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1/19/2007
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Salesforce.com Goes From Sizzling To Merely Hot

A licensing deal with Dell for 15,000 users reveals a lucrative upside in large accounts

Salesforce.com last week quieted naysayers who wondered about its ability to land large accounts, signing a 15,000-seat license deal with computer maker Dell. But two weeks before the close of its fiscal year, questions remain about Salesforce's ability to maintain its stellar growth rates and its plans for moving into new markets.

At a jam-packed news conference in San Francisco, CEO Marc Benioff said Dell had signed what ties for Salesforce's largest deal yet; Cisco Systems also has 15,000 users of its online CRM app. Contracts of that caliber are important; 27,100 companies have signed up with Salesforce, but many of those accounts are small.

Beyond CRM, a man with a dream

Beyond CRM, a man with a dream
Revenue for the fiscal year ending Jan. 31 is expected to grow by 60%, to $495 million, though Salesforce at best expects to break even because of stock-option expenses. But growth is slowing as Salesforce gets larger--next year's revenue is expected to rise 45% to $720 million in the best-case scenario. "It doesn't make me happy," Benioff says of the slowdown. "The most important thing for us is that we continue to expand our distribution." The company is hiring salespeople aggressively, he says.

Salesforce is also expanding its network of independent software vendors and consultants. It upgraded its 556,000 users to a newer version of its software last week, which includes an Ajax main screen and calendar, more fine-grained accounting for sales territories, and a call-center edition that lets companies integrate their phone networks into Salesforce.com. In tandem, Salesforce began testing a programming tool called Apex that's supposed to make it easier for ISVs to customize Salesforce for vertical markets and write add-on software. That could help Salesforce reach customers such as construction companies and travel agencies that for the most part haven't used CRM, says Yankee Group analyst Sheryl Kingstone. "You really need partners with deep domain expertise to make it work," she says.

GROWTH BRINGS COMPETITION

Dell, notably, signed up for Salesforce's Unlimited Edition, which lists for $200 per user per month--double the price of its next-most-expensive version. Even with volume discounts, its price is much higher than Salesforce's average selling price of about $70 a month per user, says Mark Murphy, a First Albany Capital analyst.

Salesforce's wins are coming as competitors stumble. SAP warned this month it would fall short of 2006 license goals because of slowing sales in the United States and Asia. SAP is due to report fourth-quarter financial results Jan. 24. Oracle last month reported that new license sales of business apps in its fiscal second quarter rose less than it had predicted.

And new rivals are coming on. Microsoft just released a preview version of CRM software it says can be updated to all customers simultaneously using "multitenant" technology. By midyear, Microsoft plans to host the software from its own data centers, putting it in direct competition with Salesforce. Meanwhile, online accounting software company NetSuite--owned in part by Benioff's ex-boss, Oracle CEO Larry Ellison--is preparing to go public.

All of which raises the question of whether Salesforce will need to dip into its $4.7 billion market cap for an acquisition that can help it expand. Benioff calls competing beyond CRM "a dream I have" but says he doesn't want to buy another company to do it.

Instead, the company will rely on partners selling extensions to Salesforce to compete in new categories. So far, 250 companies have posted apps on Salesforce's AppExchange Web store,bringing new licenses and commissions for each one. Says Benioff, "I don't want to send a message to entrepreneurs that we're going to try to do everything and we're going to drive them out of business.

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