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Salesforce CEO Marc Benioff famously tried to buy LinkedIn, and even offered a higher price, before Microsoft ran away with it for about $26 billion.
Most people believed Benioff’s obsession with LinkedIn was rooted in the vast amounts of data the professional network owns in its database.
That importance became particularly clear after Salesforce complained to regulators about the Microsoft/LinkedIn deal, citing ownership of LinkedIn’s data as the reason for the complaint.
Meanwhile, Salesforce launched a new artificial intelligence product called Einstein last month, which requires lots of data to push out predictive analytics.
But speaking at a meeting with financial analysts on Wednesday at his company’s big tech conference, Benioff insisted the real reason he was willing to pay so much for LinkedIn wasn’t about the data. It was all about LinkedIn’s financials, especially the growth in deferred revenue, he says.
“I really like the financial characteristics of the company, and that’s why I was willing to go to a higher price just because I felt like the asset was undervalued,” Benioff told them.
“I was valuing that asset based on their deferred revenue. That’s it. I wasn’t valuing that asset based on the data,” he added, referring to LinkedIn.
Deferred revenue is the amount of money that has not been recorded as revenue – yet. In the subscription software business, in which both Salesforce and LinkedIn are in, revenue gets recognized only when the actual service is delivered.
That means if you sign a $1,200-a-year contract, only a quarter of the amount (or $300) gets recorded as revenue in the first quarter, with the remaining $900 going to deferred revenue. Each passing quarter, another $300 would get added to revenue, while the same amount would get reduced from deferred revenue.
LinkedIn has indeed grown its deferred revenue significantly over the past few years. As of the end of 2015, it had $709 million of deferred revenue, up 35% from the previous year. Its deferred revenue jumped 33% and 52% in 2014 and 2013, respectively.
Benioff argues some Wall Street people still don’t understand this part of the deferred revenue model and that it’s probably why LinkedIn was so undervalued. In February, LinkedIn lost nearly half of its market cap after giving weak earnings guidance. Growth in deferred revenue could be seen as the company adding lots of new contracts that are pretty much guaranteed to convert to actual revenue, and perhaps selling more to existing customers as well, reflecting product stickiness.
Not interested in Twitter
It’s hard to tell if Benioff’s interest in LinkedIn was really just based on deferred revenue. The number is not a new metric or anything, and most Wall Street analysts fully understand how cloud subscription businesses work these days anyway.
Instead, Benioff may have made those comments to convince the investor community that he’s not interested in Twitter. In fact, Benioff also says that Salesforce isn’t hugely dependent on data from elsewhere to make Einstein a really strong predictive engine.
“We have massive amounts of customer data…I would say we have the data that we already need,” Benioff said during the analyst meeting.
Evercore’s analyst Kirk Materne pointed out in a note Thursday, Benioff’s comments illustrate that Twitter fails to fit Salesforce’s acquisition profile because it doesn’t have a large deferred revenue balance (not a recurring revenue model) and can only offer huge amounts of data.
“While Benioff did not explicitly refute the idea that Salesforce could bid on Twitter, we believe a number of the points that he made would seem to indicate that the chances of deal happening are fairly low,” Materne wrote.
Investors clearly seem to welcome Benioff’s comments. Salesforce stock dropped as much as 8% earlier this week after it was reported to be interested in buying Twitter, but went back up more than 4% Thursday.