In the recently concluded fiscal year Q1 2012 earnings,
) 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
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
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