Aware of the ongoing trend of companies transitioning their IT budgets to the cloud, Salesforce.com (NYSE:CRM) aims to grow significantly by targeting the European region. The company plans to open a data center in United Kingdom this year, along with others in Germany and France in 2015. Recently, the leading CRM software and cloud computing company announced its partnership with German telecommunications giant, Deutsche Telekom AG (NASDAQOTH:DTEGF).
In this new alliance, Salesforce.com appoints its European partner's corporate customers unit, called T-Systems, as the reseller of its CRM software in Austria, Germany, and Switzerland -- which form the DACH region. Also, Deutsche Telekom will be the data center provider for Salesforce.com's upcoming establishment in Germany. As it invests in cloud infrastructure, the German organization plans to work with its new ally to expand its own cost-effective cloud services. Considering how Salesforce.com looks to increase its market share in Europe, SAP AG (NYSE:SAP) might see a threatening situation to its established leadership in enterprise software.
Salesforce.com's entrance to Europe
European organizations have worried constantly about storing their information in data centers located in the United States, due to the controversy of spying and other security breaches. For that reason, Salesforce.com announced months ago that it would establish data centers in Europe, satisfying a significant demand in the market. With Deutsche Telekom as a partner, Salesforce.com will be able to offer its solutions through the Telekom Cloud, assuring security to its customers.
Also, the new partnership could lead Salesforce.com to have a successful massive launch in Europe. Taking into account the vast reach and popularity of Deutsche Telekom in the DACH region, the new alliance seems like a sound initiative for Salesforce.com to grow its popularity in the market. Given that the American company spends heavily in its marketing and sales crew, it could be forming partnerships with renowned corporations in order to reduce these high costs -- which could also partly explain its recent alliance with Philips.
Propelling T-Systems restructuring plan
In regards to Deutsche Telekom, it plans to improve its T-Systems unit with Salesforce.com's help. In that manner, it can expand its cloud portfolio with cost-effective services mainly targeted to small and medium sized enterprises. Currently, the company has a well-established cloud business in Germany, and has been awarded top marks by research firm Experton. In its latest quarter, Deutsche Telekom reported a revenue decrease of 6.7% year-over-year for T-Systems due to restructuring and repositioning costs. For that matter, its partnership with Salesforce.com might alleviate these expenses, and move its 2015 restructuring plan forward.
Maintaining revenue growth
Salesforce.com shows consistent and significant revenue growth over the past years. At the moment, its success with European customers is evidenced by its 41% revenue growth in its full fiscal year 2014 in Europe. Moreover, the company's fiscal year 2015 guidance projects that it will garner around $5.3 billion of total annual revenue, a 30% increase year-over-year.
As Salesforce.com reports constant net losses, investors could still expect its stock price to increase through its sustained revenue growth. With Deutsche Telekom as a reseller of its platform, and its current growth in Europe; the company might see a greater amount of sales upon its entrance to the region. Moreover, the German organization could potentially revert revenue declines for T-Systems in future years, as it improves its portfolio and follows its restructuring plan with Salesforce.com's help.
Competing with SAP AG
SAP is currently in a dominant position in the German enterprise software market. In its most recent quarter, the company generated revenue of about $5.1 billion, which fell short of analysts expectations along with its operating profit. However, its cloud subscriptions revenue grew considerably by 38%. It also reported 36 million users in the cloud.
In addition, it shows positive results for its relatively new services. Its real-time business platform launched in 2011, SAP HANA, reached 3,200 customers in total, and SAP Business Suite, released a year ago, almost got to 1,000 customers. Lastly, the organization shows consistent net profit, which makes it much less of a volatile stock compared to Salesforce.com.
Final foolish takeaway
Salesforce.com and Deutsche Telekom are forming a partnership that will allow the former to establish itself successfully in the DACH region (composed of Germany, Austria, and Switzerland). Although many investors worry about Salesforce.com's net losses, its expansion in Europe could still increase the price of its stock thanks to the potential, significant revenue growth.
At the same time, Salesforce.com will provide expert help to its German partner. This could propel Deutsche Telekom's plan to restructure T-Systems and improve its cloud service portfolio, which could lead to increase in sales in future years. Still, both companies should be aware of the leading position of SAP in the market, as it is growing its business considerably, increasing sales for its product and services while generating profit.