Salesforce.com Looks Frothy As Strong Revenue Overshadows Ballooning Costs

Salesforce.com (NYSE:CRM) announced its Q3 2012 results on November 20 and reported a quarterly revenue of $788 million up 35% y-o-y. Its subscription and support revenues was $741 million while professional services revenue came in at $47 million. The huge jump in revenue was well received by the market, sending its stock up by nearly 10% after the results were announced.

Despite impressive revenue growth, the company has had weakness related to earnings and reported a net loss of $220 million. Salesforce, which has been pushing its social media strategy by acquiring companies such as Buddy Media, has enabled its customers to interact and engage with clients in meaningful ways. With the Sales Cloud, companies can gain deeper insights into customer behavior which can translate into more sales. With strong analytics provided by Radian6, Salesforce has managed to integrate customers views and feedback into the sales process.

See our full analysis for Salesforce.com

Outlook And Full Year Guidance

After the strong revenue growth in Q3, the company tweaked its full year revenue outlook higher, a 35% to 36% y-o-y growth. It also initiated a FY 2014 guidance of $3.8-$3.85 billion. For Q4, the company expects revenues of $825 million to $830 million, an increase of 31% y-o-y.

Acquisitions Weigh On Salesforce

Salesforce has beefed up its social media offerings by acquiring Buddy Media, a social enterprise software that enables clients to listen, engage, gain insight, publish, advertise and measure social marketing programs. In a recently filed 8-K, the company revealed that Buddy Media is losing money and in the six months ended June 30, 2012, it reported a cumulative net loss of $20.5 million. This is likely to weigh on Salesforce.com’s earnings in the short term, and we will keep our eye on how its acquisitions are faring.

Rising Costs A Concern

The cost of revenues as a percentage of sales has been trending higher and is currently at about 19% while R&D costs have gone up by more than 50% to $114 million and marketing expenses are up by more than 40% annually at $428 million. As the company enters new businesses, we expect this to grow faster than revenues in the short run before trending downward and we will keep an eye on this metric in the future.

Owing to these changes in the business performance, we currently have a $127 Trefis price estimate for Salesforce.com, which is about 20% lower than current market price.

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