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Information Technology

Download These Outperformers

By Elliott H. Gue, on Feb. 27, 2015

Founded in 1999 by former Oracle Corp (NSDQ: ORCL) executive Mark Benioff and three developers, salesforce.com has emerged as the 800-pound gorilla in the cloud-computing space, accounting for about 11 percent of the SaaS market.

The San Francisco-based company was the first pure-play SaaS application provider to achieve $1 billion in quarterly revenue and ranks as the world’s sixth-largest enterprise software firm. Management has set its sights on becoming the first SaaS company to deliver $10 billion in annual revenue—a target that looks eminently achievable, given the firm’s momentum.

Salesforce.com specializes in cloud solutions that enable businesses to engage with their customers through four core offerings that users can access on any device:

  • Sales Cloud (48.7 percent of annual subscription revenue): A sales-force automation platform that provides users with accurate customer and prospect information while enabling them to track leads and progress and collaborate with colleagues from anywhere.
  • Service Cloud (26.3 percent): A platform for companies to engage with customers and address their service and support needs.
  • Marketing Cloud (10.1 percent): A platform that uses data from any source to help develop and deliver personalized messages to any customer on any channel–email, mobile, social media or within their own product.
  • Salesforce1 Platform (14.9 percent): A cloud platform for developing custom applications. Customers use this service to connect all its apps and customer data and make them accessible anywhere on any device. Veeva Systems (NYSE: VEEV) is the first company that developed its SaaS applications on Saleforce1 to go public. The firm offers customers in the life-sciences industry a suite of cloud-based solutions tailored specifically to their needs.

At this juncture in its life cycle, salesforce.com continues to invest heavily in research and development and mergers and acquisitions in an effort to innovate and broaden its capabilities.

These investments compress profit margins, but are essential to staying on top in this highly competitive industry and winning contracts from Global 500 companies–usually the province of industry heavyweights such as Oracle, IBM (NYSE: IBM) and SAP (Frankfurt: SAP, NYSE: SAP).

Dislodging these incumbents, many of which are developing their own cloud-based packages, has proved to be a challenge; uptake of SaaS products has been particularly strong among small to midsize businesses, many of which had been priced out by the infrastructure expense associated with traditional enterprise resource management solutions.

We like the company’s efforts to become even more customer-centric and build solutions targeted to six specific verticals: media and communications, the public sector, financial services, health care, automotive and retail. Speaking the language of these industries should help to drive sales and yield more big contracts.

These strategies paid off handsomely during salesforce.com’s fiscal fourth-quarter and full-year ended Jan. 31, 2015.

Salesforce.com delivered a blowout quarter, headlined by a 26 percent upsurge in sales to $1.44 billion and a 32 percent increase in deferred revenue to more than $3.8 billion. For the year, the company grew its revenue to a record $5.4 billion—up 32 percent—and improved its operating margins by 175 basis points.

Management attributed these strong full-year results to increasing traction among larger enterprises and highlighted major contract wins with ABB (Zurich: ABB, NYSE: ABB), Merck (Frankfurt: MRK, NYSE: MRK) and Time Warner Cable (NYSE: TWC).

Over the course of its fiscal year, salesforce.com closed about 550 seven- and eight-figure sales deals—almost 100 more than over the previous 12 months. More important, the number of eight-figure transactions increased by 33 percent, suggesting that the company’s SaaS solutions have penetrated beyond department-level tests for many customers.

During the company’s fourth-quarter earnings call, the ever-ebullient Benioff highlighted a megadeal with what the CEO described as “one of the world’s top software companies.” Not only will this unnamed client use salesforce.com’s solutions to drive its business, but the customer also plans to migrate its software products to the SaaS company’s cloud.

Salesforce.com also highlighted the early success of its Wave Analytics offering, emphasising this game-changing solution’s appeal to existing customers and value as a Trojan horse to win new sales from customers that were on the fence.

Management also called for operating margins to improve by another 125 to 150 basis points and raised its revenue guidance for the new fiscal year to between $6.475 and $6.52 billion from the previous range of $6.45 billion to $6.5 billion.

Unfavorable currency exchange rates will remain a near-term headwind, but salesforce.com remains the preeminent SaaS company and has the vision and execution to take advantage of its considerable growth opportunities.

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