Salesforce's second-quarter earnings on target

Salesforce.com reported on-target second-quarter earnings Wednesday, driven by strong sales of its hosted customer relationship management tools.

San Francisco-based Salesforce delivered a profit of $5 million, or 4 cents per share, for the quarter, a 331 percent increase over the same period last year, when it reported a profit of $1.1 million, or a penny per share. The results met the expectations of Wall Street analysts, who had projected earnings of 4 cents per share for the quarter, according to Thomson First Call.

Salesforce said it generated revenue of $71.9 million for its second quarter of fiscal 2006, which ended July 31, 2005, an increase of 77 percent over the same time frame last year, when it reported revenue of $40.6 million.

The company said it added 41,000 new subscribers during the second quarter, bringing its total number of clients to 308,000. Salesforce said its applications are now used by almost 17,000 companies worldwide.

Salesforce is widely credited with helping spur the current wave of interest surrounding on-demand business applications, or software hosted away from an organization's physical premises by a vendor who maintains the data and programs. Proponents of on-demand tools claim the applications offer a number of advantages over traditional enterprise software, including faster installation, lower overall costs and increased ease of use.

Dealing with the heavyweights
Salesforce executives said that more important than the strong earnings performance, the company is now winning larger deals with enterprise customers. Industry experts have long held that on-demand applications were best suited for small and midsize companies, which have made up the bulk of Salesforce's customers up to this point.

Among the enterprise deals Salesforce added during the quarter were a 5,000 license deal with Aon, a 1,500 license deal with CIT Group and a 1,400 license agreement with Citizens Financial Group. The company previously announced a 5,000 license deal with Merrill Lynch and a 5,500 license deal with ADP. Salesforce also said Cisco Systems will add another 1,000 licenses to its existing 2,000 seats before the end of the year. A report filed by JMP Securities in June had indicated that Cisco was struggling with its Salesforce applications.

Salesforce Chief Executive Marc Benioff said the growing number of enterprise deals was the result of an increasingly positive reputation among larger customers.

"Almost every one of our large enterprise deals was a referral from an existing customer," Benioff said. "There's no cap on the size deal that we can handle; when you talk about ADP deploying 5,500 salespeople with the (product), it's not hard to imagine 25,000 user deals."

Over the last year, rival CRM software makers including Siebel Systems, SAP and Microsoft have launched competing hosted applications, or detailed plans to introduce similar tools. According to researchers IDC, the overall on-demand software market is expected to grow to $4.8 billion in the United States alone by 2009, driven by a 28 percent annual compound growth rate.

Industry watchers said Salesforce's impressive numbers indicate that more companies than ever before are open to moving to on-demand applications.

"This just further reflects a trend that more and more people are opting for this lower-risk deployment model," said Liz Herbert, an analyst with Forrester Research. "People are investing in CRM again, and they're attracted to the lower upfront cost and (to) pushing some of the risk to the vendor."

The analyst said that as providers of on-demand applications build out their integration tools, like Salesforce did with the launch of its Multiforce development platform in June, larger numbers of enterprise customers are likely to consider hosted tools.

"One of the challenges in the past for on-demand, moving into the enterprise segment, has been the customization and integration capabilities," Herbert said. "As you see companies like Salesforce invest in tools that address those needs, we're seeing more large enterprises looking at (on-demand). As people see other companies succeeding in integrating on-demand with their complex back-office systems, like SAP and Oracle, more large enterprises will be willing to take that risk."