Here's some perspective from someone deep within the Salesforce ecosystem: Salesforce has very concretely and deliberately pursued the "imperial" approach in the B2B/Enterprise market, which is to do a careful survey of existing products in a particular space, the potential revenue to be gained from expanding into that space, and what is needed to get a heads up on existing products.
As is generally the case in the enterprise space, this means providing more features than the competitors. There is also a network effect in that the more features and integration points a particular platform has, the more valuable it is.
Salesforce has done this extremely effectively, from salesforce automation, to customer relations management, to customer service, etc. In many cases now it is virtually unimaginable not to use Salesforce, since the feature set is so extensive. One note here is that although the UI has had its warts, Salesforce is actually has a much better UI experience compared to most other enterprise apps (lightweight competitors tend to be better, but not deliver the feature set).
In any case, marketing is a natural extension for Salesforce at this point and I have ever reason to expect they will be successful at dominating this market segment just as they have in other sectors and points on the value chain. If they have to pay a bit of a stock price premium in order to do so that's not a lot of sweat off Benioff's brow.
"Salesforce has done this extremely effectively, from salesforce automation, to customer relations management, to customer service, etc. In many cases now it is virtually unimaginable not to use Salesforce, since the feature set is so extensive."
This is the same strategy that Microsoft has pursued for years - and it sometimes works and sometimes doesn't - MSFT going after Intuit comes to mind, as does their own Salesforce.com competitor.
ExactTarget is a good large-scale email tool, but it is a very below average marketing automation tool. Now, they purchased Pardot, which is a decent, if basic marketing automation tool - good for small business but nowhere near an Eloqua or a Marketo - more comparable to Hubspot. So the question is how integrated they can make all these various tools. To date the Pardot/ExactTarget integration was rather weak - probably more to come on that front. I could see a world where they use Pardot's front end and ExactTarget just for scale email sending but the existing user base won't appreciate that move.
Now, I look at the integration (or lack thereof) with existing Salesforce acquisitions, and I have little confidence that Salesforce will be able to build a world-class, fully integrated product. For reference, look at the integration of Buddy Media or Radian6. So Salesforce may have all the tools, but true integration between the tools has been historically lacking. Now they're adding a company that is strong in B2C email and has a small B2B marketing automation tool that they themselves are trying to integrate. Sounds very complex and difficult - and sounds like something that would take a number of years to get right.
The real question for me is what now happens to Marketo and Hubspot - Hubspot, for example, has an investment from Salesforce, but was probably unavailable for acquisition as they want to spin public. Now that Marketo is public, and it looks like their business is not very sustainable (based on my read of the S-1), they'll likely see their stock price dip to the point where they look more interesting as an acquisition to someone. They're valued at around $800m right now - so if they show poor financial metrics, I'd expect that to dip. If they get cut in half, then a pick-up in the $600-800m range becomes viable - about the same price as Eloqua - but I'm not sure who would be the buyer at this point.
I think Salesforce did the right thing in terms of topline revenue (ExactTarget does around $300m vs. $65m for Marketo) and customers (ExactTarget has large B2C brands, Marketo mainly B2B), but they bought a far inferior product. Maybe they pickup another company in the space for the product?
Provided Salesforce's internal sales teams and enterprise consultants can effectively promote ExactTarget as a new addition to the product platform to Salesforce customers that hitherto hadn't considered it, the actual details of the level of integration are of secondary importance.
My own experience is that their internal sales teams and enterprise consultants are separate islands based on the product and they are very poor at cross-selling. We're a pretty decent size Salesforce.com customer and they have never even attempted to sell us other services. Not Radian6, not Buddy Media - hell, we had to ask them about Data.com.
So I'm doubting their ability to cross-sell. And then the integration is absolutely important - if you looked at the integration between Salesforce and ExactTarget, you'd be shocked by how primitive it is. Now, they might try and then sell them Pardot.
