Salesforce Platform Strategy Holds Immense Promise

| About:, Inc. (CRM)

According to Gartner’s Forecast: Enterprise Software Markets, Worldwide, 2012-2017, 2Q13 Update, worldwide spending on enterprise software is projected to grow 6% this year to $304 billion. Within the market, Gartner projects CRM market to be a fast growing market with an estimated annual growth rate of 15% over the period 2012 through 2017. A quarter ago, Gartner had projected this market to grow 9.7% annually over the same period.

Salesforce’s Financials

Leading CRM services provider, (NYSE:CRM) is already witnessing strong revenue growth. Q2 revenues grew 31% over the year to $957 million, significantly ahead of the market’s projections of $937 million as it continues to add big names like Johnson & Johnson and Juniper Networks to its customer list. However, the loss for the quarter widened to $0.09 per share missing the Street’s projections of a loss of $0.04 per share for the quarter. The increase in losses was attributed to increase in R&D and sales and marketing expenses. R&D expenses grew 36% to $161 million and sales expenses grew 26% to $480.6 million.

By segment, revenues from subscription and support services grew 31% over the year to $902.8 million. Professional Services and Other revenues grew 23% over the year to $54.3 million.

By region, revenues in the Americas grew 34% over the year. Despite economic concerns, the European market grew 39% over the year while Asia Pacific was the slowest growing region with 6% annual growth.

For the current quarter, Salesforce projected revenues of $1.050-$1.055 with EPS of $0.08-$0.09. It raised its fiscal projections to revenues of $4–$4.025 billion with an EPS of $0.32-$0.34. The market was looking for revenues of $1.043 billion for the quarter with earnings of $0.07 per share. It had pegged the company’s fiscal revenues at $4 billion with EPS of $0.33.

Salesforce’s Expanding Cloud Offerings

Salesforce recently entered into a partnership with another SaaS provider, Workday (NYSE:WDAY). As part of the partnership, the two will standardize all of their solutions for each other’s applications to help improve performance analysis and identify trends in customer relationships. Customers will also be able to receive direct updates from Workday through Salesforce Chatter to ensure greater security. The integration will also help speed up decision making by customers of both companies due to a faster availability of financial and operational performance data. Greater terms of the deal have not been disclosed. This is an interesting partnership given that neither company is on very friendly terms with Oracle, which is expanding its own cloud and analytics offering.

Earlier this month, Salesforce also announced the release of its file sharing service, Salesforce Files. Salesforce had a similar offering earlier called the Chatterbox where users could share files over Salesforce Chatter. But the new offering enables anyone using Salesforce’s sales, service, or marketing software tools to access and share files residing in third-party storage applications such as Microsoft’s SharePoint and Google Drive without opening a separate application.

Last month, Salesforce also expanded its marketing offerings by acquiring e-mail marketing service, ExactTarget for an estimated $2.5 billion. Through the acquisition, Salesforce will be able to enable customers to connect with end consumers across sales, service and marketing services on all platforms including email, social, mobile and the web. Salesforce hopes to be able to offer one of the most comprehensive marketing automation solutions as it will now have access to ExactTarget’s social marketing capabilities, which will complement its sales, service and platform solutions.

Marketing automation tools and services are a hot market these days. Last year end, Oracle acquired Eloqua, another marketing services provider, for an estimated $871 million, to improve its relationship marketing program. Last year, ExactTarget, through its acquisition of Pardot, had expanded its B2B marketing automation services. Pardot brought to the table additional capabilities to create, deploy, and manage online marketing campaigns. The move had also helped ExactTarget being labeled a “visionary” according to Gartner’s Magic Quadrant for CRM Lead Management. Salesforce should surely benefit from this acquisition.

Salesforce has benefited tremendously from its platform strategy. I wrote a piece this week in Harvard Business Review on corporate incubation called When Big Companies Support Start-ups, Both Make More Money. There is still enormous headroom for it to grow in this arena, and I don’t think the opportunity is lost on Marc Benioff. Judging by its recent investment in Apttus, a company that has built on the platform, and has become quite successful, Salesforce is aware of the vast potential of the platform strategy. Investing aggressively in incubating these start-ups would yield handsomely for the company.

The market is pleased with Salesforce’s growing cloud capabilities. The stock is trading at $52.35 with a market capitalization of $31.20 billion. It touched a life high of $54.25 soon after the quarter’s result announcement.