Salesforce Q3FY15 Preview: Growing Customer Base Should Drive Revenues Higher

Salesforce.com (NYSE:CRM) is scheduled to report its third quarter results on Wednesday, November 19th, after the close of markets. The world’s largest cloud software company posted revenues of $2.55 billion in the first two quarters of fiscal year 2015. Revenues from subscriptions and support services, which account for nearly 94% of total revenues, expanded over 36% year on year to $2.38 billion. The company outpaced top line estimates last quarter, posting revenues of $1.32 billion against a consensus figure of $1.29 billion, helped by strong traction across its product lines.

Salesforce expects revenues to range between $1.365 billion – $1.37 billion in Q3FY15, an increase of 27% year on year. We expect the company to surpass this top line range, driven by rising demand for software-as-a-service modules in the Customer Relationship Management vertical. The company expects a per share net loss of (-$0.13) to (-$0.12). Comparatively, per share net loss from a prior year period in Q3FY14 stood at (-$0.21).

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Salesforce Entry Into Business Intelligence Could Accelerate Revenue Growth

Last month, Salesforce launched its sixth cloud platform named Wave on October 13, 2014 to enter the Business Intelligence market. ^[1] Through this new cloud offering, Salesforce intends to provide customers with predictive analytics features by integrating its own Customer Relationship cloud offering. Salesforce Wave is designed to make it easier for everyone to explore data, uncover new insights and take action instantly from any device. Although the Business Intelligence (BI) market has grown 8% last year to reach more than $14 billion in 2013, investments into mainstream BI tools that generate actionable insights have been tepid, with significant investments into ancillary tools such as experimental silos, infrastructure and other support services.

Given the extensive network Salesforce has built in its Sales and Service clouds, utilizing that data on the Wave platform to unveil new insights could immensely benefit its customers. Companies can quickly deploy sales, service and marketing analytics, or build custom mobile analytics apps, using any data source. As of now, Salesforce intends to offer Wave as an analytics tools for sales, service and marketing departments. However, partner companies will be working on other domains, such as human resources and finance. The standalone Salesforce Wave comes in two variants – one for “builders” with access to create and manage data sets priced at $250 per month, and one for “explorers” with access to viewing and sharing data insights and dashboards, priced at $125 per month. ^[1]

While the entry of  Salesforce into the analytics realm is certainly a positive development with good long term prospects, the near term outlook is challenging due to strong competition in the more mature product areas. As niche product areas such as predictive and prescriptive analytics gain traction, Salesforce has the opportunity to create tools that disrupt the traditional market trend and accelerate sales growth.

Margins Likely To Remain Under Pressure As Race For Customer Growth Intensifies

The CRM market has largely been dominated by Salesforce since it first rolled out its software-as-a-service modules. However, larger players such as SAP, Oracle and Microsoft are beginning to catch up with Salesforce through a string of acquisitions in recent times. Gartner reports that the global market for CRM suites is likely to expand from $21 billion in 2013 to $37 billion in 2017. More importantly, cloud subscriptions are likely to grow faster, and the share of on-demand subscriptions is expected to grow from about 50% in 2013 to more than 85% by 2025.

The rapid growth potential in the CRM market has resulted in large investments into R&D and S&M operations to gain customers and increase customer life-time values. As the leader of the CRM market, the need to maintain strong customer growth has put Salesforce’s operating profit margin under pressure for multiple quarters.We expect more pressure in the near term on margins as competition from larger legacy players intensifies and the race for faster customer growth gains momentum. As a function of its strategy, Salesforce has prioritized growth over profitability for years.

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1. Salesforce Delivers Wave, the Salesforce Analytics Cloud, Salesforce Press Release, October 2014 [↩] [↩]