Marc Benioff says that coronavirus won't have a major impact on Salesforce's business because the company was built to withstand recessions and downturns
CEO Marc Benioff said on an call with analysts Tuesday that he doesn't expect Salesforce's business to be affected by coronavirus. While Salesforce is watching what's happening with the coronavirus around the world, he and cofounder Parker Harris built a company that is able to withstand recessions and these kinds of crises, he said. Many of Salesforce's customers have signed long, multi-year contracts with the software maker, so the company is able to predict its revenue and growth far enough in advance, which contributes to its strength. Click here for more BI Prime stories.
Many major tech companies are worried about how the coronavirus disease, COVID-19, is impacting their business, with Microsoft just announcing it won't meet its sales forecast for its Windows and Surface business for the quarter and Workday and Facebook cancelling its upcoming conferences. However, Salesforce may avoid any such impact. CEO Marc Benioff said that he doesn't expect Salesforce's business to be affected by coronavirus. During a call with analysts after reporting earnings that beat estimates on Tuesday, Benioff said that while Salesforce is watching what's happening with the coronavirus around the world, he and cofounder Parker Harris built a company that is able to withstand recessions and these kind of crises. "When we started Salesforce, Parker and I really built a business model that was designed to transcend these situations so that we would have durable growth over time regardless of the crises. I think that really played out in a surprising way with a level of strength in 2009, '10 and '11 financial crisis that if you look at our revenue curves, it looks like it never happened." Benioff said, referring to Salesforce's performance after the 2008 recession. Benioff said that "our hearts go out" to the people impacted by the virus and that he has heard from customers who are impacted. These have mostly been airlines, hospitality companies and companies who have their operations primarily in China or who have significant supply chains based in China. He added that, whether bookings are slightly up or down between quarters, the company has enough reserves and a strong enough business model to withstand it. He didn't elaborate and say if Salesforce was seeing any changes in bookings due to the coronavirus. He did say that many of Salesforce's customers have signed long, multi-year contracts to use Salesforce's software, so the company is able to predict its revenue and growth far enough in advance. "93% of our revenue is deferred, so that just gives us tremendous visibility into the future," he said describing the company's model of subscription software a "key architecture of our accounting" that illustrates "our deep contractual multi-year relationships with our customers," Benioff said. But there are some indications that Salesforce is feeling the effects more directly. Salesforce has turned its upcoming conference in Australia into an online only event, due to fears over the coronavirus. "Nothing is more important than the health and safety of our stakeholders. Over the last few months, we have been closely monitoring the evolving situation with the COVID-19 Coronavirus outbreak to ensure we are taking every precaution to look after our customers, partners, and employees," it said in a statement The annual event reportedly brings in tens of thousands of technology leaders from across the Asia-Pacific region. Salesforce said that, "going digital" will let more people participate in the event. Got a tip? Contact this reporter via email at firstname.lastname@example.org or Signal at 925-364-4258. (PR pitches by email only, please.) You can also contact Business Insider securely via SecureDrop.Join the conversation about this story » NOW WATCH: Taylor Swift is the world's highest-paid celebrity. Here's how she makes and spends her $360 million.
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The coronavirus crisis is force-feeding 2 big changes into the stodgy enterprise software market. Here's why some startups are already benefiting.
