salesforce executive refused to answer. It is possible the ExactTarget acquisition is not producing fruit as quickly as would be liked or perhaps integrating it with Radian6 and Buddy Media is proving more troublesome than initially thought. I expect time will tell.

A similar situation may be happening with Salesforce1, given the drop in mentions of Salesforce1 and Mobile.

Google Trends

“Dynamics CRM” is the blue line and “Salesforce.com” is the red line. Dynamics CRM continues to be the more popular search term worldwide and appears to be breaking away.

Geographically, the highest countries remain the same as last quarter.

Insider and Institutional Sales

Again, the trends remain the same for share sales. Institutional sales appear to be tapering though.

 

2014 Q2

2014 Q3

2014 Q4

2015 Q1

Insider Sales

0.50%

0.50%

0.50%

0.50%

Institutional Sales

3%

2.75%

2.72%

2.71%

Still no one buying despite the average analyst rating being more of a buy than a sell. It is lucky the institutions are freeing up all these shares so others can follow the recommendations and buy the shares.

Conclusions

Newton’s First Law states: “An object either remains at rest or continues to move at a constant velocity, unless acted upon by a force”. In other words, Salesforce continues on its trajectory with little changing, based on their own predictions for the year. It will take an impulsive force for things to change and it is clear, based on the exuberance of the executive, this force will not come from within.

The institutional sales will slowly apply a force to the Salesforce share price, as will shareholder sentiment. Also, if there is a takeover of Salesforce through merger/acquisition, the new owners (say Google or Oracle) will apply their own pressure to the Salesforce body. With the share price having a lot of optimism built in, it is unlikely to be a takeover target in the near future so this is unlikely to be an applied force any time soon. As for the shareholder sentiment, no one can predict this.

While not having the drama of a telenovela, I enjoy watching Salesforce, like watching a comet move gracefully across the sky. Some comets cross the skies for millennia, others burn out or crash and, for me, the excitement is seeing which Salesforce will be. Whatever the outcome, I find my gaze fixed and will file my report next quarter on this radiant body.

Wednesday, May 14, 2014

The Iron Triangle and its Effect on the Tender Process

As a follow-on from last week’s article, where I talked about the Iron Triangle, in relation to CRM Projects, this article explores the Iron Triangle in relation to CRM tenders and the problems tenders produce, even before a contract is signed.

Iron Triangle Recap

The Iron Triangle is a concept familiar to project managers which says of the three elements, you can control two of them but the third becomes a function of the others. For example, set the scope and the schedule and the required resources becomes a quantity which cannot be changed.

The Folly of the Tender

A common way to acquire larger CRM projects is via a tender process. Unfortunately tenders do their best to ignore the Iron Triangle.

  Client’s Perspective Vendor’s Perspective
Cost/Resources Client has a fixed budget but does not communicate it To make the bid as cheap as possible, but cover the costs of responding
Time/Schedule Client has a fixed deadline and communicates it in the tender To ensure that what can be delivered meets this deadline
Scope Broadly understood and communicated Understood but not at a level to design to

Knowing that two can be controlled, but not the third, generally the client believes they are controlling the scope and the schedule and the appropriate cost will come out in the responses.

From the vendor’s perspective, the pressure to make the bid as cheap as possible means the scope is interpreted to err on the side of simplicity with the cost being low and improving the chances of winning the bid.

Although the price tag is low, the client will never get the best possible value for money because there is always ‘fat’ included to cover the bid cost. It can literally cost tens of thousands of dollars of opportunity cost to complete a tender response and this is always passed on and inflated, based on the chance of winning.

The end result is padded bid responses which propose to deliver the least possible functionality to meet the scope. Once delivered, change requests flesh out the skeleton of a solution, blowing out budgets and timelines. There must be a better way.

Fixing the Tender Process

The key issue with the tender process is the lack of trust between the client and the vendor. The obvious solution to make the tender process more practical is quite simple; include the project budget in the tender papers.

With a known budget and deadline, the vendor is free to focus on delivering the most feature-rich solution for the price. The responses become a battle of value rather than a battle of corner-cutting.

Generally the reason the budget is NOT included is a fear of a vendor pricing their solution at the budget but delivering inferior functionality. Given there are usually multiple, independent responses to a bid and given without knowledge of the budget, inferior functionality in a response is an inevitability, this seems like a poor reason to exclude it.

The main disadvantage with this approach is the client is still paying for the time and resources in delivering the response. From my perspective the better solution is to abolish the tender process altogether. However, to provide the veneer of transparency and even-handedness, resorting to a tender process may be inevitable.

I refer to this as a veneer as it is all too common for a vendor to have an existing relationship with a client and to get the ‘inside track’ on a tender providing an insurmountable advantage to their response. Generally this advantage is in having a more refined understanding of the scope and budget, leading to a response more closely aligned to the client’s needs, at the right price.

The end result is the vendor with an existing relationship winning the work and the client paying for the response time. Cutting to the chase of simply engaging the winning vendor directly, rather than through a tender would save everyone time and money.

