Salesforce Issues Senior Notes

In an effort to further its expansion plans, Salesforce.com (CRM - Analyst Report), recently announced its plans to offer $1 billion in convertible senior notes to institutional investors through the private placement route.

The proceeds generated through the issue would be partially used to fund the company’s prospective acquisitions and investments in technology and will also support its capital expenditure program.

Salesforce.com has been adopted a hedging strategy for its convertible note and warrant transactions, to prevent dilution of its converted shares.

The company’s financial health looks decent, as there is no long term debt. The company is consistent with its capital expenditure plans, which is evident from the fact that it has incurred $50.5 million during the fourth quarter of 2013, and a total capex of $175.6 million in the fiscal year 2013.

Moreover, going forward the company plans continue with its capex plans, specially targeting its R&D for new product development and to fund acquisitions.

Salesforce has also spent quite a bit on acquisitions, which have always been the preferred route for picking up skilled and qualified human resources. This fact is reflected in the company’s acquisition of Buddy Media Inc., last year, for $689 million. Buddy Media helps companies place advertisements on Facebook Inc. (FB - Analyst Report) and Twitter Inc.

While acquisitions add value to a company’s growing business, they increase the headcount leading to higher operating expense. We remain concerned about a sluggish business environment in Europe, coupled with currency headwinds and not-so-encouraging tech expenses that will have an impact on Salesforce’s results.

The cloud market offers considerable opportunity for growth, although growth prospects have been rationalized to a considerable extent by the renewed focus of tech giants such as Dell Inc. (DELL - Analyst Report) and Hewlett-Packard Co. (HPQ - Analyst Report) in the cloud space.

Considering the situation, it is hard to predict Salesforce’s success story, unless the company adopts other innovative business strategies to fuel growth.

Although the revenue expectation by the company for the first quarter of 2014 looks decent ($882 million to $887 million) reflecting a yearly increase of 27.0% to 28.0%, Salesforce projects a GAAP net loss per share in the range of 44 to 42 cents per share, as the company expects operating expense to remain high.

Salesforce shares carry a Zacks Rank #3 (Hold).