Salesforce Steps Up To Intensifying Cloud Market Competition With New Mobile Platform, HP Partnership

by Trefis Team
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Global cloud CRM leader Salesforce.com (NYSE:CRM) reported Q3FY14 results on November 18. Quarterly revenues were $1.08 billion and exceeded the $1 billion mark for the first time.  The top line grew 36% on a year-over-year basis, beating industry estimates of $1.06 billion by a small margin. Sequentially, revenues grew approximately 12.5% boosted by the ExactTarget acquisition completed in July 2013. In addition to strong revenue growth, deferred revenues grew at double-digit pace on a year-over-year basis, indicating strong demand for cloud services. The dollar value of booked business for Salesforce stands at $5.94 billion compared to $5.36 billion at the start of the year. We believe that this strong subscription pipeline should help drive growth going forward.

However, expenses continued to grow faster than revenues and this resulted in losses at the operating and net income levels. Compared to Q3FY13, cost of sales and operating expenses as % of revenues expanded by 130 and 90 basis points respectively during the quarter to stand at 25% and 84% respectively. Expenses increased due to the Oracle license partnership and the acquisition of ExactTarget (See: Oracle’s Growth Drivers: Cloud Adaptation & Database Management Systems). GAAP earnings per share stood at a loss of $0.21 this quarter compared to a steeper loss of $0.39 from a prior year period, supported by a favorable tax benefit.

For fiscal 2014, Salesforce raised its revenue guidance by $30 million due to strong performance of ExactTarget and expects revenues of $4.05 – $4.055 billion, implying a growth rate of 33% year over year. On the bottom-line front, the company reiterated its previous guidance and expects full year earnings to range between $0.33 – $0.34.

In the current article, we highlight key takeaways from the recent quarterly results which we believe could create significant value addition to Salesforce’s financials.

See our full analysis for Salesforce.com

New Platform ‘Salesforce1′ Could Present Big Opportunity

Before the start of the annual Dreamforce conference, Salesforce announced the launch of its latest mobile platform called “Salesforce1″. This latest offering provides Salesforce’s desktop platform through a mobile interface with easier and customized services for its customers. Furthermore, the new Salesforce1 platform, intended for smartphones and tablets, has 10 times more Application Programming Interfaces (APIs) than any other Salesforce platform. [1] This allows application developers across small, medium and large enterprises to leverage customer mobile connectivity and provide their applications across various platforms and interfaces. Salesforce reports that Internet companies such as Dropbox, Evernote and LinkedIn (NYSE:LNKD), as well as ADP(NASDAQ:ADP), are already on-board for the Salesforce1 platform to power their mobile applications for better CRM services. [2]

Targeted customer service offerings bode well for mobile and tablet customers. Combined with its recent acquisition ExactTarget, which specializes in cloud marketing services, Salesforce could provide customers utilizing the Salesforce1 platform with pin-pointed services on their smartphones and tablets. Given the growth potential within the smartphone service market, we expect good demand for the product from various enterprises and this should translate into additional revenue growth for Salesforce’s CRM business.

Salesforce Inks Cloud Partnership With HP To Combat Intensifying Competition

To counter increasing competition from large software companies such as Oracle (NASDAQ: ORCL), IBM (NYSE:IBM) and SAP AG (NYSE:SAP), who have been vying for entry into the hyper-growth cloud market, Salesforce struck a partnership with hardware player Hewlett Packard to offer enterprise CRM services on HP’s Converged Infrastructure. Through the partnership, Salesforce expects to expand its data center capabilities with HP’s Converged Infrastructure hardware and increase its service reach to large enterprises requiring higher work-loads.

The new offering with HP, called the ‘Salesforce Superpod’, would be made available to its largest customers at an additional fee. [3] Customers choosing the Superpod option will get a dedicated instance of Salesforce on their own infrastructure, as opposed to the present shared infrastructure offering. [4] A dedicated instance is beneficial for large enterprises which usually require private and isolated virtual networks instead of a shared public cloud network.

In recent times, competitors Oracle and IBM have stepped up to the cloud opportunity by offering their own application software through their Convergence Infrastructure systems Exadata and Flex Systems respectively. With improved data centers in operation through the HP partnership, we believe Salesforce could challenge the growing competition from software providers like Oracle and IBM.

We are in the process of revising our price estimate of $33 for Salesforce to reflect its recent Q3 results.

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Notes:
  1. salesforce.com’s CEO Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, November 2013 []
  2. Salesforce Making Business Software More Social, The New York Times, November 2013 []
  3. Salesforce.com and HP Announce Strategic Cloud Partnership, HP Newsroom, November 2013 []
  4. Salesforce Strikes Cloud Partnership With HP, allthingsd.com, November 2013 []
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