Cloud customer relationship management (CRM) leader Salesforce (NYSE:CRM) announced a new strategy on April 2 to individualize offerings across industry verticals to accelerate top line growth for the company. Revenues for Salesforce have seen an annualized growth rate of over 30% in the past five years, boosted by strong migration to the cloud from company-owned infrastructure. Last fiscal year (ended January), revenues for the company crossed the $4 billion mark, partially supported by the acquisition of digital marketing company ExactTarget for $2.5 billion.
In this note, we take a look at Salesforce’s ‘New Industries Strategy’ and analyze its potential impact on the top line going forward. The company continues to invest heavily to support its impressive top line growth, which has impaired operating and net income profit margins on a non-GAAP basis for the company.
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“New Industries Strategy” Should Present Targeted Growth Opportunity For Salesforce
We believe the new industries approach is a way for Salesforce.com to offer vertical, industry specific solutions using the Salesforce1 platform, which allows customers to develop company-specific mobile and desktop solutions. By clearly demarcating industry verticals it serves, Salesforce.com expects to derive greater value from enterprise deployments of its CRM suite. Going forward, the company expects significant demand for CRM solutions from enterprises and governmental organizations operating in six global industries – financial services/insurance, healthcare/life sciences, retail/consumer products, communications/media, public sector and automotive/manufacturing.
Given the possibility of skewered growth in enterprise CRM from certain industries going forward, Salesforce’s strategy to overlay these groups acreoss its existing operating structure looks to be a prudent move. The company has already recruited executives with rich industry experience to build customer solutions for specific industries).  This industry-specific structure from Salesforce should bode well for future growth from the company, and should be able to create a strong binding with its mobile-first Salesforce1 platform.
However, the creation of these groups suggests the company’s intensive investment in growth will continue, which will bother those of us seeking higher profitability. With the new industry-specific reorganization of its Go-To-Market team, Salesforce will be investing in creating business operations, hiring, and training personnel to gain expertise in individual industries. The company announced to “grow its current team of industry experts, develop and ecosystem of preferred partners and create transformational solutions that leverage the power of the trusted Salesforce1 platform” for each sector. These investments ahead of growth would further strain margins for the company going forward.
However, prudent strategies such as the Salesforce1 platform and the launch of industry-specific teams to cater to enterprise needs should boost top line growth . We expect Salesforce’s market share in the global CRM market to see continued uptick going forward. In a recent analyst presentation, the company reported 17 straight quarters of declining attrition rates from its customers driven by greater usage of the Salesforce CRM suite and increased customization using the Salesforce1 platform. The new industry groups should bolster further customization with industry-optimized solutions and this should further reduce customer attrition.
We have a $49 price estimate for Salesforce, which stands at a 12% discount to its current market price of $55. Despite the company’s impressive strategies to prop up top line growth, we believe the concerns on margin pressure for Salesforce.com are larger than what the market is factoring in at the moment.Notes: