Is SaaS such a great business model? – 19 months later.

Unbelievably I went back and read what I wrote in January of 2010 (link) where I compared BMC and Salesforce in terms of comparable companies (revenue speaking), BMC being a more traditional software vendor and Salesforce being the pure SaaS player.

Let’s look at the evolution of those two companies over the last 19 months

01/2010 SalesForce BMC
Market Cap $8.01B $6.84B
EBITDA $145M $633M
Revenue $1.24B $1.8B

Back then I thought that SaaS was not necesseraly the way to go for a startup, although fundamentally, I was seeing a lot of benefits to this model. Now about 19 months later the same table (looking at the last Balance sheet)

09/2011 SalesForce BMC
Market Cap $15.9B $7B
EBITDA $115M $677M
Revenue $1.94B $2.11B

Do you see what I see?? Salesforce doubled its market cap, increased its revenue by almost 30% and is dwarfing BMC.. That said it still has a small EBITDA. In comparison BMC basically stayed the same, with a slight growth and still a nice Earning number.

Salesforce numbers are impressive in terms of growth but scary in terms of earnings so the question remains: Is SaaS such a great business model?

Hell YES! I made one big mistake in my previous analysis and this post is here to correct it. I did not really look at the stage at which the companies were in their growth. Salesforce is a fast growing startup which has one thing in mind: Growth of the top line. On the other hand, BMC has been a stagnant company and is focused on its bottom line. I should not have compared those two companies in the first place because investment decisions are completely different in those two cases.

So why with only 6% of revenue in EBITDA is SaaS a great business model? The answer is simple: It’s the subscription model of SaaS, and it’s the growth.

If your business is using the SaaS model, you will get no big check when you sell your product, in fact it’s the opposite, you get a big cost. If the customer is big enough or if your reached a certain amount of customers on the same infrastructure, you may have to upgrade it, you will have larger server load, memory usage, bandwidth usage and all this will cost you from day one. Of course you will amortize those costs, and if you priced you offer well, you will collect the benefits of this model in the long run. So for Salesforce, a lot of those costs are applied today (R&D, Sales, Marketing, Infrastructure) which eat the margin (reducing the EBITDA).

The growth is the second factor. Growth is costly, you have to hire, you have to invest, you have to discount to win customers, etc. Marc Benioff said today in a keynote that we are trying to hire as many people as he can and the problem he has is that he cannot find enough people! Especially in sales. For a business, if the strategy is growth, where should you put your dollars? As earnings that will be taxed? distributed to shareholder (who will be taxed as well)? Or into your business to make it grow even bigger? Think about $1 of earning. Take out 30% tax. Distribute it, and take another 25%, this dollars is wasted. Now put this dollars in a business that has doubled its market cap in 19 months.. What makes sense now?

The low EBITDA of Salesforce is nowhere near the sign that the SaaS business model is weak, or that the company is not doing well, it’s the opposite. This business is doing very well, demonstrating how powerful the SaaS model can be. Companies using the SaaS as a business model cannot be evaluated as standard software vendor with on-premise solution. If you are considering SaaS for your own business, it should be very clear in your mind. It should also be very clear that transitioning from an on-premise model to a SaaS model is extremely difficult without significant hits on your revenue which is why SAP, Oracle and other big vendors have so much trouble.

Regarding Salesforce, the fun fact is that as soon as the growth starts slowing down, the earnings will explode through the rough relative to revenue. Funny how things work with SaaS.

Cloud and SaaS – do people really know what they are talking about?

I keep seeing blog posts, articles and presentations about Cloud and SaaS, the two words being used interchangeably.. Are they doing it on purpose?? I mean, if you are a company using the SaaS model are you saying Cloud company because it’s hype right now?? SaaS and Cloud are not the same thing! you cannot switch one another to be hype! Let’s clarify very simply:

SaaS: Software as a Service = You pay for the usage of an application (or a set of application) as you go (it’s like a service). You do not update or maintain the product, you access it and use it (it’s as a Service). It’s a Software (like Software as a Service). An example is Salesforce CRM solution. it’s a CRM software, that you can use as a Service. SaaS.

Cloud: “Something” from which you draw resources without really knowing what’s in there. Basically it’s a bunch of Server, routers, switches and load balancers with a OS layer that removes all those terms from you vocabulary and make it look like a Cloud. You want more power, you get it, you want more space, you get it. Who or what provides it, it’s the Cloud. you don’t need to know in fact.A Cloud is not a SaaS, it’s an infrastructure on top of which resides “your needs”. SalesFroce has something called Force.com which is a Cloud, on which third parties build SaaS offerings.

As I said, SaaS companies often times use Clouds to put their product. Simply because the SaaS model will grow as you get more users and you don’t want to have to buy too big right away. So starting on Cloud allows you, as a SaaS provider to grow as you go.

There is a lot more to the Cloud and to SaaS than what I just exposed here, but please, stop saying Cloud company when it’s a SaaS company and vice versa. It just demonstrate right from the start that you have no clue what you are talking about.