February 25, 2004 5:03 PM PST

Salesforce trumpets megadeals ahead of IPO

Salesforce.com said it has landed two of its biggest contracts ever for its customer service and sales software, two wins that could help the company's bid to go public.

The software maker discussed the multiyear deals for its subscription-based applications on Wednesday at a customer event in New York, where it launched a weeklong road show to gauge institutional investors' interest in the anticipated public trading of its shares.

The announcements touch on one of the risk factors Salesforce highlighted in the registration form for its initial public offering: Its customer base has a high proportion of small customers. These clients are less likely to keep their deals going, making long-term contracts with larger businesses important to the San Francisco company's stability, according to the IPO filing.

"We derive a significant portion of our revenue from small businesses, which have a greater rate of attrition and nonrenewal than medium-sized and large enterprise customers," Salesforce stated in the filing.

The problem of attrition underlines a dilemma facing Salesforce and others that provide software as a service: On the one hand, the subscription model attracts customers because it's cheap and fast to install, and it's less risky than plunking millions of dollars down to license traditional enterprise software that may never fulfill its promise. On the other hand, because it's so easy to sign up, subscription software is also easy to switch off. Without a major financial commitment, customers aren't locked in.

Sales to small companies--that is, to those with fewer than 200 employees--accounted for about 40 percent of Salesforce's revenue in the first nine months of its fiscal year 2004, according to the IPO filing. Because Salesforce is relatively young--with only five years in business--it may have trouble attracting larger customers, the filing states.

The new contracts with Automatic Data Processing (ADP) and SunTrust Banks each entail the delivery of Salesforce customer service and sales force automation applications to 2,000 workers or more. The financial details were not disclosed.

The deals are a nod to the fledgling market for corporate applications delivered over the Web for a monthly fee, according to Salesforce CEO Marc Benioff. "For the first time, we're seeing the very largest companies standardizing" on Salesforce's software, Benioff said.

Customer attrition rates, which Salesforce does not disclose, are likely to be one of the biggest concerns for potential investors, said Soundview Technology securities analyst Peter Coleman. "It's going to be something people will focus on," Coleman said.

Because Salesforce is in a quiet period pending an IPO, Benioff said he was not able to disclose any information related to Salesforce's finances, including attrition rates.

Wednesday's deals may also soothe concerns among potential investors about Salesforce's ability to take on growing competition, especially from rival Siebel Systems. Both ADP and SunTrust Banks also use customer relationship management systems from Siebel. A Siebel representative said that both companies continue to use its programs and that neither plans to replace Siebel with Salesforce products. Yet the deals give Salesforce some bragging rights over Siebel, which recently introduced a subscription service to compete with its rival.

 

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