Do you feel your experience is representative of how their sales teams generally work? (genuine question)
If that's the case I'm surprised, since decision makers (especially at C-level) overlap a lot, their products' basic use cases and value propositions are relatively straightforward and they have armies of pre and post sales specialists to refine the proposal and worry about implementation details. Maybe I'm overestimating their sales organization based on their growth figures achieved...
In this case, I think it is a function of the fact that these are acquisitions and my guess is you have stovepiping going on. Meaning, the organizations probably aren't properly aligned.
Sales teams can function this way - but usually the way I've seen it setup is that you have a group that is focused on cross-sell/up-sell after the close of some additional business (farmers) vs. a hunter organization.
It works exceptionally well if you can lean into a market fully. Microsoft was heavily constrained by anti-trust issues.
Oracle is perhaps a better example of how well it can work than Microsoft. Ellison has openly admitted his strategy was acquired from the Office approach that Microsoft leveraged. Oracle has spent a huge pile of money, far more than Microsoft, in consolidating their space, and all without having a monopoly to lean on.
Not sure I agree that Marketo's business is unsustainable - clearly they want to make more headway in the B2C space; the B2B Marketing Automation market would seem to be saturated, but I would argue that there's still plenty of growth for them for the next 3-5 years, at a minimum.
As far as I can tell, ExactTarget's marketing automation capabilities vastly pale in comparison to Marketo or Eloqua, I could be wrong though.
something like 90%+ of Marketo's customers integrate it with Salesforce. Of course Salesforce won't just cut them off if they have a competitor tool, due to anti-trust issues, but it doesn't necessarily bode well for Marketo now that Salesforce owns a competitor. Pardot is a fairly small piece of Exacttarget though so potentially Marketo could still be a target at some point.
Larger scale B2C marketing automation is generally much more complex than b2b. Ecommerce databases are generally less normalized across businesses, aren't hosted by an intermediary like salesforce and contain more data. Cross-channel retailers with physical stores track a ton of transactions and customers. I really don't think that any b2b marketing automation platform will make much headway trying to go b2c. Hubspot has some success only because they focus on local and small businesses.
I completely agree. SFDC is really looking for a quick toe hold to get into the market and Exact Target gives them a ready made product and a solid base to integrate with their existing platforms. From there, it's a simple up sell to existing SFDC clients.
I would comment on this, but DHH has captured my thoughts nearly exactly on Twitter today: http://twitter.com/dhh
This is insane. $2.5b for a company that has lost money through its existence, has a very small set of (likely not-so-diverse) clients (6,000ish), and makes 10% of what they paid for them in revenue? Strikes me as a crazy purchase, but perhaps there's something else afoot that I don't see. I've been proven wrong about this stuff before.
Buying ExactTarget adds 6000 more prospects/customers that Salesforce can sell to. Assuming that it signs up a fraction of those to use Salesforce Service Cloud or Data.com or any of the other Salesforce products, that's more money and helps justify the price.
Oracle has been doing this for years (and probably where Benioff got his playbook) They buy up a company, fold in their customers and cross-sell their other products to them.
Yeah but assuming that works out as profitable, those customers (assuming they all stay with them) would have to start spending 10x the money they're spending with ExactTarget now on Salesforce products. That's a big stretch and risk, but again, maybe it'll work out for them. :)
Well, the purchase is a onetime cost, and revenue is recurring. If they spend 2x what they are paying now they'd recoup the cost (in terms of revenue) in 5 years. Plus, that's not counting new customers for ExactTarget's services. If you are a heavy SFDC user and were previously deciding between Marketo, Hubspot, and ExactTarget, you may go with ExactTarget because you know it'll be fully supported by SFDC.
I think it's sort of the opposite (of acquiring ET for their customers).
As a company "born Cloud", Salesforce have had to make sure their integration capabilities have been up to snuff, and other vendors have been able to leverage those integrations to reach Salesforce customers via the AppExchange (similar to the App Store).
