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How Salesforce Plans to Expand to Europe

By Adrian Campos - Mar 10, 2014 at 10:00PM

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Learn why Salesforce.com is opening new data centers in Europe, and how this move could affect the company's top line.

Leading cloud computing company Salesforce.com ( CRM -11.74% ), famous for its cloud-based customer relationship management platform, has seen amazing revenue growth in the past five years, as corporations all over the world shift their IT budgets to the cloud.That being said, the company recently has experienced fierce competition from emerging cloud players, such as Workday and NetSuite. Even traditional tech giants like Microsoft and Google are joining the cloud game.

The challenging competition from well-established and resourceful companies could potentially damage Salesforce.com's top-line growth. The company is already using an aggressive pricing strategy to protect its market share, as evidenced by the fact that it reported a net loss of $116.6 million in the most recent quarter, despite seeing revenue of $1.13 billion. In its current struggle, Salesforce.com is planning to expand to Europe. How does this company plan to conquer this new market?

Conquering Europe
Salesforce.com plans to open three new data centers in Europe. In August, the company will open a data center near London. Plus, it will take this expansion further by opening centers in Germany and France by 2015.

Note that in the past few years Salesforce.com has performed well in this region. Last year, the company saw a 41% revenue growth in Europe. Also, 18% of its revenue in the fiscal year ending in Jan. 31 come from Europe.

It seems Salesforce.com is well aware that government agencies and financial institutions in Europe are in need of a trustable and secure data host, and cloud solutions provider.

Europe is an attractive market for cloud technology
Gartner predicts that from 2013 to 2016, roughly $677 billion will be spent on cloud services worldwide, with Europe, Asia, and Latin America, showing the highest growth rates. According to IDC research, by 2017, the Western European market for cloud software will go up to $29.4 billion.

Even in mature markets, like the UK, there is plenty of room for growth left when it comes to cloud solutions. Computer Weekly forecasts that 32% of organizations in the UK will acquire cloud services from external providers.

In addition, the IT budget in UK might increase by 3.6%, and in Europe, by 3%. Thus it appears like the Salesforce.com's new data center in Europe will be settled at an adequate timing.

Competitors
The European environment is attractive for the cloud. However, tech giants like Microsoft and Google are already settled there. The former has two data centers, in Ireland and Netherlands, while the latter has three, in Finland, Ireland, and Belgium. Both companies have reached Europe in order to provide safer cloud solutions for organizations.

SAP AG ( SAP 1.07% ), the German multinational software corporation known for its quality customer relations service, can toughen Salesforce.com's Europe expansion. The company has experienced consistent growth in the past few years. Its current annual run rate revenue from cloud exceeds $1.06 billion, and aims for a $30 billion revenue by 2017.

Overall, there is strong competition in Europe, to which Salesforce.com must take on aggressive measures. Because of the fierce competition, the expansion in Europe might show unpleasing results in the short term. That being said, Salesforce.com investors may be more long-term oriented than the average investor, as this company is usually regarded as a growth pick, rather than a value stock.

Final Foolish takeaway
Despite heavy competition, the demand in Europe from government agencies and enterprises seems solid enough for Salesforce.com to generate meaningful revenue in the mid run.

Note that Salesforce.com has seen positive results in Europe in the past few years. The region has interesting growth potential, as evidenced by the strong demand for cloud solutions, which is supported by the recent economic recovery. Even after accounting for the presence of tech giants like Microsoft and Google, or well-established companies like SAP AG, Salesforce.com may have a good chance of succeeding in Europe in the long term. The company has a consistent track of achieving record sales in Europe, and this trend should continue, backed up by the recent installment of new data centers in this region. Therefore, in the long run, Salesforce.com should see plenty of benefits from expanding its operations in Europe.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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