Salesforce.com faces increasing competitive pressure from Microsoft, SAP and Oracle, analysts say.
Analysts were sounding a cautious note about Salesforce.coms future earnings potential just a day after CEO Marc Benioff predicted his company would achieve a $1 billion run rate in 2008, a goal he has been talking about since 2006,
In its third quarter 2007 earnings report on Nov. 15, Salesforce.com beat estimates Wall Street estimates by 2 cents per share, pulling in $6.5 million, or 5 cents a share, on revenue of $192 million.
The potential fly in ointment for Salesforce.com is increasing competition from some of the worlds biggest software companieseven if they are "old school" business applications providers that got rich selling on-premise software.
Salesforce.com is arguably the leaderwith a clear first mover advantagein the emerging SAAS (software as a service) market. The company has clearly been savvy in its moves, creating not only well-liked CRM [customer relationship management] software but also a huge partner ecosystem, a third party applications marketplace [AppExchange] and an on demand development platform [Apex]. However, Microsoft, SAP and Oracle are pushing hard into the on-demand CRM market.
SAP, with its introduction of Business ByDesign in September, is going a step further with a mid-market ERP [enterprise resource planning] suite written from the ground up to be services based that includes CRM capabilities.
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Microsofts on-demand CRM suite is expected by years end, and Oracle announced earlier this week at its OpenWorld conference that every application it builds from 2008 on will be "SAAS ready." During his keynote address Nov. 14, Oracle CEO Larry Ellison demonstrated three new Fusion Applicationsthe SAAS ready onesthat are centered on Salesforce.coms sweet spot, sales force automation.
Industry financial analysts are taking note.
"We are reiterating our Neutral rating on Salesforce.com shares," wrote Goldman Sachs analyst Sasa Zorovic, in a research note. "We believe the company benefits from the ongoing transition to the SAAS model and as the first mover in on-demand customer relationship management, and as such is currently the leader in the space," Zorovic wrote.
However, he also noted "the company may face increased pressure (both actual and headline) from Microsoft, Oracle and SAP as they continue to rollout enhanced CRM offerings in hopes of capitalizing on the large SAAS market. We also believe that while investors are willing to pay for growth, a company of this size should have more balanced growth and profitability where the top line growth translates into higher operating margins."
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During Salesforce.coms earnings call with analysts, company executives said that they expect modest margin improvements due to investments, including a new data center in Asia that should help it better compete on a global basis.
At the same time, according to Goldman Sachs, revenue growth for the company continues to decline year over year in the Americas. Several analysts pointed out that the company continues to be unclear about revenue contributions from their multiple product lines.
A Wedbush Morgan Securities research note publish Nov. 16 that "while we applaud the companys continued innovation, we are concerned with limited financial transparency regarding revenue contributions by category. As the market for on-demand sales force automation eventually becomes more crowded, CRM could face pricing pressure."
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