The Week the Cloud Won
February 25, 2012
This was a milestone week for enterprise computing: The cloud won.
On Tuesday, Dell reported lower earnings, and said sales in the current quarter would fall 7 percent. On Wednesday, Hewlett-Packard, that other stalwart of enterprise hardware, also reported lower earnings, and also projected a lower outlook for both the quarter and the year.
Meg Whitman, H.P.’s chief executive, said a full transformation of H.P. might take as long as five years…
Then on Thursday, Salesforce.com, which rents business software through a cloud-computing based system, said its fourth-quarter revenue was up 38 percent. Salesforce also raised its revenue projections for 2012, to a rise of 30 percent year on year.
If these reports hold up elsewhere, it would seem that businesses are moving to cloud computing faster than almost anyone would have thought a year ago. Salesforce and others are rushing to offer more applications to businesses via the cloud, and old-line software giants like SAP and Oracle are spending billions to buy and build their way into the cloud.
This doesn’t just change the software business, but it does radically affect the hardware business. The cloud is a collection of thousands of computer servers, bought by companies that are buying in volume, and care less about brand. Laptops and desktops don’t get as much wear and tear when a business is connected to the cloud. Those stalwarts also face competition from tablets and smartphones, as employees find they can do more tasks on mobile devices.
If the changes are happening as rapidly as this week’s earnings suggest, all the traditional manufacturers, resellers, consultants and other camp followers of the current client/server computing world, who thought they had a few more years to adjust to the new realities, are having a really bad day.
“We’re at a tipping point, where mission-critical applications are moving into the cloud,” says Rick Sherlund, an analyst with Nomura Securities. “The hardware is different, the infrastructure is different; it affects a lot of things.”
To be sure, comparisons among the three companies are far from perfect: aside from the individual woes and triumphs at each company, Dell and H.P. are still much bigger companies than Salesforce. H.P.’s revenue on the quarter is more than 10 times as big as Salesforce’s for the year, though H.P. also has much lower profit margins. After accounting for things like stock-based compensation and amortization of intangibles, Salesforce lost 3 cents a share in the last quarter, and 9 cents on the year. Critics would say this is an apples and oranges comparison.
But apples and oranges are both fruit. You can similarly abstract the differences among these companies, and make some decent comparisons. They all have the same customers, for example, and most of those buyers are looking for a cheaper alternative. They are all publicly traded companies too, and for the most part have the same type of investors. The day after their respective earnings came out, Dell shares fell about 6 percent, and H.P. shares fell 7 percent. Salesforce gained 8.6 percent.
As much as a stock price is a bet on the future, Salesforce appeared to have a better outlook.