Q1 2011 Cloud Apps Financial Results Roundup

Last week, Salesforce.com reported first quarter earnings for its 2011 fiscal year. That last report of the season allowed us to pull together this roundup of financial results for ten publically traded cloud apps companies. While there are plenty of public companies with cloud apps offerings, these ten are "pure plays" that can give us a clear picture into the health of the cloud application business model. And healthy it is!

Quarterly Revenue ($ Millions)

Salesforce (CRM) led the way with a 35% year-over-year growth rate. What's most impressive is that Salesforce's $127 million in new revenue (i.e. incremental relative to Q1 2010) is larger than the total quarterly revenue of all other companies in our analysis. Other standout performances came from SuccessFactors (SFSF) and Kenexa (KNXA), which grew 54% and 51% year over year, respectively. 

It's worth noting that most of these companies made acquisitions in the last year, so some of this growth is acquired, as opposed to organic. The revenue from acquired companies was not disclosed in most cases, so we weren't able to tease apart acquired versus organic growth. While Salesforce acquired both Heroku and Dimdim in the last year, we don't think acquired revenue from either of these deals overshadow the company's strong organic growth. 

Quarterly Operating Income or Loss

Despite consistent revenue growth, publically-traded cloud apps companies are not yet raking in the dough. Half of this universe of companies remains unprofitable. Meanwhile, those companies that are profitable are turning in rather meager operating margins. This, of course, reflects a deliberate strategy to invest heavily in growth. Cloud apps companies and their investors see this as a "go big or go home" opportunity and have decided that top-line growth is more important than near-term margins. 

SaaS Revenue by Application Category

Customer relationship management (CRM) represented 57% of all revenue amongst our public universe. Of course, that results from Salesforce – primarily a CRM vendor – dominating the revenue composition. At the same time, it demonstrates that the cloud has not gained nearly as many converts amongst enterprise resource planning (ERP) buyers.

The first apps to move to the cloud were sales force automation, expense management, and some human resources apps. While these are not simple apps, their functionality could be replicated on the web more easily and the users of these systems were open to cloud-based systems. ERP, call center, supply chain management, business intelligence and other apps present a bigger challenge in the cloud, but technology has now evolved such that these apps can now live in the cloud. As a result, we expect to see cloud app adoption grow considerably in the next couple years. 

Approximate Customer Count

Salesforce also leads the universe with 97,000 customers. However, it's important to note that Salesforce has a huge base of small and mid-size organizations. Peers like RightNow (RNOW) and the human resources SaaS companies tend to sell to larger organizations and therefore have smaller customer counts. In aggregate, this universe of publically traded SaaS vendors has over 160,000 customers. These customer counts are more precise for some companies than for others, depending on how trasparent they are in reporting customer counts in their quarterly releases. 

The simplicity of the cloud app model allows these companies to address a dramatically larger market than traditional on-premise systems. 

Average Annual Subscription Value

We did our best to determine the average annual subscription value for each company by dividing each company's subscription revenue by its approximate customer count. To some extent, this chart is the inverse of the customer count chart above; companies with fewer customers are targeting larger enterprises. This is especially true for the cloud HR companies like Ultimate Software (ULTI), SuccessFactors, Saba (SABA) and Taleo (TLEO), all of which are targeting larger customers. The chart also illustrates Salesforce's smaller deal sizes. We were surprised to see how concentrated NetSuite's business is around small deals. Again, we expect this to change over the next few years as NetSuite moves deliberately up market. 

Market Capitalization ($ Billions)

Our universe of ten public cloud app vendors have earned, in aggregate, a market capitalization of over $31 billion. Salesforce represents roughly 57% of that valuation. Most of these companies now have a market cap of over $1 billion.

Market Capitalization / Revenue Run Rate

In this analysis, we charted each company's market cap relative to its revenue run rate (latest quarter revenue x 4). And while Salesforce has earned a handsome multiple of 8.5x revenue, both NetSuite (N) and SuccessFactors enjoy higher multiples. The SuccessFactors multiple can be explained by its higher growth rate (54%), but the reasons behind NetSuite's ~11x multiple are a little less obvious. We believe that investors are assuming that cloud apps will soon be adopted broadly in the ERP market, and are betting on NetSuite as a prime beneficiary of that activity. So, they are paying a premium multiple today for expected growth tomorrow.

Revenue Growth Rates and Multiples

This scatter plot allows us to visualize how each company's valuation (market cap / revenue run rate, again) compares to its year-over-year growth. Companies who are on the right side of the chart are getting a higher valuation relative to their growth rate. This implies that investors are feeling better about these companies' momentum and future prospects. NetSuite sits at the far right, which again implies the expectation of a bright future for this cloud ERP leader.

Year-Over-Year Change in Share Price

It's been a good year for cloud app investors. All ten of these companies have seen their share price increase over the last twelve months. All but two of them have outpaced the appreciation of the Nasdaq market index, which was up about 26% in the last year. NetSuite's 126.62% share price appreciation tops our chart. It appears that investors' enthusiasm for the company has come about, or at least accelerated, recently.