A pair of trends going on in the enterprise software business may help it weather the...A pair of trends going on in the enterprise software business may help it weather the coronavirus crisis, Jai Das, an industry expert, told Business Insider. The shelter-in-place orders and the economic downturn have spurred interest in cloud-based software as an easier-to-manage, less costly alternative to running applications in corporate data centers or workstations, he said. Many recent enterprise software companies bill customers based on how many employees they have using their software, a model that could expose them to big revenue cuts with corporations slashing their workforces. But some software makers are moving to usage-based billing models, which could limit the losses, Das said. Click here for more BI Prime stories. The enterprise software sector is already starting to feel the impact of the coronavirus crisis, but a pair of trends may help buoy the industry, one expert says. The widespread shelter-in-place orders have spurred demand for software and services that run in the cloud rather than in corporate data centers, said Jai Das, president and managing director of Sapphire Ventures, which focuses on enterprise software startups. Meanwhile, software makers are moving from per-person billing models to usage-based ones, which could limit the damage to their revenue from customers cutting their staffs. "Everybody saw a slowdown in April" as the pandemic throttled business activity, Das said. But because of such trends, "it wasn't like completely the world [was] cratering. That didn't happen." Many big companies have long operated their own data centers where they host applications and corporate information. But for many, the COVID-19 outbreak has made those setups seem more like a liability than an asset, Das said. Offices have been closed around the nation and world in an effort to limit the spread of the virus, which has made it difficult to get IT managers into corporate data centers to keep them up and running, he said. In the past, some companies have turned to outsourcing firms such as Infosys to manage their data centers. But with many corporations slashing their budgets in response to falling revenue during the crisis, the cost of operating data centers, even under outsourcing arrangements, is coming under close scrutiny, Das said. Most recent enterprise software startups host their applications in the cloud rather than on corporate servers or individual workstations. Now, according to Das, established companies are starting to see cloud-based technology as cost-competitive, less headache-inducing alternatives to managing their own data centers. Companies are saying: "That is a budget that we don't need to spend, let alone having the people there any more," Das said. In terms of the applications they choose and use, he continued, "people are trying to move those as quickly as possible to the cloud." Usage-based pricing could replace per-user billing In recent years, many enterprise software companies have moved to a subscription-based business model, charging customers monthly fees on a per-user basis. The danger of that model in an economic downturn is that with many companies laying off substantial portions of their staff, enterprise software makers could see their revenue slashed. A company that just cut 25% of its sales positions, for example, could theoretically reduce its spending on Salesforce's software by that same 25% just based on having fewer people using it. But some enterprise software companies are moving toward a different model that could limit such cuts, Das said. Cloud computing providers have long billed based on usage — how much of their computing resources a customer uses in a given month — rather than on the number of people within a corporate customer that have access to their services. Some enterprise software makers are heading in the same direction, Das said. Slack, for example, bills customers based on their active number of users each month, rather than the total number of people within a company that have access to its service. It keeps close track of how many employees within a company are actually active during the month and adjusts customers' bills based on that usage. The general sense is that bills based on usage may not fall as much in the downturn as those based on numbers of total users, and that they're fairer for both parties. "Consumption-based pricing is one of the things that people are really focused on," Das said. To be sure, those trends are matched by others that are weighing on the sector. Hard-pressed corporate customers are ditching some enterprise software and services and asking for prices concessions on others. And as they've cut jobs, they've moved to cut their software bills. It remains to be seen how those trends will balance out, Das said. Many enterprise software companies have seen interest in their services pick up in recent months even to record levels in some cases, he said. "Everybody is watching carefully [to see] how well they convert into actual deals, actual revenue and how long it takes," Das said. Got a tip about startups or the tech industry? Contact Troy Wolverton via email at email@example.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop. Read more about startups and the downturn: Enterprise software companies aren't immune to COVID, and experts warn investors are underestimating how many customers might demand price cuts or peel away Airbnb just cut nearly 2,000 jobs, but the layoffs aren't even close to offsetting a $2.4 billion revenue shortfall this year The government is now giving startups a green light to participate in its $670 billion small-business loan program, but at least some advocates are urging caution Startup advocates worry venture-backed companies that got money under the $670 billion small-business loan program are going to have to give it back SEE ALSO: 'That becomes a lot more interesting to invest in': This Silicon Valley VC is betting there's going to be a surge in automation thanks to the coronavirus crisis Join the conversation about this story » NOW WATCH: We tested a machine that brews beer at the push of a button