So the capability of using Salesforce whilst using other apps with integration has been a capability for a while, and so customers could tailor their own solutions to their needs, budgets etc. Except that more and more, customers want the one-back-to-pat/one-neck-to-strangle, and the associated 'one-solution, no integration' benefits. Hence Salesforce have been parking their tanks on the lawns of service providers. When asked for features, Salesforce response is sometimes "There's an app for that", however sometimes the demand for them to provide certain functionality is so great, or the opportunity large enough, that they'll enter a market in this fashion. They're currently doing something similar with identity management. Ping Identity had a solution they could sell you, but soon they'll have to compete with Salesforce Identity.
Competing with someone who hosts the platform you're working on is possible, but it's definitely a disadvantage.
The other factor here is what the other players are up to - Oracle recently purchased Eloqua, and for those of us in the Salesforce line of work, an acquisition like this has been expected for the last few months. Email marketing is an area in which Salesforce has been weak for some time, they didn't want to do it because it's not their core focus, and hey, "there are apps for that". But once Oracle moved, Salesforce were going to follow suit to block that advantage.
It says they ran a $21MM loss on almost $300MM in revenue last year. Their growth rate combined with the LTV of their customers is probably very promising.
In the quotes they seem to playing on the "CMO will eventually have a bigger budget than the CIO" card. Whether this is a reasonable expectation, I don't know, but there seems to be the expectation of explosive growth in this sector. (I don't know the numbers or how Heroku has grown since but Salesforce did pick up Heroku relatively early in the cloud hosting lifecycle too.)
I generally agree with DHH's assessment of CRM and think it is ridiculous it trades such a high p/e compared to similar companies like Adobe.
That said, moving email providers is likely a huge pain in the ass for those 6000 customers. They are basically locked in for years and years. There may be potential to raise prices and gain profit from those customers. Internal investment to move vendors is likely in the hundreds of thousands.
Salesforce already has a few of these same clients through BuddyMedia and other B2C offerings, but the cross sell of a marketing suite is what they are envisioning. I expect that outside of a potential Marketo purchase, they will purchase companies with more b2c or general marketing offerings, potentially search, display or other ad related products to compliment Social.com.
We've lost profit because we do not focus on profit. We focus on revenue. This strategy has worked well for other companies like SalesForce and Amazon.
This has allowed ExactTarget to spend more money on developers (like me), products, and to acquire other businesses.
That may not matter -- in fact, most companies that take on VC money are not profitable for quite awhile, with the expectation that in the long term, the business will be enormous.
Before making the judgement that "psh, they're not profitable", be sure the vectors look right. For example, have they been making that margin smaller and smaller, and is the revenue getting larger and larger? If so, then they're fine in the long term, and it's a sound investment.
We don't have any insight into their financials as far as margins etc. We do know they had raised $188MM, and had purchased 3 companies (according to CB anyway). My personal take on this, after looking at their funding history briefly - had their margins been getting smaller, they wouldn't have had to continue raising round after round.
I don't get the fascination with subsidized revenue growth - almost anyone can do that with massive infusions of cash.
I don't think there's a fascination, I just think that's where most VCs invest their money, and it can be a compelling investment for acquisitions.
The larger issue is that short term profitability is not the only thing to look at. It should certainly be one thing to consider, but there are lots of examples of companies that became enormous after a long period of unprofitability. And since ET has so much revenue and only 7% loss compared to that revenue, I can totally see how this would be a good investment for Salesforce.
We're the little guy competing against ExactTarget. I had no idea their business wasn't profitable. From their customers who have reached out to me, it seems that for web businesses to integrate with them there are huge complexities (like mirroring your production database, and having ET engineers write custom code for you).
Even with all this they've clearly been successful on the revenue front. With an acquisition like this (company losing money), it'll be interesting to see what SalesForce does to make them turn a profit.
