3 Factors Behind Salesforce.com's Higher Expenses


In the recently concluded fiscal year Q1 2012 earnings, Salesforce.com ( CRM ) provided some insight on why operating expenses for the company increased. The company specifically mentioned three factors that increased expenses and lowered its operating margin outlook: 1) the acquisition of 7 companies last year which were dilutive to margins, 2) it accelerated hiring related to its core business, and 3) higher expenses on marketing programs. As these costs are aimed at driving future growth, this investment could pay off as Salesforece.com contends with larger competitors: SAP (NYSE:SAP), Oracle (NASDAQ:ORCL), Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM) in the cloud-computing market.

We currently maintain $122 price estimate for Salesforce.com , which is about 15% below market price.

Investing in the Future

Over the last year, Salesforce.com acquired 7 companies including well known names like Jigsaw, Heroku and Radian6. According to management, these acquisitions will add businesses with lower operating margins and thus change the operating margin outlook. However, management adds that they are important for increasing its cloud-computing product portfolio and should help drive future growth. We discussed our concerns on the operating profit outlook in our preview note, see Salesforce.com Earnings Preview: What We're Watching .

As shown in the above chart, the company's SG&A expenses as a % of gross profits increased in the last couple of years due to higher spend in SG&A. We expect these expenses to result in higher profits in the medium to long-term and grow gross profits so we should see a drop gradually through our forecast period.

Management also mentioned that accelerated hiring and marketing programs have pushed up expenses for the company:

..Accelerated hiring in the second half of last year is helping new business momentum but increasing expenses. Q1, we really felt the full effect of the roughly 850 employees we added in Q3 and Q4.

..In Q1, we spent significantly on marketing programs. Our first ever Superbowl ad, our Wall Street Journal, Chatter ad campaign, and the large Cloudforce events in New York and Paris were among the many investments we made in our brand-building awareness of our industry-leading products.

See our complete analysis for Salesforce.com stock here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CRM , DELL



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