Salesforce.com (NYSE:CRM) is set to announce its fiscal year Q3 earnings on Thursday. It reported a significant increase in revenues last quarter, but posted a small net loss, due to ever increasing operating expenses. It continues to grow in the on-demand enterprise software space despite increasing competition from the likes of Oracle (NASDAQ:ORCL), SAP (NYSE:SAP) and Microsoft (NASDAQ:MSFT), which seem to have set their sights on the cloud based software market.
While cloud based customer service software accounts for more than 50% of its Trefis price estimate, we expect much of its growth in the future to come from its other cloud computing offerings, which currently accounts for more than 35% of its $124 Trefis price estimate, which implies 10% downside to its current market price.
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Here are a few things we will be looking at in this earnings release, which should help us figure out how Salesforce.com’s future will play out.
Growth in the On-Demand CRM Market
Salesforce.com is a leader in the on-demand CRM (customer relationship management) market, and has almost 15% share of the total CRM market. We currently expect it to increase its overall share of the global CRM market to 20% by the end of the forecast period. However, Oracle, Microsoft and SAP have made some serious moves to capture this rapidly growing market, which may lead to a slowdown in Salesforce.com’s growth. We should get a clearer picture of where Salesforce.com is headed in this market in the next couple of quarters.
New Cloud Products
Salesforce.com has continued to launch new cloud based software products throughout the last quarter. It recently launched Do.com, a social productivity app and also partnered with Infor to launch ERP apps on its Force.com platform. It also launched a new database – Data.com, which will augment its CRM offering. In this earnings release and the following earnings call, we expect Salesforce.com to reveal some growth numbers about its new offerings.
We currently estimate Salesforce.com’s share in the overall cloud computing market to be close to 0.26%. We expect it to increase significantly throughout the forecast period. The global cloud computing market is expected to be worth nearly $400 billion by the end of the forecast period.
Expenses, Expenses, Expenses!
Revenue growth is only one part of the story; profit is the other, and arguably the more important one. While Salesforce.com’s revenue growth has traditionally been impressive, its operating expenses have jumped a lot in the last year, especially its sales & marketing expenses.
Eventually, Salesforce.com will need to bring down its expenses and turn a healthy profit in order to justify its high valuation. We hope it will be sooner than later, but we should get a better idea about how they plan to control increasing expenses in the earnings call.
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