What Salesforce.com, Inc. (NYSE:CRM) Is Doing To Accelerate Growth Abroad
Salesforce.com, Inc. (NYSE:CRM) generates the majority of its revenue in the U.S., but the company has other plans – to grow globally. The EMEA region, for instance, contributes less than 20% to Salesforce’s total revenue, but the opportunity is huge, especially in Europe.
Salesforce defies currency headwinds
As Salesforce looks outside the U.S. for growth, the company is also showing effective management in dealing with potential risks in the international market. Usually, companies with wide exposure to foreign markets are impacted by adverse foreign exchange rates, but Salesforce has shown that it can effectively deal with that problem.
The company was able to post strong quarterly results in its first quarter 2016, with revenue soaring 23% to $1.51 billion despite strong foreign exchange headwinds. But the first quarter 2016 is in the past. For the future, Salesforce guided current quarter (second quarter 2016) revenue in the band of $1.59 to $1.60 billion, indicating a growth of 21% year-over-year. The company also raised its annual revenue forecast to a range of $6.52-$6.55 billion, indicating a possible increase of 21%-22% year-over-year.
Issuing ambitious performance guidance alone does not do anything. So, what exactly is Salesforce doing to achieve its performance targets and more future growth?
Salesforce.com, Inc. (NYSE:CRM) is aggressively building data centers in the U.S. and overseas. Part of the reason is that the company wants to increase its capacity so that it can better serve its growing list of customers. The company is anticipating strong demand for various enterprise marketing and customer management solutions. As such, Salesforce has figured out that the best way to tap the opportunities is to get ready for the opportunities with a platform that is able to withstand huge demand.
In the current state of affairs, cost of revenue is going up at Salesforce as the company invests more to expand capacity. While the adverse impact of the high capital investment will be short-lived, benefits will last longer, with more growth domestically and abroad once the projects are completed.
Eliminating data privacy hurdle
The other reason Salesforce is building out data centers abroad, in the U.K., Germany and several other international markets, is to address data residency issues.
Since the publishing of the damaging spying claims by a former NSA contractor that implicated the U.S. government, U.S. technology firms have had a tough time selling to international customers. Some international consumers have raised concerns about data residency and privacy, and have been hesitant to sign U.S. technology providers over these fears.
By building data centers in the local markets, Salesforce is eliminating concern among its international customers, which should encourage them to buy more from the company. In Germany alone, Salesforce plans to invest about $1 billion over the next couple of years to expand capacity there and more importantly tackle data residency issues in the market.
The change in data residency will not only affect existing customers in a positive way, but have a huge sentiment impact, which should inspire signing of more deals with existing and new customers abroad. There is also a fair chance that customers could defect to Salesforce if other foreign providers seem to be dragging their feet to store data locally.
Salesforce in EMEA region
Europe, Middle East and Africa (EMEA) are some of the key markets that Salesforce.com, Inc. (NYSE:CRM) is targeting outside the U.S., of course, there is also Asia-Pacific.
Looking at the present revenue contribution of the EMEA region, it is safe to say that Salesforce has barely scratched the surface in the market, and Europe is particularly very promising.
Salesforce generates less than 20% of its total annual revenue, which is just about $1 billion, from the EMEA. The amount of revenue that Salesforce is getting in EMEA currently is just a small fraction of what rivals, SAP SE (ADR) (NYSE:SAP) and Oracle Corporation (NYSE:ORCL), are getting in the region.
While in the past the huge presence of Oracle and SAP in Europe’s enterprise application market was a threat to Salesforce, these days it is an opportunity. Salesforce is executing well, demand for its products in Europe is strong and the company is taking its share from rivals. For that reason, the large market share currently enjoyed by SAP and Oracle presents a huge market opportunity that is up for grabs for Salesforce.
In addition to the opportunity to grab market share from rivals, customers in Europe are also increasing their exposure to Salesforce by buying additional solutions from the company.
While Salesforce ticks in Europe
Innovation: Many customers in the EMEA region are coming to try Salesforce services for the first time and there is a high level of stickiness among customers that have tried Salesforce applications. The reason Salesforce is doing well in EMEA is that the company is doing well on the innovation front, thus leading rivals with more effective products.
Effective marketing: Salesforce is trying to lead by example. Taking advantage of its own customer management solutions, Salesforce has put together a powerful sales and marketing machine that is helping it to win customers from rivals. This way, the company is also promoting its products through its actions.
Partners hiring to meet demand: Salesforce’s distributors in Europe are boosting their headcount to satisfy demand. With a larger capacity of its partners, Salesforce should be able to sell more in EMEA.
Rise of digital marketing: Currently, EMEA lags the U.S. in the adoption of digital marketing tools. However, demand for cloud marketing solutions is on the rise in EMEA, and this is opening up new revenue opportunities for Salesforce.
Salesforce.com, Inc. (NYSE:CRM) generates about 50% of its sales from large customers with SMBs accounting for the rest of the sales. The important thing in having a big base of large customers is that stickiness among large customers is usually higher than among SMBs.
In essence, large customers try to maintain the status quo because defection causes major disruptions and may not make meaningful economic sense at the end of the day. For this reason, Salesforce is able to keep the large customers it signs for a longer time. Additionally, large businesses are less likely to fail, which means that customer life is relatively higher than startups. However, exposure to startups is also important because of the huge growth potential.
As such, the nearly 50/50 distribution of Salesforce’s customer base between large businesses and SMBs is important for growth and survival in hard times.
What is the priority for now?
What is happening currently is that Salesforce has its main focus on growth more than margins improvement. The company is investing in capacity with data centers coming up in several markets around the world. Last year, the company’s gross margins fell to 84%, from 87% in 2011, and the reason for that is the high capital investment it is making.
As such, margins will likely remain under pressure as Salesforce prioritizes growth over short-term profitability. But again, significant increases in sales due to the ongoing expansion should drive some margin lifts.
Salesforce.com, Inc. (NYSE:CRM) is doing well on several fronts from product innovation to effective capital allocation. However, competition is intense in its industry, and if things get more intense, the company may be forced to spend more on promotions or cut prices to retain existing customers, which can adversely impact financial results.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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