Salesforce: CRM is smaller than the market for ERP ?

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The COO and CFO of cloud computing giant Salesforce talk about their growth and profitability, and how they’re helping industries do “digital transformation,” and refute a claim by Oracle’s Larry Ellison that their market for “CRM” is smaller than the market for “ERP.” Analysts noted the outlook for Salesforce’s “billings” came in a little below what they were looking for.

Following a report this afternoon by cloud computing giant (CRM) of better-than-expected fiscal Q2 results, and a raised forecast, COO Keith Block and CFO Mark Hawkins were kind enough to take a few minutes to talk with me by phone about the results and outlook.

Salesforce shares are down 75 cents in late trading, at $92.20, with some Street observers writing this evening that the forecast may suggest some pressure on the company’s profit margin the rest of this year. They also see the outlook for “billings” being less than what the Street had been expecting. That’s consistent with what some bulls had warned in previews of the report yesterday.

For example, Mizuho Securities’s Abhey Lamba, who has a Buy on the stock, writes that the billings of $2.39 billion last quarter was “meaningfully” above consensus for $2.17 billion, but that the implication for this quarter is billings of $1.95 billion to $1.99 billion, below the same $2.17 billion estimated for this quarter.

In addition, writes Lamba, “By raising F2H18 revenues by ~$60mm and keeping EPS flat, management is essentially modestly lowering margin expectations.”

On the call, Hawkins kicked things off by pointing out this is the second quarter in a row in which the company has raised its revenue outlook by more than $100 million, and only the third times in the company’s history.

Regarding the company’s outlook for as much as $10.4 billion in revenue in this fiscal year ending in January, Hawkins emphasized no other software maker has reached the $10 billion mark as quickly in its lifetime. Hawkins also emphasized the company’s “billed and unbilled deferred revenue balance of $15 billion,” which grew at a rate of 29%.

Block remarked that the company had “outstanding execution.” He said more CEOs of companies in various industries, around the world, are looking for growth as their top priority, and that they’re using Salesforce to implement “digital transformation” to achieve it.

One segment is retail. Hence, I asked Block if Salesforce can save the retailing sector of the economy, including the so-called Amazon Effect of (AMZN).

In response, Block said those companies will “survive and thrive” which develop “innovation,” and offered Salesforce is the one to help them do that:

I think innovation — and you can pick your industry, every one of them is littered with stories about this — innovation is a disruptor. Those who embrace it, survive and thrive. We know what happens to those that don’t. Every company aspires to be like Amazon, and, you know, we happen to be a great partner to Amazon. Whether in traditional retail, or in packaged goods, the classic B-to-B companies who want to be B-to-C, turn to us. There are lots of opportunities to enable innovation in the marketplace.

I also asked the gentlemen about a comment by Larry Ellison, founder, CTO and chair of Oracle (ORCL), one of Salesforce’s biggest competitors. During Oracle’s analyst day event last September, Ellison told the Street that so-called enterprise resource planning, or ERP, is a much, much bigger market than Salesforce’s market of “customer relationship management” and the related functions.

Block disagreed, said Salesforce has a $100 billion market to go after, as construed by research firms such as Gartner. He includes in that not just CRM, but also “analytics” used on top of CRM; the company’s “commerce cloud” offering, and basically “anything focused around customers.”

Block noted reports from Gartner that say CRM is going to be the biggest of the four main enterprise software categories, including ERP and databases and operating systems. Gartner also says CRM is the fastest-growing of the four, at 14%.

Said Block, “ERP is very interesting, but we are all about growth.”

He quipped, “We are about the future; ERP is not about growth, it’s about accounting.”


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