Arik Hesseldahl

Recent Posts by Arik Hesseldahl

Huh? After Spending $278 Million, Backs Out of San Francisco Campus.

There’s a great big collective “huh?” reverberating around the universe of analysts and investors who follow The company said yesterday that it was backing away from the development of a new campus complex in San Francisco, a project that has been on the drawing board for more than a year. It had even spent $278 million on a 14-acre parcel of land in the city’s Mission Bay area.

What’s so confusing, though, is that Salesforce is still growing like crazy and adding new employees at a relatively fast pace. Faster than ever before, in fact, and yet it still doesn’t need the new building? Apparently, Salesforce can satisfy its office-space needs by sticking with the traditional leases upon which it has relied so far. As Salesforce chief messaging officer Bruce Francis told Reuters: “We are growing now faster than we were growing at the time when we originally made the decision to build the campus. We are going to need space faster than we could build it.”

But the decision is going to add another log on the fire for Salesforce’s critics, who have argued that its shares are too expensive, and that its CEO, Marc Benioff, has no discipline when it comes to controlling expenses.

And they are growing at an alarming clip: Salesforce’s combined annual operating expenses grew 46 percent year over year to $1.8 billion in 2011, or about 80 percent of sales; up from $1.2 billion, or about 74 percent of sales, in 2010. That’s notably faster that the growth in annual sales, which grew 37 percent from $1.7 billion to $2.3 billion. And let’s not forget that Salesforce finished the year with a $35 million operating loss, versus a $97 million operating profit in 2010.

Salesforce defenders would say that deferred billings are really where you look for indications of growth in a cloud-computing company, and that’s fair: Future billings say more about the uptake of a subscription product like’s primary cloud-based customer-relations management software than revenue that’s already been booked. And to that point, deferred revenue grew 48 percent, or ever so slightly faster than expenses.

Still, none of that helps explain why Salesforce management felt it was: A) justified in spending $278 million on 14 acres of real estate, and going to the expense of hiring architects and contractors; and B) why it no longer thinks it needs it. The purchase felt like a rash decision then, and backing away from the project feels just as rash now.

Anyhow, the news comes on the heels of Salesforce reporting quarterly results that blew by the expectations of analysts and undid much of the negative buzz that emerged in the quarter before that. Benioff made his regular appearance on CNBC’s “Mad Money” with Jim Cramer to talk about it. Cramer is apparently still liking the taste of the Salesforce Kool-Aid. In his remarks, Benioff discloses that Salesforce just closed a big deal with Hewlett-Packard, along with some other monstrously large transactions with other companies. What neither one of them bothers to talk about is the growth in expenses.

(Image courtesy of I Can Has Cheezburger)

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