Let’s take a look at three big companies in the industry.
salesforce.com, inc. (NYSE:CRM): Solid revenue growth, but increasing loss margin and operating costs
salesforce.com, inc. (NYSE:CRM) is the market and technology leader in on-demand CRM applications and business services. The company has a strong market position that it enjoys from being a first mover in the industry and providing low ownership costs for its customers.
The company has exhibited solid revenue growth, as it grew to $835 million in Q4, a 32% increase from last year. On the other hand, operating expenses increased 34% compared to the same period last year, to $672.1 million. This is due to higher expenses primarily in R&D (50.3%), sales & marketing (33%), and administrative expenses (23%).
The company is spending to enter other promising markets and to develop new products. salesforce.com, inc. (NYSE:CRM)‘s acquisition of Rypple in February 2012 allows it to offer services to the SaaS-based human capital management market. Similarly, the company has a social collaboration application platform called Chatter.
In order to generate revenue growth, salesforce.com, inc. (NYSE:CRM) incurs heavy expenses on headcount additions, data center expansions, and strategic acquisitions. There is a risk that these increased investments turn into losses due to its relatively high customer acquisition costs. These investments are certainly necessary for long-term growth, but could put pressure in the coming quarters, affecting the company’s operating margins, currently at 3.6%.
SAP AG (ADR) (NYSE:SAP): Increasing working capital is putting pressure on operating cash flow
SAP AG (ADR) (NYSE:SAP) is the recognized leader in providing collaborative e-business solutions for all types of industries and for every major market.
The company reported total revenue of $4.95 billion for Q3 2012, a 16.4% increase from last year on a constant currency basis. EPS was $0.65, 2.3% less than the same quarter the year before on a constant currency basis.
Operating cash flow, which is one of its strongest points, increased 3.1% from last year to $4.35 billion year to date. On the other hand, cash and cash equivalents dropped 20% due to the recent acquisition of Ariba.
With more than 12,000 partners, SAP AG (ADR) (NYSE:SAP)’s unique open ecosystem strategy helps it add additional customer value across all their channels. I consider this well-oiled system its biggest asset, followed by its systematic approach to expand and market its business, which keeps new clients coming in.
Oracle Corporation (NASDAQ:ORCL): Flat operating margin offsets decline in revenue
Oracle Corporation (NASDAQ:ORCL) is one of the largest database and enterprise software providers. After its acquisition of Sun Microsystems, the company started selling hardware products and services.
The company’s third-quarter results were disappointing, as low performance from the sales department left many deals incomplete. As a result, revenue dropped 1% to $8.97 billion. Hardware systems products dropped 22% as customers postponed their purchases after Oracle Corporation (NASDAQ:ORCL) announced new products will be released in the upcoming months.
Operating margin was same from last year at 44.7%, and since operating expenses remained flat, the decline in revenue was compensated. The company expects to expand its margins through cost savings, such as reducing the number of products and adopting a build-to-order model. I believe this reduction needs to be correctly analyzed, since Oracle Corporation (NASDAQ:ORCL)’s diversified product pipeline makes it more competitive against Salesforce.com and SAP.
Bottom line
Even though the industry’s prospects seem bright, increasing competition and the rise in operational costs puts a cap on the margins of its major players.
salesforce.com, inc. (NYSE:CRM) still leads the SaaS CRM sector, but this status could change as technology changes rapidly. Most of the efforts come down to investing in marketing and R&D. The continuous contraction in its operating margin could lead salesforce.com, inc. (NYSE:CRM) to reduce these investments.
SAP AG (ADR) (NYSE:SAP) and Oracle Corporation (NASDAQ:ORCL)’s efforts to build their position through aggressive acquisitions has filled their balance sheets with intangible assets and goodwill. Not all acquisitions might perform as the companies expect, and this could affect their valuation.
The article A Review of the CRM Market originally appeared on Fool.com and is written by Damian Illia.
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