's Growth Shows SaaS Success In Tough Economy - InformationWeek

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Cloud // Software as a Service's Growth Shows SaaS Success In Tough Economy

Revenue growth of 34% shows businesses are buying SaaS despite of, and perhaps because of, tight IT budgets. There are spots of trouble, however.

As the largest provider of software as a service,'s financial performance is a bellwether for how well SaaS is doing in the tough economy. The answer: very well, but with a few areas of concern.

Salesforce announced net income of $13.8 million for its fourth quarter ended Jan. 31, up from $7.4 million last year. Total revenue was $289.6 million for the quarter, an increase of 34% over last year's fourth quarter. And despite a plunging economy that hit many IT budgets the hardest in late 2008, Salesforce increased its revenue by 5% over the preceding third quarter.

The revenue growth suggests that SaaS is attractive to businesses with tight IT budgets, as the up-front costs are substantially lower than licensed software.

" was not impervious to the toll of the global recession in the second half of 2008, but the company's 4Q08 results prove SaaS continues to be a winning technology in the down economy," wrote Technology Business Research analyst Melissa Grady in a report issued Wednesday evening.

Salesforce is more cautious about its first quarter, which runs February through April. It's estimating revenue of $304 million, a 22% increase over the $248 million in revenue it made in the same quarter last year. If that estimate proves true, this year's first quarter growth will be slower than the past, as last year's $248 million was up 52% over the same quarter in 2007.

There are a few problem areas for Salesforce. The company recorded an average of $5,230 in revenue for its 55,400 customers in the fourth quarter, compared with $5,340 in the third quarter and $5,520 in the second, Grady noted. Salesforce, which charges a premium for its CRM service over some competitors, including Microsoft and Oracle On Demand, may have negotiated better deals with customers to be more price competitive.

Grady said customers' shrinking workforces may have impacted revenue per customer in the fourth quarter, but also expects more price competition from RightNow and NetSuite in 2009, as they have strategies in place to position themselves as low-cost leaders.

In a report issued Thursday morning, Peter Goldmacher, an analyst with Cowen & Co., said "execution was impressive" at Salesforce during the fourth quarter, but Cowen remains "concerned about deal dynamics, churn, and competition." Cowen believes that "deal sizes are getting smaller and invoices are getting shorter."

InformationWeek has published a recent interview with Salesforce CEO Marc Benioff and done an insightful assessment about the nature of SaaS. Download the report here (registration required).

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