• Salesforce.com Spends Like It’s 1999

    In a Feb. 25, 2011 The Wall Street Journal article, “The Truth Behind the Salesforce.com Hype,” author Brett Arends speculates that Salesforce.com’s booming stock may not be much of a bargain while trading at 100 times earnings with earnings growing at just 6% a year.  More unsettling, though, is the company’s bubble-esque spending spree in the midst of a tepid economic recovery.   Has CEO Marc Benioff learned nothing from the excesses of the past decade or does he know something we don’t?

    First, let’s acknowledge Salesforce.com is a juggernaut among juggernauts capitalizing on the “cloud” trend.  Their stock doubled in the past year and their quarterly results greatly exceeded expectations.  Double-digit sales growth is likely to continue through 2011 barring a double-dip recession — not likely, but not unlikely either considering the current widespread political unrest and rising oil prices.  So, what is the problem?  Absolutely nothing if you are a current shareholder or employee or both like Mr. Benioff who sold $220 million worth of stock in the past year.  But while most businesses bruised by the recession are cautiously managing their cash, Salesforce is spending like it’s 1999. 

    Consider these facts from The Wall Street Journal article:

    • Salesforce’s revenue grew 29% last quarter, but its total operating expenses grew 40% to $365 million resulting in a loss of $391,000 from operations.
    • For the full year, sales rose 28% but costs rose faster resulting in a 15% decline in operating income (the company made only $97 million from operations out of $1.55 billion in revenue).
    • The company hired a staggering 500 people in the last quarter alone.
    • In addition to paying sales staff huge commissions, the company is adding big incentives including in stock.
    • “Aggressive” acquisitions include $212 million in cash for a small software company called Heroku and $170 million for a partly-owned subsidiary in Japan.
    • The company spent $278 million in cash to buy 14 acres of land in San Francisco to build a new campus (that’s the price for the land alone and does not include building construction).  By comparison, entire downtown office buildings are selling for one-third the price of this land.
    • A year ago, Salesforce had $2.2 billion in assets and liabilities of $1.4 billion.  This year assets are down to $2 billion and liabilities are up to $1.8 billion.   That’s a decline of $600 million or 75% in one year.
    • The number of shares jumped to 140 million from 111 million six years ago with more dilution scheduled for next year.
    • Currently Salesforce has operating margins of just 6%.

    Shareholders aside, how do prospective customers feel about funding Salesforce’s lavish offices, sales commissions and executive pay?  Does this take the shine off the brand?  Does this make this “upstart” more vulnerable to competition from stalwarts Microsoft and Oracle?

    Time will tell.  In the meantime, for Salesforce.com, it is good to be king!

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    Rating: 4.3/5 (3 votes cast)
    Salesforce.com Spends Like It's 1999, 4.3 out of 5 based on 3 ratings
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