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Salesforce: In Search Of The Bottom Line

|Includes: Salesforce.com, Inc. (CRM)

Plenty of pixels have been spilled about Salesforce's valuation. Let's turn our attention to Salesforce's emerging product offerings and consider how they might contribute to the company's financials. The core sales automation app, now packaged as the Sales Cloud, is the revenue engine for the company. The last 10-K included this nugget under Risk Factors:

We derive substantially all of our revenue from subscriptions to our CRM enterprise cloud computing application service, and we expect this will continue for the foreseeable future. The markets for our Marketing Cloud and Salesforce Platform remain relatively new and it is uncertain whether our efforts will ever result in significant revenue for us."

While the company apparently does not break out its financials by product line, I have dug up other guidance on what we can expect from Marketing Cloud and Platform.

Marketing Cloud is a relatively new area for Salesforce. As Mr. Benioff said on the recent conference call, "we've acquired our way into marketing." (Buddy Media was acquired for nearly $700 million and Radian6 for about $340 million) Benioff indicates on the call that Marketing Cloud revenue is breaking past nine figures so let's assume Marketing Cloud revenue of $125 million in FY2014. The midpoint of guidance for total FY2014 revenue is $3.86 billion. Therefore, I estimate Marketing Cloud revenue at 3.24% of total FY2014 revenue. This business cannot make a meaningful impact on Salesforce's financials without a substantial increase in revenue -- assuming Salesforce can also make the business profitable (a big assumption since CRM's total GAAP earnings from 2004-2013 come to exactly $0.00 (Morningstar)).

Next up: Salesforce Platform. Benioff touts the tens of billions of transactions per day but does not provide details on profitability or competition. A recent Forrester survey of developers summarized here shows Salesforce Platform just about tied for third place with Google, trailing Azure and getting trounced by Amazon. Don't miss the second chart: it shows a trend of developers planning to increase use of Amazon Web Services and Azure while the outlook for Force.com and Google is a mixed bag.

By the way, I was interested to learn that Heroku runs on Amazon EC2 servers, another fact we are unlikely to hear from Mr. Benioff on a conference call (Nick D'Alleva, TechSling). And the Sales cloud runs on Oracle databases, though I have seen speculation (based on job listings) that they'll transition to a different database (Klint Finley, Wired Enterprise).

The bottom line:

  • I estimate Marketing cloud revenue at between 3 and 4% of FY 2014 revenue. Salesforce needs to achieve extraordinary growth and profitability for this offering to contribute to Salesforce's bottom line (psst: Salesforce has no bottom line: a decade of CRM's GAAP EPS comes to $0.00).
  • According to developers surveyed by Forrester, Force.com is essentially tied for the #3 spot with Google. Salesforce's competitors in Platform -- Amazon, Microsoft and Google -- have a combined market capitalization of $706 billion.

I have not estimated potential contributions by the Service Cloud business and would welcome readers' views on that.

Disclosure: I am short CRM.