Salesforce.com Climbs Higher On Cloud Connections

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Acquisitions have helped Salesforce.com maintain its dominance in the customer relationship management software market. But there's plenty of competition.

More than 70,000 will be at its Dreamforce cloud computing event later this month. Colin Powell, Jeff Immelt and the Red Hot Chili Peppers will be on hand.

Salesforce.com ( CRM ) has come a long way since its start in a Bay Area apartment during the height of the tech bubble. In 2000, it rolled out its first customer relationship management or CRM service. A dozen years later, the legend grows.

Today, the company uses the cloud to deploy applications that let businesses stay connected with their customers and employees. Its model is cashing in on a global trend.

"The whole world is moving to the cloud," said Piper Jaffray analyst Mark Murphy. "You have large organizations committing to wholesale replacements of their IT infrastructure."

A formula that embraces shared infrastructure and open standards has led Salesforce.com to cast a wide net. It now has more than 100,000 customers.

"For people who want to know what it's like when you're witnessing the ascendancy of a giant, this is what it looks like," Murphy says. "They are closing deals worth over $100 million at a time."

Murphy notes that keeping customers happy has been a key to this success. "It has a level of customer satisfaction that we've rarely if ever come across in the software industry," he says. "Its partner ecosystem is convinced that it has the platform of the future."

Social Networking

Whether it's an app that helps track sales leads or one that promotes file sharing, the theme of social networking is common across the Salesforce.com portfolio.

"Salesforce.com is leading customers in their transformation to become social enterprises," said CEO Mark Benioff in his Aug. 23 earnings call. "Social enterprises are able to connect with customers, partners and employees in entirely new ways."

The breadth of the lineup driving this shift has been met by a warm welcoming. "Markets always move to suites," says William Blair analyst Laura Lederman. "You are quite isolated if you only have one product or service."

Salesforce.com has been making a bold push to shore up its cloud marketing offerings. Last May, the company completed its acquisition of Radian6, a social media monitoring company, for $326 million in cash and stock. In June, it signed an agreement to buy Buddy Media for $689 million. Buddy Media assists clients in gauging the effectiveness of social media marketing programs.

These additions give Salesforce.com more firepower, but it may still be looking to add to its arsenal. "If you combine Radian6 and Buddy Media, you have components of a marketing cloud," Lederman says. "Whether through additional acquisitions or internal development, they'll add to that."

Murphy believes the Radian6 deal was a major score. "Customers have the ability to praise a brand or slaughter it," he says. "Radian6 is the number one technology for a business to monitor what's being said about it across all social channels," he says.

Great Expectations

Salesforce.com has built an impressive track record of growing both organically and via acquisitions. Lately, the growth rate has been burning white-hot. During its previous four quarters, year-over-year revenue growth has checked in at 34%, 38%, 38% and 36%.

The top-line gains have translated into healthy profit expansion and a surging stock price. Year-over-year earnings per share were up 24%, 32%, 39%, and 6% in the company's trailing four periods. Shares of Salesforce.com have risen 42.7% so far this year.

These results have led Salesforce.com to surpass consensus estimates in each of the last four quarters. Analysts are now calling for the company to post EPS growth of 7% for the current fiscal year. Next year, Wall Street is forecasting a 33% pop in EPS and a 26% jump in revenue.

One of the immediate challenges Salesforce.com may face is keeping these expectations in check. "The comparisons for Q4 and Q1 will be difficult," Lederman says. "Analysts are notoriously neurotic."

To sustain revenue growth, Salesforce.com is ready to fight back competition on a number of fronts.

The HR cloud, in particular, has become a hotly contested battleground. The company acquired the social performance management company Rypple in December to break into the arena.

Since then, it has been "game on" as companies known for their enterprise resource planning (ERP) platforms have been shelling out sizable sums of cash to establish a presence in this area.Oracle ( ORCL ) andSAP ( SAP ) are two of the more notable names that could give Salesforce.com a run for its money.

Oracle's Acquisition

In January, Oracle ponied up $1.5 billion for the cloud-based CRM provider RightNow Technologies. The following month, it unveiled plans to buy Taleo for $1.9 billion. Taleo uses the cloud to aid its customers in performing a number of HR functions.

Not to be outdone by Oracle, SAP made a big play of its own when it bought SuccessFactors for $3.4 billion in February. Included in the SuccessFactors suite are solutions for talent management and workforce analytics.

Murphy acknowledges that competitors are taking aim at Salesforce.com in other areas of the cloud as well. He points to a very familiar combatant. "Their single biggest challenge is going to be fending off some of the ankle-biter products," he says. "I think chief among them is going to beMicrosoft ( MSFT ) in a very small business space."

Microsoft's Office 365 platform lets small businesses access e-mail, instant message and file share over the cloud.



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

Referenced Stocks: CRM , MSFT , ORCL , SAP

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