by Jeff CateAre you thinking this headline is just written to be sensational? I can assure you that couldn’t be further from the truth.
I am generally not a believer that Cloud Computing is always
going to be in the best business
interest of enterprises, even though many vendors and the media are full-steam
ahead with the idea. If you missed it,
you can read why I think this in a recent two-part article I wrote for this
blog.
This past week Salesforce.com, the pioneer and largest enterprise-focused
Cloud Computing company in the world, announced its latest quarterly
earnings. Once again, they reported a
loss when using Generally Accepted Accounting Principles (GAAP). Also once again, they reported a profit using
non-GAAP reporting and very much emphasized the non-GAAP results in their
report to stockholders and the market.
There are many market watchers who would liken Salesforce.com’s
current business practices to a pyramid scheme.
It is fairly easy to see why.
They have a regular practice of paying employees a huge amount of their
compensation with stock instead of cash.
By doing it this way, they can do two things: A) they can increase their
cash on hand dramatically (which looks good to the stock market), and B) they
can report profits using non-GAAP because they don’t consider the stock issued
to employees as operating expense (a major no-no in the GAAP world of financial
accounting).
Why would they want to do it this way? Simple – they need their stock price to stay
high so that they can afford to pay their employees in stock, rather than
cash. If they had to pay their employees
in cash, they would be insolvent. So,
they need new investors in the stock market to pay their employees for them by
purchasing the recently issued stock from the employees. Then, the employees can put the investors’
cash in their pockets.
Doesn’t this sound a lot like a pyramid scheme? The people who are really supporting the
house of cards are the last people in – in this case the latest investors who
are purchasing the stock issued to employees as compensation.
Switching gears – what has this got to do with SharePoint? Well, last week I was in Las Vegas the entire
week at Microsoft’s SharePoint Conference 2012.
From the opening keynote, the entire conference was carefully
orchestrated to emphasize SharePoint in the Cloud. The Cloud version of SharePoint was
demonstrated first by a Microsoft employee in every single session that I
attended. It was completely clear that
this was by design. Microsoft wants its
enterprise customers to switch to SharePoint in the cloud as soon as
possible. There is no doubt in my mind
about it anymore.
What I do have doubts about is whether the Cloud is really a
profitable business model for vendors such as Salesforce.com and Microsoft at
the price that they are currently charging customers. I think the data that Salesforce.com is
reporting raises a lot of doubt about this.
Many in the CRM market feel that Salesforce.com’s pricing is
very high already. Unfortunately, as is
clear from their GAAP financial reports, that pricing does not generate a
profit for them.
Will enterprise customers get lured into the Cloud at prices
that really don’t generate a profit for the service provider? If that happens in the short-term, what will
the long-term look like? Will the
service providers raise prices dramatically so that they can start making a
profit? If the higher prices no longer
make economic sense for customers will they be able to migrate out of the Cloud
and back on-premises, or will the service provider “own them” so much that it
is not possible to move somewhere else?
If Salesforce.com were to go belly up, I think we would
quickly see some major re-thinking about the role the Cloud will play in the
future of enterprise computing.
Note: Here are some
links to different discussions on the web about what is going on with
Salesforce.com’s financial model:
http://finance.yahoo.com/mbview/threadview/?&bn=12e59a33-dea1-3f06-b0f4-6edfe13d6ea2&tid=1321565751000-ff52e87b-ca2b-3c4b-8881-aa3e43f4b27d
http://seekingalpha.com/article/826301-benioff-s-bombastic-boasting-can-t-hide-salesforce-s-expenses-bomb
The reader comments section of the last article I link to is
very lengthy and gives a lot of viewpoints on what is going on at
Salesforce. One commenter does a
particularly good job at boiling it all down in very simple terms. Here is what he said:
“I'll
try to explain it simply what Salesforce.com is doing. To complement salaries of employees, they give them stock options instead of cash.
Then they say: because we did not pay our employees 100% in cash, we saved ourselves the cash, so we will not count stock-based compensations as costs and we will add the saved cash to our cashflow, as if we will never have to pay it. Moreover, we will treat the saved cash as profits and thus add them to our non-gaap earnings.
You see, because the stock based compensation is rising and counted as non-gaap profit, they were able to "beat" on non-gaap earnings. In reality, in Gaap accounting, the stock based compensation should be counted as a real expense, this is mandatory by the SEC. That's why you see increasing GAAP losses.
It's a Ponzi scheme that works as long as the stock price goes up, because if it goes down, employees will not accept stock based compensation as salary.
An added expense to the shareholder is the dilution that these increasing stock based compenstaions are causing. Every quarter, the share count is rising. So the shareholder is fooled in a double manner. By dilution and representing costs as profits.
Once investors realize it's a Ponzi scheme that can't keep carrying itself, the crash will be swift and hard. The only problem is that I cannot predict how much longer the investor can be fooled, in other words when he wakes up.”
