Gartner’s recent forecasts for worldwide enterprise software peg the worldwide CRM market to grow 15% annually from 2012 through 2017. Many CRM companies are expecting strong growth. But this rising revenue is not necessarily turning into profits.
Last week, CRM services provider, Salesforce.com (NYSE:CRM) reported a stellar quarter, with revenues crossing the billion-dollar milestone for the first time ever. Q3 revenues grew 36% over the year to $1.08 billion, ahead of the market’s projections of $1.06. Revenue growth was attributed to the acquisition of ExactTarget. Adjusted EPS of $0.09 was in line with market expectations. Salesforce continued to report losses on a GAAP basis and ended the quarter with a loss of $0.21 per share.
During the quarter, revenues from Subscription and Support grew 36% over the year to $1 billion and revenues from Professional Services and Other segment increased 50% to $71.6 million. By region, revenues from the Americas grew 41%. Europe and Asia revenues grew 46% and 4%, respectively.
For the current quarter, Salesforce projects revenues of $1.12-$1.13 billion, compared with the Street’s forecast of $1.12 billion. It projected EPS of $0.05-$0.06 which fell short of the market’s projections of $0.07. Salesforce expects to end the year with revenues of $4.05 billion-$4.055 billion and non-GAAP net loss of $0.33-$0.34 per share. The market was looking for revenues of $4.03 billion and a loss of $0.34 per share. Salesforce expects to end the next year with revenues of more than $5.15 billion-$5.20 billion.
Salesforce’s Growing Product Offerings
Salesforce continues to expand its market presence through tie-ups and product expansions. Earlier last quarter, it entered into an agreement with Workday (WDAY) to integrate its apps to help customers improve performance analysis, identify trends in customer relationships, and make informed decisions using financial and operational performance data. Recently, it also entered into an agreement with Hewlett-Packard (HPQ) to develop and sell a new computing product for enterprise customers, the Superpod. Superpod is a dedicated Salesforce instance which is available within the Salesforce data center and will run on HP’s infrastructure.
Recently, it also released a new platform for its mobile segment called Salesforce1. Salesforce1 is a CRM platform for developers and software vendors who are focused on mobile apps. Through the platform, Salesforce’s developer customers will be able to customize services for smartphones and tablets and applications developers will also be able to use new tools available on the platform.
Salesforce does have a strong product portfolio and is seeing impressive revenue growth. The company’s biggest concern, though, remains profitability. Last quarter, operating losses grew 81% to $98 million, primarily attributed to the more than 38% growth in payroll costs due to the several acquisitions discussed above. But for now, management is not looking to significantly improve margins. During the recent quarterly results announcement, CEO Mark Benioff said that the goal was to increase margins, but they also want to grow as Salesforce continues to reinvest its earnings to expand market share. In the long run, Salesforce wants to earn revenues of more than $10 billion per year.
As I said earlier, Salesforce needs to execute its platform strategy effectively. That is one of the keys to effectively impact the long-term profitability for the company.
For now, the stock is trading at $52.71 with a market capitalization of $31.65 billion. It touched an all-time high of $58.37 earlier this month.
Disclosure: No positions