The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.



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operating expenses have been increasing at a faster rate than its revenues over the last few years. Although's top-line growth is still impressive and beyond that of competitors


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, the increasing expenses mean that the company is not seeing similar free cash flow growth.

Free cash flow often matters most to investors, and in the case of, the rapid rise in expenses could add risk to our $116 price estimate for the company's stock. Our price estimate is about 5% below market price.

Factors Behind Increase in Operating Expenses's SG&A and R&D expenses have been increasing at a faster rate than both revenues and gross profits. SG&A expenses relative to its gross profits are hovering at around 70%, while R&D expenses are relatively smaller at around 13%. The key takeaway here is that both of these ratios have continued to increase over the past few years (see charts displayed above and below).

During Salesforce's recent earnings conference call, management cited a few sources of the operating expense increase. Particularly for the last year, management cited increases in headcount and commission expenses, as well as the Dreamforce event:

"Sales and marketing expenses increased to 46% of revenue, up from 44% in FY '10, primarily as a result of three things. First, sales headcount additions; second, commission expense, because we had a significantly higher percentage of our sales teams being above quota on accelerated commission rates; and third, of course, the biggest Dreamforce in our history, which as predicted, had a net EPS impact of around $0.05 in the quarter."

Another reason cited by management was the expansion in international markets:

"Growing our International business is an important goal for, and we continue to focus our sales and marketing resources in the largest software markets in the world."

Our Take

It is evident that management sees further near-term investments in sales and marketing resources as necessary to grow the business. However, these expenses will ultimately need to be corralled relative to top-line revenues and gross profits. If the expense growth continues to exceed gross profits for a prolonged period, it would imply downside to our $116 price estimate for stock. You can see this effect by tweaking the trend lines in the interactive charts above.

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full analysis and $116 price estimate for

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.