Mr Marc Benioff believes his internet company has its house well in order, writes Barry O'Halloran.
To anyone who saw their pension fund dip by 15 per cent over the past three years, this could sound frightening: A dynamic internet company, with the potential to change the way we do business, is seeking to float on the New York market.
Early last month, internet-based application service provider, Salesforce.com, filed the documents with the US Securities and Exchange Commission (SEC) needed to begin the process that will end up with the initial public offering (IPO) of its shares.
Salesforce.com is based in San Francisco with offices in Dublin, where it employs 60 people, and Tokyo. It is focused on customer relations management (CRM). Because of its requirement for extensive databases, CRM is a popular area with software developers. Only Salesforce doesn't sell software. Instead it hosts its clients' databases on a server, while they access and manage the information via the web.
According to its chief executive, Mr Marc Benioff, his company's system is superior to CRM software, largely because it's cheaper and easier to use. Salesforce provides the applications they need via the web, hence the term application service provider (ASP).
Since he established the company in 1999, its motto has been "the end of software". He believes that in his business, the internet has cut out the need for software, which he says has been less than satisfactory for many companies, simply because they could never get it to operate properly, or at all.
Salesforce could be the first of a number of high-profile technology IPOs this year. And it may be on a list that could ultimately include search engine star, Google and the airline-backed travel site, Orbitz.
Investors whose fingers are still stinging from the last round of technology flotations could be forgiven for regarding all this with scepticism. These market candidates are clear plays on the internet. And many people feel that unless the internet is part of something else, for example, Ryanair.com, it has, on its own, failed to deliver a profit to anyone.
To bear this out, neither Salesforce nor Orbitz made a profit at their last year-end. So are we just looking at another batch of hyped technology companies, more adept at spending investors' money than generating revenue and profits?
Mr Benioff says we're not. And the reason he believes that is that any company that wants to go to the market in this post-Enron world must first have its house in order. In the US, this means it has to comply with the Sarbanes-Oxley Act, the linchpin of a tough new corporate governance regime.
Among other things, this requires directors to certify annual and quarterly financial information. It has also toughened up the accounting and auditing procedures, making both preparing for a listing, and staying listed, an expensive business.
"Today in the United States we have a number of regulations that are high hurdles for companies to reach," Mr Benioff says. "The excess of the 1990s has paid off in a better structured market, with new rules and regulations, specifically in the United States, that I think will create a better, more controlled environment.
"Because of that, new companies will have a much harder time coming in to the public markets, and not many companies are ready for that, which is why you haven't seen that many." And he does not believe there will be many IPOs out of Silicon Valley this year.
Not only that, he makes it clear that many of the companies that went to the market the last time should not have done so. "They were only looking for the money to pay for their continuing operations," he says bluntly. Asked how his company intends to use investors' money, Mr Benioff points apologetically in the direction of the S-1 that Salesforce.com has filed with the SEC.
The rules surrounding what he can and can't say at this delicate juncture in his company's career force him to do this several times during the interview. This includes any discussion of numbers. The S-1 shows that Salesforce.com began turning a profit late last year.
In the nine months to the end of October, Salesforce.com had a pre-tax profit of $5.2 million (€4.11 million), on the back of $66 million in revenues. Its fiscal year ends in January, so there is no information on full-year revenue and profits available. Last year, it made a $9.34 million pre-tax loss on sales of $51 million. That was a considerable turnaround from 2001, when it made a $31.6 million loss on $5.4 million sales.
The company also seems to be capable of generating cash. Its filings show that operating activities generated net cash of $15.7 million in the nine months to the end of last October. Salesforce.com is a subscription-based business, which means that clients pay upfront for the service. However, the revenues from this are accounted for over the full length of the subscription period.
Salesforce.com's overall position compares well with some of the other flotation candidates. In the first nine months of last year, Orbitz had $172 million in revenues and lost $2 million. It lost $19 million in 2002. US technology training company, Blackboard, was betting on $90 million in sales last year. The exception is Google, with estimated annual revenues of $1 billion.
US analysts believe that sales of around the $100 million a-year mark are solid enough to consider an IPO. Ms Linda Killian, portfolio manager with investment house, Renaissance Capital, recently told USA Today that investors were still burned. "The underwriters are going to be a lot more careful about what they put forth," she said.
On the basis of its nine-month performance, Salesforce is comfortably in the territory accepted by analysts as suitable for flotation. There is no word on how much it intends raising, but one report in the US media suggested somewhere in the region of $100 million. Orbitz is thought to be likely to raise $300 million.
Google, on the other hand, would be something of a phenomenon, if it happened, and it is only a rumour at this stage. However, if it went to the market, this would, in the words of USA Today, signal that the "party is back on". In that case, let's hope nobody drinks too much.
