Bright Skies Ahead for This Cloud Company

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Salesforce.com (NYSE: CRM) reported its third quarter earnings with a net loss; however, revenue grew by 35% in US dollars and 37% in constant currency. Salesforce.com provides cloud computing and social enterprise solutions to various businesses and industries worldwide and also delivers customer relationship management applications through the cloud.

Results

The Company has reported this quarter’s operating loss of $54.2 million, lower than the prior year’s same quarter’s loss of $10.2 million. Total operating expenses increased by 40.9% on a year over year (YoY) basis driven by a 50% increase in research and development expenses (R&D), 40.7% increase in sales and marketing expenses and 222.8% increase in general & administrative expenses. The increases in R&D and administrative expenses continue to be a concern for investors and analysts.

The Q3 revenue of $788 million was an increase of 35% on a year-over-year basis. The revenue has increased over all geographic regions of America, Asia and Europe. The main source of revenue, Subscription Fees and Support Service, increased by 35% YoY. Professional services and other revenues increased by a 36% YoY basis. The Gross profit has expanded by 32.1% over this time frame.

Forecast

Though the company expects to continue investing in new technologies and in international markets and expand through acquisitions (it has already made five acquisitions in 2012 !!) the revenue for the company’s fourth quarter is projected to increase with its expansion in American, European and Asian markets. A lot of developments about launching products like Salesforce Touch, new files storage tools, new security tools and social media management is already doing the rounds in the market. However the net loss for the final quarter is still estimated between 23 and 25 cents per share.

Competitors

Jumping ahead in the race with Salesforce.com is Oracle Corporation (NYSE: ORCL) and SAP AG (NYSE: SAP). Oracle has continued to grow consistently over the past 10 years. The sales and earnings have increased every single year and have in fact quadrupled since 2003. The sales have increased from $9.5 billion to $37 billion, and earnings per share from $0.43 to $1.96 (i.e.; CAGR of 16%).  Oracle with its attractive valuations, quality, reputation and competitive strategies such as acquisitions of other companies promises long term growth to investors.

Meanwhile, SAP’s strengths can be seen in multiple areas, such as its revenue growth, striking stock price performance, good cash flow from operations and largely solid financial position with reasonable debt levels and expanding profit margins. SAP reported total revenue of €3.97 billion ($4.95 billion) in the F3Q of 2012, up 16.4% year over year on a constant currency currency basis.

Final Words

Even though Salesforce.com has reported a quarterly loss, its expansion strategies, acquisitions and launching of new products (such as Force.com, Data.com and Social Enterprise Vision to name a few) are still on a high. The company has received a strong customer response to their next Generation social and mobile cloud technologies. Apart from facing tough competition from Oracle and SAP, it will also face increased competition from new giant entrants Dell and Hewlett-Packard in the industry. I am optimistic that the large expenses in R&D and SG&A prove to be fruitful for the company’s performance in the upcoming year. Thus investors with a long term prospective can consider investing in this cloud as I believe it will deliver promising results soon.


mittalvinita has no positions in the stocks mentioned above. The Motley Fool owns shares of Oracle and has the following options: long JAN 2013 $50.00 puts on Salesforce.com. Motley Fool newsletter services recommend Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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