Is the Cloud a Reliable Investment?

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Help yourself with the Fool's FREE and easy new watchlist service today. (NYSE: CRM  ) had a fairly epic day of events on its quarterly conference call. Besides announcing results, there was a sprawling who's-who of celebrities, from Sheryl Sandberg to Green Day. All that star power, along with CEO Marc Benioff's frenzied pronouncements of recent record successes, made it difficult to pick up on any cracks in Salesforce's business veneer. But there are a few shortcomings to consider before diving in to this company.

Record sales, diminishing losses
Salesforce turned in impressive sales this quarter, with $1.08 billion, a 36% increase year over year. Benioff called Q3 an "absolute monster quarter" thanks to $1 billion sales within its Subscription and Support segment and $81 million from the acquisition of digital marketing company ExactTarget. This is the first time an enterprise cloud computing company has produced over $1 billion in a single quarter, and the growth allowed Salesforce to raise its guidance for FY 2015 to the $5 billion, another first for the company.

The sales stat certainly fired up Benioff, but it didn't keep Salesforce's profit margins out of the red. The company's operating loss was $97.9 million, significantly higher than the $54.1 million the company burned through during the same quarter in 2012. The reason for the widening loss was a boost in marketing expenses. Salesforce still managed to lessen its net loss from $220.3 million last year to $124.4 million. Quarterly cash flow, meanwhile, was reportedly up 30% on a year-over-year basis, thanks to the ExactTarget acquisition.

Not the best quarter for PR
Despite Benioff's fervor over Salesforce's record quarterly sales, the company has recently had to face a string of bad headlines. For starters, as a result of the ExactTarget acquisition, Salesforce may be flush with cash, but the "synergies" of the merger (as a Salesforce spokesperson told CBC New Brunswick) also led to the layoffs of at least 200 Salesforce employees.

Adding to Salesforce's woes is a debacle swirling around its Hackathon controversy. The event, which aimed for developers to "build the most awesome app" from scratch, "using the power of Salesforce Platform," quickly lost its spirit of fun when initial winner, former Salesforce employee Thomas Kim, faced complaints from other contestants. Fellow contestants alleged Kim had already demoed a similar application before the official date to start coding. The kerfuffle eventually resolved with both first and second place receiving prize money, but it certainly didn't help the event put Salesforce's suite of products in a positive light.

Put your money in the cloud?
While no company wants a skirmish during a promotional event, it's more likely that Salesforce's widening profit losses have the company's stock trading at its lowest point in a month. If the company can do a better job of bridging its gap in earnings- which will hopefully happen once the dust settles on its ExactTarget acquisition- it would certainly gain more solidity as a stock, especially with revenue and guidance reaching all-time highs. For the time being, Salesforce is riding high on a cloud of buzz, but could stand to go even higher with a better business structure.

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9/26/2016 4:02 PM
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