Salesforce.com (NYSE:CRM) is expected to announce its earnings for Q4 FY12 on February 23. In the last quarter, it posted impressive revenue growth as usual, but it failed to keep a lid on its operating expenses, which resulted in a loss of a few million dollars. Since then it has continued to launch a series of new cloud based services, which should help its increase its market share in the rapidly expanding on-demand software market. Salesforce.com competes primarily with Oracle (NASDAQ:ORCL), SAP (NYSE:SAP) and Microsoft (NASDAQ:MSFT) in the enterprise software market. Oracle and SAP have recently made certain acquisitions like Taleo, RightNow and SuccessFactors which pit them directly against Salesforce.com in cloud-based enterprise software.
We currently have a $121 Trefis price estimate for Salesforce.com, which stands nearly 5% below its market price. Cloud based software accounts for more than 90% of its Trefis price estimate.
Competition Intensifies in the Cloud
Salesforce.com may have been the first mover in the cloud-based enterprise software market, but the space has seen the entry of giants like Oracle and SAP in the last couple of quarters. Both of these companies have spent billions of dollars to acquire Salesforce.com’s largest competitors like Taleo, RightNow and SuccessFactors to gain a foothold in the cloud computing market. As competition increases, Salesforce.com may not be able to maintain its current levels of revenue growth in the coming years.
However, Salesforce.com continues to improve its existing offerings and has launched a series of new products like Heroku Postgres, Radian 6 Social Marketing Cloud, Desk.com and also acquired companies like Rypple and Model Metrics. If it plays its cards right, it has a good chance of maintaining its lead in the cloud-based software market, especially by targeting SMBs instead of going after large enterprises which Oracle and SAP would focus on.
Operating Expenses Continue to Worry
Salesforce.com’s operating expenses have continued to rise faster than its revenues, making that profit as elusive as ever. Its marketing expenses have ballooned over the years – its SG&A expenses are expected to be at an all time high in 2011. We expect it to clamp down on its operating expenses in the coming years and turn a profit. However, if it fails to manage its expenses, there could be a significant downside to its Trefis price estimate.