Salesforce sales rise, but acquisitions weigh on profit

The SaaS provider saw a 34-percent jump in revenue in the first quarter, but the purchase of seven companies and significant investment on marketing led to a dip in profits
Written by Ben Woods, Contributor on

Salesforce.com has posted its first-quarter results revealing a 34-percent increase in net income year-on-year, but a fall in profits.

On Thursday, the software-as-a-service provider reported net income of $504m (£310m) for its fiscal first quarter 2012, rising from $377m. However, the San Francisco-based company's earnings were hit by a rise in the cost of delivering its services and by operational expenses. For the three months ending 30 April, its operating expenses were $404.1m, up from $272.1m the previous year.

These increases offset the revenue gains, meaning that Salesforce posted quarterly profits of $530,000, considerably less than the $17.7m profit recorded in the same period the previous year.

During an investor earnings call on Thursday, Salesforce's chief financial officer Graham Smith attributed the increase in operational costs to the company's acquisition of seven companies. These included social-media monitoring company Radian6 and platform-as-a-service company Heroku.

Moreover, an accelerated hiring plan that added 200 employees and a $254.5m investment on brand-awareness marketing, including a Super Bowl ad, contributed to increased operating costs, Smith said.

Competition from rivals

The customer-relationship management specialist reported an increase in customers. It said competition from rivals such as Microsoft and Oracle had not affected its business in terms of client base or pricing, especially for its flagship Sales Cloud software.

"Microsoft's desperate strategy of underfunding, [and] pricing with undifferentiated and highly proprietary products basically has had the same impact on our business as the Windows tablet and Zune did against the iPad and iPod," Salesforce's chief executive, Mark Benioff, said during the earnings call.

"We call Microsoft's strategy 'the Zune strategy'. It's the concept that they can take a proprietary, undifferentiated offering at a lower price and somehow make an impact on a high-value, highly differentiated product," he added.

In March, Service Cloud 3 added social-networking monitoring capabilities via dedicated services and the integration of Radian6 for the monitoring of blogs, forums and discussion groups.

"We believe this is a massive opportunity to redefine cloud computing. It's giving customers the social intelligence they want with the business context they need. It further differentiates the Sales Cloud [and] the Service Cloud. It further differentiates the platform and Chatter," Benioff said.

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