Another option is a hybrid approach, directly engaging the vendor with the pre-existing relationship and also producing a tender stating the vendor will be engaged but that if a better proposal is presented, they will be replaced. This process removes the cost of a formal response from the incumbent but provides alternative approaches from competitors to keep them honest. I have never seen this approach used but, to my mind, it provides the best of all worlds.

Conclusions

No vendor likes the tender process because it is time-consuming and discourages providing value to clients. The tender is simply a hurdle to overcome before a meaningful engagement can begin. However, in jumping the hurdle, the relationship is already compromised.

If a direct engagement can occur outside of such a process, all parties benefit and trust can develop. At worst, a formalised invitation to the market to compete against an incumbent will ensure the best possible value is being delivered, while minimising the tender overheads passed onto the client.

I am sure there are approaches which provide transparency without compromising value and trust. However, the tender response process is not one of them.

Sunday, May 4, 2014

The Iron Triangle and its Effect on CRM Projects

There is a wisdom amongst project managers called the Iron Triangle.

In essence, of the three parameters of scope, time and budget, you can control two of them but not the third as it becomes a function of the other two. For example, if you control the scope and the time, the resources required become fixed. It is a case of working out what you can live without controlling. In this framework I thought it is worth considering common methods for delivering CRM projects and the pitfalls inherent in ignoring the triangle.

Agile CRM Projects

Agile” is a project methodology, which seeks to deliver a high quality result through high-interaction with the customer and iterative development. It is common in bespoke coding projects and is creeping into CRM projects more and more in recent years.

I have seen my share of successes with Agile but, more often, failure. Let us consider why.

Agile is often sold as a superior methodology with all upside and minimal downside but this is naive at best and downright dangerous at worst. There is no question an agile methodology, if employed correctly (i.e. very high levels of collaboration between the client and the developers), will deliver a high quality result. However, where Agile projects are often considered a failure is with the blowout of time and resources.

If the client is not given a voice to articulate their requirements or, if the client does not have a clear, precise vision of their needs, agile projects drag on gobbling up budget and time. The end result, assuming there is one, is a product which is built as requested but not as required. The fit is poor to the business’ strategy, the end user needs and, inevitably, the product dwindles into non-use.

Often, the solution to the blowout is to ‘time-box’ the project, that is control the schedule AND the scope. From the iron triangle this fixes the required cost/resources. If these resources are not available or if the budget is not there, something will give and the project, again, has the risk of being considered a failure.

Waterfall CRM Projects

Waterfall is the ‘traditional’ method for delivering CRM projects and comes out of the construction industry. The objectives are defined up front, the solution is developed and then it is tested for compliance at the end. Strictly speaking, one does not move to the next phase of the project until the previous one is completed i.e. you do not move to development until the design is complete. However, this is often impractical in practice, leading to some to call CRM projects “Agile/Waterfall” when feedback is introduced into the project ‘on the fly’. As far as I am concerned, there is little Agile about these sorts of projects; they are simply Waterfall projects with some healthy communication.

Even in the most Waterfall of projects there is always adjustment. If we consider a very traditional Waterfall project, like building a house, while it is true that the architect plans are drawn up before the foundations are laid, there is also a bit of ‘creativity’ employed as the project progresses.

Waterfall defines the schedule first and the scope and therefore, like Agile, this imposes restrictions on the resources/budget. If the budget does not meet the lofty goals of the scope, problems will occur. One drawback of Waterfall is there is much less interaction between the client and the development team during the building phase of the project. The idea being that the scope is well-defined and, therefore, guides development.

After development takes place, the testing phase ‘sanity checks’ the solution to make sure what the client understands to be in-scope matches the solution. If there are gaps (not unusual), negotiation ensues to determine whether the gap needs to be plugged. An adjustment to the scope means the other sides of the triangle also get tweaked (cost and schedule). As testing comes towards the end of the project it is often the schedule which is seen as the biggest casualty.

Again, a poorly defined scope means changes down the track but, with a good change request process in place, it is not a disaster, assuming the resources and budget are available to cover it. If it is not clear, my personal bias is to lean towards Waterfall for CRM projects but I can see how, for a client with a clear strategy and requirements but poor product knowledge, a carefully controlled Agile approach can work (and has for me in the past).

Like an Agile project with poor scope communication, if the scope is poorly understood by the client, the project gathers dust on a virtual shelf and never reaches its potential.

Conclusions

It is very easy for a client, especially one with little experience of software projects, to believe they can lock down the scope, schedule and budget of the project. In reality, a project never understands these three elements perfectly and, regardless of the methodology employed, adjustments need to be made and pragmatism must be employed.

When the client or vendor choose to ignore this and try to break the iron triangle, it is the project that becomes broken first. Either budgets blow out, schedules are violated or a poor, impractical solution is delivered. By developing trust between the vendor and client and respecting the constraints of the iron triangle, the perfect result may not be delivered but the optimal result for everyone involved will be produced and a relationship built to ensure the foundation delivered can be built upon in the future.

 
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