Founded in 1999, Salesforce.com (CRM, Financial) is the leading provider of hosted Customer Relationship Management (CRM) software services, which helps organizations manage critical operations such as sales force and marketing automation, customer service and support, document management, analytic and custom application development. Leveraging its expertise in on-demand software has allowed the company to increase the scale operations and moreover, it has been currently expanding its product portfolio through new services, especially cloud products. The new cloud products include six different lines: Sales Cloud, Service Cloud, Marketing Cloud, Work.com, Salesforce Chatter and Salesforce Plaform. The company has more than 100,000 customers around the world, including managing customer information for Allianz Commercial, Dell, Dow Jones Newswires, Japan Post, Kaiser Permanente, KONE and SunTrust Banks.
The company reports revenues through two segments: Subscription and Professional Services & Other. Subscription revenues comprises revenue from subscription fees received by the company from customers for accessing its enterprise cloud computing application service, and from subscription fees generated from customers for providing additional support. This stream accounted for 94.1% of Salesforce’s 2013 earnings. The Professional Services & Other segment includes fees that the company derives from consulting and implementation services and training. This segment represented, for the same period, 5.1% of total earnings.
Results for the last fourth-quarter 2014 were mixed, with a wide loss per share but above estimated revenues. The most important highlight seems to be the diverse cloud offerings and strong spending on digital marketing posting positive results. Still, competitors are developing new products as well, and the weakened European market might affect the company’s future revenues, given the sluggish spending environment.
Better Solutions
Analysts tend to agree when saying Salesforce.com is leader in customer relationship management software, building a better solution for its customers. Its users pay annual subscription fees for continued access to the services, providing Salesforce.com a steady revenue stream and cash flow yields. The public cloud development has allowed the company to reduce costs by supporting a common hardware, networking and software platform and passing some of that savings along to customers. Thus, heavy capital investment usually needed for on-premise software installations has been lifted, enabling a predictable and manageable operating expense.
Within the cloud computing applications, Salesforce has become a leading supplier and platform vendor, positioning itself in a strong position among other cloud application providers. Currently, through Sales Cloud, the company’s most popular product, it has succeeded in expanding its addressable market towards the purchase of Service Cloud as well. Providing different on-demand Software-as-a-Service (SaaS), such as the Sales Cloud, Service Cloud and Chatter applications, it allows customers to improve communication and sales to their respective customers. Moreover, it offers other platforms such as The Force.com Platform, or Heroku Platform, and developer tools like Database.com and The AppExchange, enabling its users to customize its applications.
The new introduction of the Chatter platform is an enterprise social collaboration application platform, free add-on offering from Salesforce. Companies already using this additional platform are Chipotle Mexican Grill (CHPL, Financial), Kelly Services, Kimberly-Clark and Unilever, among others.
International Expansion
Since the first international data center opened in Singapore in July 2009, Salesforce has been establishing different data center around the world, looking to seize the increased demand of international customers. After opening data center in Japan and the Asia-Pacific region, Salesforce expects to open another data center in London, getting to expand its business through different geographical regions. A recent announcement of Salesforce points towards an expansion its Japanese operations. It seems the firm is will appoint former HP Japan head Shinichi Koide as Chairman and Chief, expanding its Japan leadership team, being in charge of growing the company in Japan into a $1 billion business with more than 2,000 employees. Hitoshi Kawahara, Senior Vice President and head of enterprise sales at Salesforce.com Japan will step up as President and Chief Operating Officer, leading the company's enterprise sales and oversee business operations. Keith Block, president and vice chairman of Salesforce.com, said “With Shinichi Koide joining our exceptional Japan leadership team, salesforce.com Japan is well-positioned to deliver on its next decade of growth.”
These expansions, however, have leaded the company to spend heavily, and increasing investments have affected margins. Indeed this development is necessary in order to achieve long-term growth, but it has still pressured over margins and is likely to continue doing so for the next few quarters, until it has effects on revenue growth.
Possible Alliances
Despite being Salesforce.com and Oracle Corporation (ORCL, Financial) fierce competitors, they have developed a cloud-partnership to drive growth and project a further integration between both companies, helping customers easily move their data between the two platforms. Salesforce software will run on Oracle’s Linux, and use Oracle’s cloud-based human resources and financial applications, while Oracle´s Exadata hardware will run on Salesforce’s cloud based applications. Their partnership is very promising, and likely to lead market share gains, accompanying the exponential cloud environment growth.
Final Thoughts
Peers like Microsoft Corp. (MSFT, Financial) and Oracle Corp. (ORCL, Financial) present strong competition in the could-based CRM market, and have been enhancing their companies through various acquisitions such as recently acquired Nimbula, Eloqua Inc., RightNow Technologies and Taleo Corp from Oracle, or MarketingPilot and Netbreeze from Microsoft. Competition is moreover expected to increase with the introduction of Microsoft Dynamics CRM software (Titan). Nevertheless, Salesforce has also been strengthening its product portfolio and expanding within the cloud based CRM services.
Salesforce.com has accelerated its acquisition activity, spending more than $1 billion on acquisitions, which have supported the company’s aggressive push of product pipeline developments. These investments might carry some integration expenses and pressure on margins. Still, Salesforce’s revenues of $1.15 billion increased 37.2% year over year primarily driven by the acquisition of ExactTarget, in July 2013. Yet, gross margin contracted to 78.9% compared with 80.3% in the previous-year quarter because of this acquisition, and the Oracle license agreements. Indeed operating margins are expected to remain depressed until management stabilizes and gains scale in selling and administrative expenses. Returns on invested capital should rise in line with operating margins, enabling the company to comfortably exceed its cost of capital.
Bullish analysts think Salesforce is leader in the on-demand delivery of CRM software, and providing its services in the public cloud will attract more customers as the cheaper cost and more mature product poses strong competition to Oracle’s and SAP AG (SAP)’s products. However, many customers are reluctant to put all of their information in the public cloud due to security and compliance concerns, making more attractive the hybrid cloud solutions. Keep watching how business develops in the technological field as well as the new Asia-Pacific expansion driven by the increased business Japanese segment.
Disclosure: James Miller holds no position in any of the stocks mentioned.