For the first time, customers can't — or won't — pay their cloud software bills, which could forever change the once-reliable subscription model
Cloud software companies like Salesforce or Okta, rely on a subscription business model, one that typically...Cloud software companies like Salesforce or Okta, rely on a subscription business model, one that typically bills per user/per month, an approach that's become the envy of the tech industry because it creates a steady flow of revenue. Cloud software companies have even been considered to be all but immune to economic downturns because their customers rely on software to run their businesses. But the COVID-19 pandemic is different. Customers in hammered industries simply can't pay their bills. Others have been forced to reduce their IT budgets and want to pay less for their cloud software, analysts say. Customers are going to their cloud software vendors asking for new payment terms. This could forever alter the once ultra-stable subscription business model, predicts Gavin Baker, founder of the hedge fund Atreides Management. Visit Business Insider's homepage for more stories. "Spoke to the CEO of a large private software company. The CFO of one of the largest airlines called him to ask for extended payment terms on a $250k bill. 250k," tweeted Gavin Baker, founder of the hedge fund Atreides Management, who is also well-known for his time managing Fidelity's OTC fund. Baker explained to Business Insider that the situation shocked him because that airline has a multi-billion dollar IT budget. If the CFO was renegotiating this relatively small $250,000 bill, many other software vendors must be fielding similar calls from their customers big and small, thanks to the economic crisis brought on by the COVID-19 pandemic. "I would suspect that every software vendor in the world who services anyone in the travel industry or the leisure industry is getting calls like that," he said. The pandemic has hammered industries including travel, hospitality, restaurants, sports and other events, gambling, as well as the suppliers that support them, including oil companies. All of those companies spend a lot on cloud software from vendors like Salesforce, Okta, ServiceNow, Workday, Zendesk and startups, powering their customer management systems, loyalty programs, and accounting. The problem is that amid the uncertainty caused by the pandemic, many of those companies can't — or simply won't — pay those cloud bills. Until the economy is back up to speed and their revenue returns, they're looking for ways to cut expenses and stretch their cash. Some of those companies won't make it, and will close their doors for good. "One thing we can all agree on is, if a business goes away, it's not going to pay its software bills," Baker said. But it's not just the companies in danger of going under that are rethinking their software bills — it's every company, he contends, and it's the top issue on the software industry's collective mind. The situation inspired Baker to pen an essay which argued that for the first time since the beginning of the cloud revolution, many cloud software companies, also known as software-as-a-service (SaaS) vendors, may not be getting paid by a lot of customers, whether or not they're under a contract. "Software payment terms will change significantly as a result of this recession. I suspect that fewer customers will pay cash up front and that we will see payment terms lengthen significantly," he argued in his essay. IT departments are desperately trying to trim costs because many of them are dealing with shrinking budgets and mandates to conserve cash. Some surveys estimate that IT budgets will decline by 5% this year, SiliconAngle reports. And with purse strings suddenly tighter, customers need ways to cut expenses. For the first time, they are looking at software vendors for that help. That's why Baker received an outpouring of response from his tweet and article, he told Business Insider, including the story of how one IT pro, after reading, called his vendors and told Baker that an hour's worth of phone calls helped him reduce his bills by 30%. A first for most cloud software vendors Historically, SaaS vendors were typically the first to get paid, even in a slowdown, because a company can't run its business without its software tools. That's why cloud software companies are traditionally considered to be all but immune to economic downturns. This has allowed SaaS vendors to have a different and far less flexible business model than infrastructure cloud platforms like Amazon Web Services or Google Cloud. Infrastructure cloud companies tend to bill like a utility company — customers receive a monthly bill for how much they actually used their cloud services. By contrast, software-as-a-service companies tend to bill on a subscription basis, typically charging per user, per month. Smaller organizations often have the flexibility to pay month-to-month, while larger companies sign annual or multi-year contracts with their cloud software vendors. This subscription billing model makes SaaS a fixed monthly cost, which doesn't expand or contract with usage. And that's "less customer-friendly from