For salesforce.com, Growth Won't Come Cheap

Marc Benioff has an enviable problem. He needs to spend billions to make good on a long-term plan to build salesforce.com (NYSE: CRM  ) into a powerhouse generating $10 billion in annual cloud computing revenue.

"We will continue to grow and continue to take market share ... I have a dream of creating a $10 billion revenue company, and I want to be up there with Oracle (Nasdaq: ORCL  ) and Microsoft (Nasdaq: MSFT  ) . We can be better, we can be larger, we can be stronger," Benioff said during a recent interview with Mad Money host Jim Cramer.

Achieving that goal will be neither easy nor cheap. Salesforce.com spent $91 million for capital improvements over the past fiscal year alone, a 69% increase over fiscal 2010 and the most in company history.

Investors should expect see more spending in fiscal 2012 and in the years following. Salesforce.com is on track to add 100,000 square feet of co-located data center space over the next year, Rich Miller of Data Center Knowledge reported last week. He was quoting from a presentation by salesforce.com's vice president of technical operations, Frank Guerrera, at a conference in New York.

According to Miller, Guerrara said that salesforce.com is evaluating whether it may need to build its own data centers. Today, the company mostly leases from hosting specialists such as Equinix (Nasdaq: EQIX  ) . But that could become a constraint at some point.

"We have to deploy equipment quickly. We're constantly evolving as a company. In the data center, we have to understand [usage] trends and build to them," Miller quoted Guerrara as saying.

A salesforce.com spokesperson wouldn't speak to data center plans, saying only that salesforce.com will build out 24,000 square feet of additional space this year. Most of that is likely to be at the company's San Francisco headquarters, where it recently agreed to build out three more floors of space.

We don't know how much of that will be used for serving customer data. But it's a good bet at least some of it will. In this sense, salesforce.com's spending plan is reminiscent of Google's (Nasdaq: GOOG  ) $1.9 billion purchase of the former Port Authority building in New York City. The structure sits atop a massive fiber optic hub that acts like an Internet peering point.

Peering points offer direct and therefore fast access to the major Internet Service Providers and the Net itself. One, the San Francisco Internet exchange (SFMIX) is spitting distance from salesforce.com's headquarters. Silicon Valley -- just to the south -- is home to some of world's fastest exchanges.

Building data center infrastructure near to or on top of these IXPs would help salesforce.com to make good on promises to deliver an access experience that's as good or better than installed software housed on an in-house server. It also explains why Guerrara is exploring owning as well as renting data center space.

Either way, if Benioff is serious about making salesforce.com into a $10 billion a year cloud-computing monster, he'll have to spend big to get his company's servers near as many of the world's peering points as he can.

The resulting build-out will take years and cost billions in capex. But it could also be the smartest investment Benioff's ever made. For a company's that's already delivered multi-bagger returns to investors, that's saying something.

Do you agree? Disagree? Let us know what you think about salesforce.com's spending plans, the size of the cloud computing opportunity, and what, if anything, could keep the company from reaching a $10 billion revenue run rate using the comments box below.

You can also rate salesforce.com in Motley Fool CAPS and keep tabs on the company by adding the stock to the My Watchlist tool, our free, personalized stock tracking service.

Google and Microsoft are Motley Fool Inside Value picks. Google and salesforce.com are Motley Fool Rule Breakers recommendations. Motley Fool Options has recommended members open a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Google and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. 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 owns shares of Google, Microsoft, and Oracle and is also on Twitter as @TheMotleyFool. Its disclosure policy likes to begin the day with a big breakfast.


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