Salesforce’s Takeover Rumors and Analytics Cloud May Take Center Stage in its Q1 Results

Leading cloud computing vendor Salesforce.com (NYSE: CRM) is scheduled to report its fiscal 2016 first quarter results on May 20th. The first quarter was particularly eventful for Salesforce, as rumors floated around that it was fielding takeover offers from one or more suitors (Read: Salesforce Reportedly Fielding Takeover Offers) The company has remained tight-lipped regarding such a potential takeover, and the rumors have since died out. Nevertheless, investors will look keenly to CEO Marc Benioff to address the matter in the first quarter earnings call.

In terms of financial performance, Salesforce appears to have reached its peak revenue growth in 2015 and revenue expansion is expected to slow going forward. This is evident from its fiscal 2016 guidance, as the company expects revenue growth to slow down to 20% to 21% to reach $6.475 billion to $6.520 billion. Fiscal 2016 first quarter revenue is expected to range from $1.485 billion to $1.505 billion, which is a year on year growth rate of 21% – 23%. ^[1] However, even though Salesforce may no longer grow at over 30% annually, the expected revenue growth rate is still commendable for a company of its size.

Despite the burgeoning top-line, Salesforce has failed to achieve a quarterly net profit since July 2011. In fiscal 2015, lower marketing and administrative expenses helped the company narrow its GAAP operating loss to -3%, compared to -7% in fiscal 2014. Its non-GAAP operating margin stood at 10.7%, which was an improvement of 175 basis points over fiscal 2014. Salesforce intends to focus on its cost saving and efficiency measures in fiscal 2016 and expects to improve its non-GAAP operating margin by another 125 to 150 basis points.

We have a price estimate of $60 for Salesforce.com, which is about 15% lower than its current market price.

See our complete analysis for Salesforce.com here

Analytics Cloud and International Markets in Focus

Having scaled the peaks of the global customer relationship management (CRM) cloud computing market, Salesforce has turned to the analytics cloud market to drive its future growth. CEO Marc Benioff mentioned as much in the fiscal 2015 fourth quarter earnings call, stating that Salesforce is “crossing over from the CRM industry into the analytics industry” on the back of Salesforce’s Analytics Cloud. ^[1] The company achieved strong adoption of its Analytics Cloud in fiscal 2015 and secured a number of leading global companies as customers (Read: Salesforce Posts Strong Q4 Results, Eyes Analytics Market to Drive Future Growth). The success of Salesforce’s Analytics cloud is expected to continue in fiscal 2016, as the shift from on-premise software to cloud-based software-as-a-service speeds up.

On the regional front, Salesforce stepped up its investments in Europe and Asia in fiscal 2015 to expand its presence in the region. In fiscal 2015, the Asia-Pacific region accounted for just 10% of Salesforce’s total revenues, while Europe accounted for 18%. German software major SAP SE (NYSE: SAP) has a strong presence in Europe, but Asia-Pacific is a largely untapped market that carries immense potential for the cloud computing industry. Thus, the company’s investments in these two regions in fiscal 2015 may pay off dividends in the current fiscal year.

Margins May Improve if Salesforce Reigns in its Marketing Expenditure

Salesforce spends over half of its revenues on marketing expenses, which has dragged its bottom-line into negative territoryon a GAAP basis since 2011. In comparison, Oracle Corp. (NYSE: ORCL), which is Salesforce’s biggest competitor in cloud computing, spends a mere 20% of its revenues on marketing expenses. Salesforce’s aggressive marketing strategy and its enormous sales team is a primary reason for its lack of profitability.

However, it seems that Salesforce is cutting back on its costs where it can, as is evident from the improvement of 175 basis points in its non-GAAP operating margin in fiscal 2015. In fact, its marketing expenditure as a percentage of sales declined from 53% in 2014 to 51% in 2015, indicating that the company may have finally begun focusing on turning a profit. In fiscal 2016, Salesforce expects to expand its non-GAAP operating margin by another 125-150 basis points through cost savings and efficiency initiatives.

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More Trefis Research

1. Salesforce 2015 Fourth Quarter Earnings Call Transcript, Seeking Alpha, February 25, 2015 [↩] [↩]