Calm Down, Wall Street - Marc Benioff Is Right About Salesforce's Margins

By Sarah Lacy , written on February 24, 2012

From The News Desk

I haven't always been the biggest Marc Benioff fan. And not just because, arguably, that title is held by Marc Benioff.

As the PT Barnum of enterprise software, Benioff grabbed ink through stunts and quips that reporters couldn't ignore. But I never felt comfortable writing about him, because I always felt like I was getting played. Like I was just a cog in his great ability to "work the press." I found it hard to have a real conversation with him, or know what he really believed versus what was spin.

Later, I thought it was lame when he tried to drape Salesforce in a social flag long after social was already hot. It was like watching your dad try to moonwalk. Sure he has the install base, but I've never met a user who says Chatter is the superior social product. And, while we're at it, I hate that new logo with the cutesy cloud. Just embarrassing.

But I'm finding myself suddenly bullish on Marc Benioff after his earnings call yesterday. Specifically when he said this, on defending his lack of profitability in the face of a nosebleed market valuation of 90 times 2013's projected earnings:

"I am very committed to expanding our margins. But I just delivered a 37% growth year. I think it is a mistake to be delivering 25% growth right now. This is the renaissance! This is the great time of the cloud! We’ve all changed how we’re using computers and there needs to be an enterprise company that can deliver this at scale. But at the same time I’m committed to raising margins. That’s important for the company. We’re trying to do it all, and doing it all is hard.”
Benioff and I agree on one thing: Rare cases like Atlassian aside, software is still sold, not bought. And that takes armies of sales people. And those people cost money. Benioff had every right to be annoyed on that call. As long as he's growing the top line by such a gargantuan amount-- no easy feat once you're in the billions-- no one on Wall Street should even bring up the word "margins."

The previous 13 years of Salesforce's business-- as great as it's been--has all been a preamble to this: Companies are just now, finally, after more than a decade of talk and prognostications actually starting to think about ripping out pre-Internet software and put in more modern systems of record.

We are finally-- in the slowest-moving revolution known to man-- about to see a major upset of Oracle and SAP, but only if companies like Salesforce and Workday and in some cases, NetSuite, are each aggressively on their game. Now is the last time any Salesforce investor should think about margins. Benioff is right, this is (finally) the renaissance. And Benioff is one of only players from the first SAAS wave who got enough escape velocity that he can play for keeps.

There is much more land he needs to grab. For instance, only 19% of his revenues come from Europe right now. When Oracle was a comparable size, 35% of its revenues came from Europe. Europe has lagged in SAAS adoption to date, and getting aggressive there will require spending serious cash on data centers and sales people to seduce CIOs into something they know is the future but don't want to do anything about quite yet.

While everyone is complaining about Salesforce's margins and lack of profitability, the company has continued to close more big deals. There's a pretty obvious correlation between the two.

This is why entrepreneurs hate to take their companies public. There are so few who can stand up to pressure like this from the Street, but its ironically the best ones who do including Jeff Bezos and Larry Ellison. I have to grudgingly admit that Benioff deserves to be in that group.