Recently, cloud CRM software company Salesforce.com (
) announced its plans to expand its operations in the European
region. Salesforce plans to open three new data centers in the
U.K., France and Germany to lure government customers that require
stricter data protection requirements, according to a
. Salesforce business is primarily concentrated in the U.S., which
accounts for almost 71% of overall revenues. The European region
contributes approximately 18% to overall revenues with Asia-Pacific
accounting for the rest.
Currently, the company has four data centers in the U.S. and one
data center in Japan to cater to its entire customer base.
Salesforce plans to open the U.K. data center by August 2014, with
two additional data centers in France and Germany to open by 2015.
The expansion plans look to be a move to increase geographic
diversity on part of Salesforce and become a global CRM player.
Below, take a look at the potential opportunity for Salesforce in
Europe and the impact of an expansion in operations on its stock
price. We have a
$49 price estimate for Salesforce
which stands at a 17% discount to its current market price of
See our full analysis for Salesforce.com
Does This Investment Contribute To Salesforce's Bottom
Salesforce's recent financial results have been been a story of
strong top line and deteriorating bottom line, as the company
continues to invest heavily in its strong growth. In its recent
fiscal earnings, Salesforce reported a revenue growth rate of 33.5%
on a year-on-year basis. Concurrently, its expenses grew even
faster, impairing its non-GAAP operating profit and producing a
GAAP-based operating loss. Investing in new data centers is a
highly capital intensive proposition. Google spends approximately
$4 billion a year on building and maintaining data centers that
support its systems, which puts the high CapEx requirements in
store for Salesforce in context.
Salesforce's capital expenditures increased from $152 million in
2011 to $299 million in 2013. Including the increases in
capitalized software reserves, the company's total CapEx spending
increased from $212 million in 2011 to $574 million in 2013. The
opening of new data centers in the next two years should expand
CapEx requirements. Salesforce currently guides a CapEx spend of
5%-7% of FY15 revenues. Our CapEx widget below gives you an idea of
an increase in CapEx spending on Salesforce's stock price. The
spike in CapEx as a percent of Gross Profit in 2013 is a result of
our CapEx valuation methodology, which includes any increase in
capitalized software reserves. Salesforce's acquisition of
ExactTarget added approximately $275 million in capitalized
software, which led to an increase in total CapEx for 2013.
Additionally, Salesforce would have to increase its investments
into operating activities such as Sales & Marketing, General
and Administrative expenses to generate additional customers in
these countries. As an SaaS company, new revenue generation
would tend to be spread across the subscription period, which is
typically between 12 - 36 months for Salesforce. The first of these
three data centers, the UK facility, is scheduled to open this
August, though sites for the other two have yet to be selected.
They thus are not expected to open until 2015. To the
extent these investments and the associated expenses are made ahead
of the revenue they are to support, they will erode profitability
to a degree.
Expansion Into Europe Could Pose Long-term Threat To
According to Gartner, enterprise software spending in the EMEA
region is expected to increase at a compounded annual growth rate
of 4.3% between 2012-16 to reach €70 billion (~$92.4 billion)
by 2016. This implies that the size of the EMEA enterprise software
market at the end of 2013 should be approximately $81 billion. For
its part, the company suggests the market for cloud software in
Europe will be $29.4 billion by 2017. This is as reported by the
Bloomberg report. The opportunity is rich.
Salesforce's expansion into Europe directly stacks up against
) position in the market. SAP is the leading software player in the
European market and derives a close to 45.5% of its $22 billion
revenues from EMEA. The company reached €975 million (~$1,295
million) in global cloud-based license sales and support revenues
in fiscal 2013 and expects cloud revenues to grow 32% in fiscal
2014. Although SAP should continue to hold Europe as its strong
hold in the near term, Salesforce's entry into the region with
domestically located data centers should result in some
migration of customers from SAP CRM deployments onto Salesforce's
platform in the long term.
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