The ability to set up a dev or test environment to test integration has been a problem with ET in past, maybe it still is (I did Drupal to ET integration several years ago).
However, from what I have seen of Salesforce, which is not direct experience but in watching demos over people's shoulders, their test environment setup is very smooth. I think you have to pay more for it, but you can get a copy of your environment, if you are writing custom plugins it checks that you wrote tests, that those tests pass, and that those tests aren't stubs, before it lets you put anything live. It seemed a legit best practices operation.
Maybe Salesforce can implement that setup for the ET service and APIs. In the meantime I will checkout customer.io for the next project that needs email campaigns.
I use Exact Target, every day, and I'm very happy with their product and their service. I won't speak to the valuation, but their technology and application is great.
You would call their technology and application great? I use it every day as well, and for me it's one of the worst pieces of enterprise software I have to use. Unusably slow, and what should be very simple makes me jump through multiple hoops.
I don't know if I would call it "great" it is pretty awesome. But it's also slow as you can possibly be. There are times it's unusable due to the slowness.
What's interesting is that the Salesforce.com integration is pretty poor when compared to other tools (including Pardot which they own). So Salesforce bought the tool with the worst integration. In contrast, Marketo has probably one of the deepest. So clearly more about revenue and customers than tech.
Using their application makes my internet connection feel like a dial up modem. Backend integration is horrible, API calls can take up to 5 minutes to get a response back.
Startups use Mailchimp & Sendgrid, etc. for email marketing, but then as they mature & grow, they see the need for more mature (although, yes, more expensive, complex, & slower) tools like ExactTarget.
Very similarly, how do startups track their customers & leads? Often, with no CRM other than spreadsheets or in-house tools. When they scale & have >10 sales staff, they realize they need a more mature, slower, more expensive CRM, & SalesForce is there.
So, yes, the acquisition price seems high, but the complementary fit is solid.
I used to work at a place that happily used SugarCRM (which is open-source) for both email marketing and for CRM, so there are better CRM solutions for small businesses than simply doing spreadsheets/in-house.
"Salesforce is paying $33.75 a share, which amounts to an 11.7 percent premium over yesterday’s closing price of $22.10. Salesforce shares are down by more than 2 percent, or $40.16, in pre-market trading on the news."
How does any of that math make sense? Since when does 2% of $22.10 amount to $40.16, or is my brain just not working so early in the morning?
It's awkwardly worded but they meant that the salesforce stockprice ( not exact targets) is down 2% to its (at the time current) stock price of 40.16. As you can see from this link, http://finance.yahoo.com/q?s=CRM. Its now down to around 39.56, a 3.59% decrease.
It sounds like they paid about 10x revenue per customer (according to dhh https://twitter.com/dhh). That doesn't seem unreasonable, but I'm not sure about the murky area of valuation. Is it high compared to other similar acquisitions? Also, how does talent factor into a valuation?
Not really. Like sendgrid if you start generating spam complaints, lots of bounces, etc. they'll shut you down. Their total deliverability is adversely affected by any spammers that use their service.
You could call us that, but we try really hard to make sure you only get emails you actually want. We helped to write the CAN-SPAM Act so you can get valuable emails but not spam.
As is generally the case in the enterprise space, this means providing more features than the competitors. There is also a network effect in that the more features and integration points a particular platform has, the more valuable it is.
Salesforce has done this extremely effectively, from salesforce automation, to customer relations management, to customer service, etc. In many cases now it is virtually unimaginable not to use Salesforce, since the feature set is so extensive. One note here is that although the UI has had its warts, Salesforce is actually has a much better UI experience compared to most other enterprise apps (lightweight competitors tend to be better, but not deliver the feature set).
In any case, marketing is a natural extension for Salesforce at this point and I have ever reason to expect they will be successful at dominating this market segment just as they have in other sectors and points on the value chain. If they have to pay a bit of a stock price premium in order to do so that's not a lot of sweat off Benioff's brow.