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Salesforce's Strategic Deals to Reap Benefits, Risks Persist

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On Jul 15, 2014, we issued an updated research report on, Inc. (CRM - Free Report) .

Salesforce is among the top three Customer Relationship Management (CRM - Free Report) vendors in the SaaS enterprise application market. Given increasing customer adoption and satisfactory performances, market research firm Gartner acknowledged that Salesforce is the leading CRM solutions provider, with a market share of 16.1% in 2013, ahead of SAP AG (SAP - Free Report) with 13.0% market share and Oracle (ORCL - Free Report) with 10.0% share.

Furthermore, Salesforce is focusing on strategic acquisitions to expand its market share. In fiscal 2014, Salesforce acquired three companies and in fiscal 2013 it acquired five other companies of which the most prominent was ExactTarget. The company acquired ExactTarget for approximately $2.5 billion in Jul 2013 to expand its cloud-based platform. We believe that these acquisitions will add value to Salesforce’s existing portfolio and the resultant synergies will benefit the company in the long run.

Most recently, Salesforce also entered into a strategic alliance with the world’s largest software maker, Microsoft (MSFT - Free Report) to offer Salesforce’s CRM services on Microsoft Azure. The partnership is expected to ensure tighter integration between Microsoft and Salesforce clouds, which will help customers to easily move their data between the two platforms.

The company has also been expanding its presence in Europe and plans to open data centers in the UK (probably by Aug 2014), France and Germany (by 2015), which will cater to international customers. Salesforce also intends to open two data centers in Canada, thereby strengthening its presence in the country. The opening of data centers in these countries will help Salesforce to reach local small and medium businesses as well as government agencies. Moreover, we believe that the company’s entry into new markets like Canada would provide it a significant growth opportunity beyond U.K., France and Germany.  

It is worth noting that Salesforce’s free add-on offerings like Chatter will enable the company to differentiate its core offerings, making them more attractive for customers. Moreover, the rapid adoption of Salesforce platforms, (salesforce 2 and salesforce 1), demonstrate its growing opportunities in the ever-growing cloud computing segment.

On the flip side, Salesforce reported an operating loss of $55.3 million in the last quarter, which widened from the year-ago loss of $44.5 million.The company’s significantly high customer acquisition costs and increased investments resulted in losses. Moreover, higher costs related to the Oracle agreement, the ExactTarget acquisition and the Dreamforce event in Nov 2013 impacted operating results. While we believe that these investments are necessary to achieve long-term growth, we believe that margins will remain under pressure over the next few quarters.

Moreover, competition from its peers, continued weakness in Europe, currency headwinds and an increase in investments could pose challenges, going forward.

Salesforce has a Zacks Rank #3 (Hold).

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