Salesforce.com Files for IPO

Hosted CRM provider Salesforce.com has announced it plans to go public. The company said in a press release that it has filed a Form S1 registration statement with the U.S. Securities and Exchange Commission (SEC) and will sell all of its initial public offering of its common stock.

According to the prospectus, the total proposed offering price will be US$115 million. A Salesforce.com spokesperson told the E-Commerce Times that the company cannot comment on the number of shares being offered at this time.

When asked for more details about the IPO, the spokesperson said the company is in a “quiet period” following the announcement and declined to comment further on the topic.

Double-Edged Sword

Sheryl Kingstone, program director and senior analyst for CRM strategies at the Yankee Group, told CRM Buyer that Salesforce.com’s decision to go public is potentially a double-edged sword.

“You’re throwing cash in the organization so that they can build out their business, but now they’re being driven by shareholders [and] can no longer just do what they want,” Kingstone said.

She added that young companies like Salesforce.com often have difficulty when they find themselves under shareholder scrutiny. However, the opportunity to obtain so much cash for product development, research and marketing can make the trade-off worthwhile.

Getting Out the Value Proposition

Kingstone said Salesforce.com has wanted to go public for a long time, noting that such a move has been CEO Mark Benioff’s dream. A key rationale for going public is to prove that Salesforce.com’s hosted CRM service is a real business model that is worth investing in, thereby raising awareness and validating the company’s offerings, particularly to those who have been skeptical of its approach in the past.

However, she added, there are risks in going the IPO route if people do not understand the value proposition. “The worst thing that can happen is to find yourself undersold — the day you go public, your stock goes out lower than when it opened,” Kingstone said.

Earlier this week, for example, travel Web site Orbitz went public, and its stock price dropped more than a dollar from its opening price. Elizabeth Roche, vice president of technology research services at Meta Group, told CRM Buyer that the Orbitz IPO set up a sort of bellwether for high-tech and Internet IPOs.

“Internet stocks are interesting, but there’s a big need to demonstrate that it’s not just about the letter ‘e’ [for e-business and e-commerce],” she said. “They have to go beyond bits and bytes. There has to be some bricks-and-mortar ROI behind them.”

Bucking the Trend

For her part, Kingstone noted that Orbitz is an e-commerce player that provides a one-off, consumer-oriented model. Customers may buy a plane ticket, but there is no guarantee that the company will retain those customers.

On the other hand, Salesforce.com sells subscription-based contracts that provide annual revenue, paid for on a monthly basis, indefinitely. As long as the company maintains its customer service and retention, its potential upsell could be astronomical, Kingstone said.

She believes Salesforce.com can buck the recent string of high-tech IPO swoons because of its substantial customer base that is paid for and under contract, because the company is financially sound, and because it offers easy-to-use products with a low TCO (total cost of ownership). According to Kingstone, Salesforce.com provides solid business value to organizations because it is selling real technology.

However, she added, the company must educate the public if it wants to maintain and broaden its ongoing revenue stream in the future.

More Options Needed?

Likewise, although Meta Group’s Roche said Salesforce.com provides ROI, the company has positioned its marketing to focus solely on its “no-software” hosted technology, as in its recent Winter ’04 release. She believes the company needs to augment this strategy with a real focus on what its sales process enablement can bring to a business’ bottom line.

“The challenge for Salesforce.com in the long term is going to be to prove to businesses that they have a growth path,” Roche said. “Businesses are reluctant to get in a rental mode because, as [these businesses] grow, they worry that they will be gated in from expansion just by nature of [Salesforce.com’s] business model.”

Roche went on to say that several companies with which she has spoken want the ability to license software eventually and bring it in-house to do what they want with it rather than continuing to pay the licensing fee. Moreover, according to recent studies conducted by Meta Group, the economic advantage of renting hosted CRM solutions over buying licensed software hits a break-even point after about three years, with hosted software becoming comparatively more expensive than traditional offerings after that point. Therefore, she said, Salesforce.com needs to provide organizations with purchase alternatives to assauge their concerns.