Today CRM, Tomorrow the World

It’s a good problem to have: huge customer usage of an online service. This happened with such industry-disruptive companies as (Nasdaq: AMZN) and eBay (Nasdaq: EBAY).

Recently, the same thing happened to (Nasdaq: CRM). Thankfully, the company has taken swift action to remedy its infrastructure so as to handle the traffic surge. In fact, has provided full transparency of its reliability by launching a new website at

And customers keep coming. In the fourth quarter, revenues increased 67% to $94.1 million compared with the year-ago quarter. Keep in mind that this was almost the same amount of revenue the company generated in 2004. Net income in the fourth quarter was $6 million, which was a 66% increase from the same quarter last year.

One way to think of is to compare it to eBay. But instead of allowing online auctions, provides online services for employees to track customer leads, accounts, marketing campaigns, and even customer service issues. The process is called customer relationship management (CRM).

Instead of charging companies huge up-front licensing fees, sells its software on a subscription basis. Last quarter, the company increased customers by 1,800 to 20,500. In all, there are 399,000 subscribers.

The customer base spreads evenly among small, medium, and large businesses. Some of the large companies include Cisco (Nasdaq: CSCO), ADP (NYSE: ADP), and Merrill Lynch (NYSE: MER).

While the CRM business is strong, realizes it needs to expand into other markets. To this end, the company recently launched AppExchange, which allows third parties to develop applications on the platform. For example, Morgan Stanley (NYSE: MS) recently signed up for 400 subscriptions to use a recruiting application built on AppExchange.

"I think our results show just how strong on-demand is right now," said CEO Marc Benioff. "And our AppExchange platform is really drawing tremendous interest: 4,400 installs and 97,000 test drives to date. And when I look outside our company, I see the giants of the legacy enterprise software business mounting weak impersonations of on-demand. We think that will continue to open minds and markets for us."

Earnings per share guidance on a non-GAAP basis (net of stock options expense) is flat, which looks like a disconnect given the torrid growth (and expectations for strong revenue growth moving forward). This is in part due to the effects of a higher effective tax rate, expected to clock at 45%. In addition, subscriber additions/growth can be volatile and, as a result, the past quarter saw a spike in subscriber growth, which might also have weighed on the company’s forecast. That said, I wouldn’t be surprised to find that Salesforce is being conservative on guidance. In fact, Benioff mentioned this a couple times on the conference call. The bottom line: With its brand, momentum, new product launches, and AppExchange, I’d expect the company’s growth to continue to be strong rather than conservative.

By Tom Taulli

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