a cashflow perspective" compared to the Amazon clouds of the world, Baker says. Baker argues that this economic crisis will be the tipping point, forcing vendors to modify their contracts if they want to keep any customers at all. "Software contracts will be adjusted to reflect lower utilization rates and fewer seats," he says. From bravado to warnings Baker isn't the only one noticing that SaaS vendors are not being paid in full by all their clients anymore. Wall Street equity analysts have also been warning their clients that change is coming to the cloud software world. "Our survey work, channel conversations and macro data all point to a very difficult software spending period over the next several months," Morgan Stanley analyst Keith Weiss wrote in an April research note on the software industry entitled "Looking through the Valley of Darkness." Weiss writes that the talk consuming the software industry these days is "companies asking for pricing concessions, aggressively cutting user bases or not paying for subscriptions outright." He says the "durability" of the subscription model is being tested. Pat Walravens at JMP Securities, another long-time software equities analyst, has a similar warning in his research note of April 20th. While he's more upbeat that many SaaS companies are in a position of strength, he writes, "depressed billings are likely to persist for 4-5 quarters. We base this on what happened in the last recession, where it took 4-5 quarters for billings growth of the SaaS companies of that era." He adds: "IT budgets, once reduced, are not likely to snap right back as enterprises may want to make sure they are in a better spot before loosening the pursestrings." In fact, the top story on CIO Magazine last week was "6 tips for renegotiating service contracts" which was chock full of advice for tech executives who are facing cash shortages thanks to the COVID-19 pandemic. The vendors react We are already seeing even the most stable SaaS vendors getting their wake-up calls from this changing dynamic. At first, the SaaS industry felt safe because of their recurring revenue model. The king of that world, Salesforce founder and CEO Marc Benioff, said in late February after reporting a solid earnings that coronavirus wouldn't likely have a major impact on Salesforce's business. He said then that "93% of our revenue is deferred, so that just gives us tremendous visibility into the future." But just few days later as the economy began to shut down, its formal quarterly report to the SEC was littered with warnings about how its business could be impacted, including if its customers slashed their IT budgets. Such examples are all over the SaaS industry. For instance, at its April investor conference, Okta's CFO, Bill Losch, said a similar thing: "Our highly recurring business model enables a high degree of predictability and allows us to maintain confidence in our revenue outlook for the first quarter and fiscal year 2021, which we are reaffirming. We do, however, expect some near-term billings headwinds as customers adjust to the current business environment. " As Baker concludes, "At the end of the day, there is no such thing as truly recurring revenue." Are you a software sales professional at Salesforce or another SaaS company with insight to share? Contact Julie Bort via email at firstname.lastname@example.org or on encrypted chat app Signal at (970) 430-6112 (no PR inquiries, please). Open DMs on Twitter @Julie188. Now read: These former Cisco star engineers now run a $700 million startup. Their two keys to surviving a recession: be good to suppliers and cut spending elsewhere. Tech CEOs say they plan to scale back on real estate for offices now that they know everyone can work from home, and it's not good news for WeWork In a rare YouTube video, Larry Ellison raves about Zoom, saying it has forever changed how Oracle — and all businesses — will work Join the conversation about this story » NOW WATCH: Why electric planes haven't taken off yet
Airbnb-backed corporate housing startup Zeus Living is asking landlords to renegotiate their leases and withholding April and May rent until they sign
Airbnb-backed apartment rental company Zeus Living has been asking landlords to renegotiate leases into revenue-share agreements...Airbnb-backed apartment rental company Zeus Living has been asking landlords to renegotiate leases into revenue-share agreements or cancel their contracts, according to documents viewed by Business Insider. Zeus has also told landlords that they wouldn't be paid their April or May rent without signing the new revenue-share agreements, according to an email viewed by Business Insider. Last Monday, CEO Kulveer Taggar hosted a Zoom conference for landlords, where he said that the company had $2.5 million in cancellations in March. Visit Business Insider's homepage for more stories. Airbnb-backed corporate home rental company Zeus Living has been asking landlords who let their homes to the company to renegotiate or cancel their leases to protect the company's dwindling cash reserves. According to documents viewed by Business Insider, up to 404 landlords have been asked to renegotiate their leases to a revenue-sharing model that doesn't guarantee payment unless the spaces are occupied. Additionally, the company told landlords that if they didn't sign the new contracts, they wouldn't be paid April and May rent, according to a separate email viewed by Business Insider. A representative for Zeus confirmed that the company has asked for rent abatements and to swap leases for revenue-share agreements. Zeus rents furnished properties for stays of longer than 30 days in six metro areas around the country, catering