Software-as-a-service pioneer Salesforce.com generated net income of $530,000 in its most recent financial quarter, which equates to just 1.1% of its $504 million revenues.
Sales rose an impressive 34% year-on-year to reach that $504 million figure. However, the company’s costs grew much faster. The cost of revenues, the money Salesforce.com spends on delivering its services, rose up 44% to $103 million, while operating expenses, including R&D, marketing and admin, rose 48% to $404 million.
Had it not been for the company’s income from investments, Salesforce.com would have lost money during the quarter.
Comment: Can the cloud make money?
It is not entirely fair to compare Salesforce.com’s profitability to that of traditional enterprise software vendors, who would usually expect a profit margin of at least 10%. For a software-as-a-service provider, every new customer requires new data centre resources, so costs grow more proportionally to revenue.
It could well be that when Salesforce.com’s miraculous growth begins to decelerate, its profitability will begin to increase.
It is worth noting, though, that the company’s operating expenses grew even faster than its cost of revenues. Such is the nature of SaaS that even when its market is saturated, Salesforce.com will still have to invest in R&D and marketing to prevent customers from switching to a rival.
This is an important issue when it comes to the future of SaaS, and cloud computing more broadly. The profitability of a given computing model has a bearing on how attractive it is to investors, and therefore its long term viability.
Salesforce.com is still the only unequivocal success story in SaaS, and yet more than a decade since its launch it boasts only meagre profit margins. Many of the other well-known SaaS companies, such as NetSuite and SuccessFactors, are consistently loss making.
Are cloud computing services disrupting the traditional software business with an alternative that is better for customers but ruinous for investors? And if that is the case, which imperative will win out?
UPDATE IT blogger and accounting expert Dennis Howlett has replied to this story with the following Tweet: "growth, op cost, cash flow mean profit is meaningless in any analysis of cloud apps biz"