Cloud Migration, Salesforce1 Could Help Sustain Salesforce’s Impressive Topline Growth Trajectory

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Salesforce.com (NYSE:CRM) reported its fiscal Q2’15 results on August 21. (Fiscal years end with January.)  Revenues topped the consensus estimate of $1,288 million, growing 38% to reach $1,319 million. The company also exceed analyst estimates in its bottom line, with a non-GAAP earnings per share figure of 13 cents compared to the consensus estimate of 12 cents.

Interestingly, the company provided a breakdown of sales by product offering for the quarter. However, prior period information was not reported for comparative purposes. Revenues from its core offering, the Sales Cloud, stood at $610 million for the quarter. Revenues from subscriptions to its Service Cloud and Marketing Cloud stood at about $319 million and $122 million respectively during Q2’15. The Salesforce1 platform, which was launched before the start of Salesforce’s annual Dreamforce conference in November 2013, generated revenues of approximately $182 million during Q2’15.

Geographically, developed markets of Europe and the Americas registered constant currency growth rates of approximately 36% and 39% respectively in Q2’15, compared to 34% each from a year prior period. The acceleration in top line growth in these regions was facilitated by an increase in IT spending on the back of a recovering global economy. Sales from the Asia-Pacific region, which contribute about 10% of revenues, grew slower than these developed markets during the quarter, at 27% year on year. However, the Asia-Pacific region’s growth rate during Q2’15 was higher than its growth rate from a similar period a year ago.

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In this earnings article, we take a look at the recently reported Q2’15 results from Salesforce. We have a $47 price estimate for Salesforce.com which is under revision to incorporate the latest quarterly earnings.

See our full analysis for Salesforce.com

Growth in SaaS CRM Deployments Should Benefit Salesforce

The global market for Customer Relationship Management software has been exploding each year, with intensifying competition amongst vendors and aggressive investments from customers. Technology market research provider Gartner expects the global CRM market to expand to approximately $36.5 billion by 2017, from about $20.5 billion last year, representing a compounded annualized growth rate (CAGR) of about 15.5%. [1]

More importantly, a recent Gartner update on the global CRM market highlights the fact that cloud deployments of CRM suites are outpacing standard on-premise deployments. The Software-as-a-Service (SaaS) model of CRM deployment, pioneered by Salesforce, is expected to register a higher CAGR of approximately 23% than the broader CRM market through 2017. [2] The higher growth rate for SaaS-based CRM software has resulted in greater share of on-demand deployments. Gartner estimates more than 50% of CRM sales to be SaaS-based by 2015. [2] On a longer term, Gartner estimates as much as 85% of CRM suites to be deployment on-demand by 2025. [2]

Salesforce should benefit from both the explosive growth in the CRM market, and the shift towards on-demand deployments from companies. The company has followed market trends carefully and has diversified itself from being a sales automation software provider into a successful sales analytics provider, presenting targeted customer-centric solutions to its users that increase their marketing return on investment (ROI). Successful deliverability of high ROI on marketing investments for its customers has resulted in a rapid expansion in its customer base over the years. And we expect increasing stickiness from older customers and expanding renewal rates from newer customers should help sustain revenue growth for the company.

In terms of deferred revenue, Salesforce’s deferred revenue base expanded by 32% on a year-on-year basis to reach $2.35 billion. For Q3’15, Salesforce estimates deferred revenues to grow about 30% year on year. [3] Moreover, the company’s unbilled deferred revenues increased to $5 billion by July 2014, underlining Salesforce’s strong business pipeline for the future.

Salesforce1 Could Become a Potential Multi-Billion Dollar Product for Salesforce

Salesforce launched the ‘Salesforce1′ platform before the start of its annual Dreamforce conference in November 2013. This new offering is engineered to connect various apps and a multitude of devices across on a single platform and greatly increases mobility for sales representatives. Built on an API first philosophy, Sales Cloud on Salesforce1 features additional API tools for developers to create and deploy enterprise-level applications across mobile devices. [4] The platform has generated sales of about $346 million in H1’15, which represents a fiscal year revenue run rate of about $700 million.

We believe the platform could see tremendous growth prospects and become a billion dollar sales generator for Salesforce in the very near future. With about 1.7 million developers on the platform and ten times more APIs than before on its Force.com development platform, we believe Salesforce is well-positioned for the growth in mobile CRM applications in the future, especially from the retailing industry. [5] In its recent Q2’15 earnings call, Salesforce reported having signed a deal with Safeway to build applications that increase store productivity for the retailer. [6] We expect the platform to build scale across industry verticals in the near future through Salesforce’s diverse customer base.

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Notes:
  1. Gartner Predicts CRM Will Be A $36B Market By 2017, Forbes, June 2013 []
  2. Gartner Predicts By 2015, More Than 50% Of CRM Will Be Deployed As SaaS, Forbes, May 2014 [] [] []
  3. salesforce.com’s (CRM) CEO Marc Benioff on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, August 2014 []
  4. Salesforce.com Delivers New Salesforce1 Sales Cloud—Transforming Selling for the Internet of Customers, Salesforce Newsroom, November 2013 []
  5. salesforce.com’s CEO Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, November 2013 []
  6. ref:2 []