specifically to business travelers. Like many hospitality businesses, the company has been heavily impacted by the coronavirus pandemic. The company laid off 30% of its staff at the end of March. The company raised a $55 million Series B round at a $205 million valuation in December of last year from a range of backers, including Airbnb and Comcast. $2.5 million worth of cancellations in March Zeus CEO Kulveer Taggar hosted a Zoom conference with 130 landlords last Monday to explain the decision, according to a source who attended the meeting. He told landlords that those who have a resident in their home will be paid. He also said that the company had $2.5 million worth of cancellations in March, and was already looking to raise money this year. A representative for Zeus confirmed the details of the Zoom meeting, and noted that the company has experienced more cancellations since March. "This has been a surreal time and everyone is hurting in this crisis," Taggar wrote to Business Insider in a statement. "Like so much of the country, we're experiencing liquidity challenges and have made difficult choices to adapt so our company and community can make it through." Typically, Zeus signed leases with landlords that guaranteed payment every month, regardless of occupancy. The company brought in furniture to make the space move-in ready, and then charged their clients a premium over the rent that they were paying for the homes. The new revenue-sharing model splits revenues between the landlord and Zeus. The exact splits depend on the contract and the amount of money that Zeus is getting paid to rent the space out, but generally Zeus gets a larger share of the profit as the property brings in more money. Business Insider reviewed the terms of one new contract. If the property receives 0-50% in revenue of the previous rate Zeus was leasing the property at, Zeus receives 4% of revenue, at 50-100% of the lease rate, Zeus gets 10% of revenue, and above 100%, Zeus gets 55% of revenue. Zeus confirmed these rates to Business Insider. Business Insider also reviewed the force majeure clauses in a pre- and post-coronavirus contract. Before coronavirus, potential events that trigger force majeure (such as strikes and natural disasters) would allow the company to delay payment without penalty. After coronavirus, these same events would allow Zeus to cancel the lease agreement if events make it "commercially unreasonable" to pay rent. A Zeus spokesperson told Business Insider that "every company is adapting in real-time to a new and volatile business environment, and our industry is no different but we don't comment on contract terms." Coronavirus continues to cripple the hospitality industry This mirrors a change happening in the flex-office world, where companies looking to reduce their financial obligations have moved away from leasing space from a landlord to entering a revenue-sharing partnership. While this can mean the company takes in less profit when spaces are full, it also protects them if profits dip. On the call last Monday, Taggar explained that the company has applied for a PPP loan to deal with the short-term cash crunch, which the firm has confirmed it had been approved for. On the call, Taggar said that the company had plans to fundraise in the second quarter of this year. A spokesperson for Zeus confirmed that the company is still fundraising. Taggar also said on the call that 52 of the 390 landlords that work with the company have agreed to sign the revenue-share agreement. A spokesperson for the company said that the company has 404 single-family owners, and that nearly two-thirds of owners have decided to continue working with Zeus so far. "The pandemic was a hard blow to our business and meant we had to adapt quickly," Taggar said in a statement to Business Insider. "But Zeus has always been nimble and I'm proud of how quickly the team shifted gears to attract new types of residents such as displaced students, healthcare professionals, government employees, grounded tech workers, and early responders. Since March there has been positive traction across marketing campaigns, we're booking more six and twelve-month leases, many residents are extending their stays, and we are beginning to see bookings pick up significantly." While the pandemic accelerated the adoption of revenue share contracts, the move was in the works before the pandemic. The company signed its first revenue-share agreement in Washington, DC earlier this year. Short-term apartment rental companies have been hit hard by coronavirus, as many of them continue to carry lease obligations while business and leisure travel has slowed to a halt, stifling almost all demand for their inventory. Lyric, another hospitality company that has raised money from Airbnb, cut 20% of its staff in March, according to a report from The Real Deal. Sonder, a venture-backed hospitality and rental company, laid off or furloughed more than 400 people or one third of their staff in March as well, The Information reported. Even Airbnb, on the eve of its likely IPO this year, has had to raise a $1 billion in cash to keep its operation running.SEE ALSO: Airbnb-backed Zeus Living just laid off 30% of staff as the coronavirus upends travel and hospitality startups SEE ALSO: Vacation home owners are turning properties into quarantine havens by beefing up amenities to include protective masks and large cases of wine SEE ALSO: What to expect when you're back in the office: 7 real-estate experts break down what the transition will look like, and why the workplace may never be the same Join the conversation about this story » NOW WATCH: Why Pikes Peak is the most dangerous racetrack in America