salesforce.com Faces Cloudy Weather

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Enterprise cloud computing company salesforce.com (NYS: CRM) had a rather mixed quarter with results that were not in line with analyst estimates. Despite clocking record quarterly revenue, spiraling costs and promotional expenditures sent the company into the red for the second consecutive quarter. Let's have a closer look at what went wrong with Salesforce.

Highs and lows
First of all, Salesforce managed to post a record quarterly revenue figure of $584 million, up by 36% from the previous year's quarter.

On a geographical basis, revenues from the Americas, Salesforce's biggest market, grew by 36% to $397 million. European revenues also saw a 29% rise -- 36% when factoring foreign exchange gains -- to $104 million. Asian revenues saw an even higher jump by 31% -- 39% when factoring in foreign exchange gains -- to $83 million. Sounds pretty solid. So, what's all the fuss about?

The issue is that despite the top-line success, operating expenses ate up more than 70% of Salesforce's revenues. This was on account of several acquisitions the company made, which added 500 people to the company's work force. At the same time, organic hiring added 1,700 people, bringing the total workforce to 7,000 employees.

Research and development expenses also grew at a fast pace in order for the company to stay ahead of competition. Marketing expenses skyrocketed mainly due to expenses relating to Dreamforce and Cloudforce, two cloud computing conferences that were hosted by the company. All of this contributed to an operating loss of $10.2 million and a net loss of $3.8 million.

But, on the brighter side, the company managed to sign up quite a few deals during the quarter. This includes Verizon, which signed up 80,000 subscribers for Chatter. Other companies include Bayer, Eli Lilly, Telstra, Fuji Xerox, Japan Post, Unisys, Parametric Technologies, and Diebold Securities.

Spreading its wings
The company has been busy eating up as many businesses as it can to put on some extra muscle in the cloud computing space. It bought Model Metrics, a social media consultancy firm, in order to boost its social enterprise offering. In September, the company announced its acquisition of Assistly, a firm that makes customer support applications. Assistly provides the capability of engaging with customers through different communication channels such as Facebook, Twitter, web chat, email, and phone, all through a single user interface. But Salesforce is not the only one that's been hard at work.

Cloudy competition
Oracle
(NAS: ORCL) also recently jumped onto the cloud bandwagon when it announced its acquisition of RightNow Technologies for $1.43 billion. The acquisition would make Oracle a direct competitor to Salesforce.com in the cloud-based customer relationship management space.

Another company that's bolstering its cloud ammunition is 8x8 (NAS: EGHT) , the cloud computing and communications service provider. 8x8 recently announced that it had completed the acquisition of privately held Contactual, a cloud-based call center and customer interaction management service provider. The acquisition would enable the company to increase its expertise in the hosted software-as-a-service market. So, as you can imagine, the cloud computing industry is pretty crowded.

What the future holds
According to Global Industry Analysts, the global cloud computing services market is expected to reach about $127 billion by the year 2017. This growth would be mainly driven by the increasing importance of enterprise mobility and increasing adoption of cloud computing among small and medium enterprises. So, the future may be bright for the industry in general. However, with the deteriorating global economy, it remains to be seen whether businesses will cut down on cloud spending in the medium term. Coupled with that, there are also security concerns surrounding the use of cloud computing that could make businesses think twice before making any commitments.

The Foolish bottom line
So, a mixture of a demand slowdown, security concerns, and increasing competition could give Salesforce a lot to deal with. The company would have to consistently tackle these headwinds in order to stay ahead of the race. What do you Fools think? Write your comments in the box below to let us know. Also, to stay up to speed with Salesforce's progress, feel free to add it to your very own watchlist. It's free and helps you stay on top of the latest news and analysis for your favorite companies.

At the time this article was published Fool contributor Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Oracle. Motley Fool newsletter services have recommended buying shares of Salesforce. A separate Motley Fool newsletter service has recommended shorting Salesforce. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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