Salesforce Posts Robust Q1 Results, Raises Fiscal 2016 Guidance

Software behemoth Salesforce.com (NYSE: CRM) reported strong fiscal 2016 first quarter results on May 20th. The company continued to defy the law of large numbers as revenues expanded by 23% year on year to reach $1.51 billion in the first quarter. Revenue growth was at the higher end of the company’s guidance of 21% – 23%. Deferred revenue continued to grow at over 30%, and 30% of the top deals during the quarter were net new. This suggests that Salesforce’s business is not likely to slow down to a growth rate commensurate with its size. In fact, Salesforce surpassed the $6 billion revenue run rate in the first quarter and is now on track to achieve a $7 billion run rate in fiscal 2015. Encouraged by the unstoppable growth, the company has already set its eyes on the $10 billion milestone in the near to medium term. However, the company refused to comment on the rumors of a potential takeover. ^[1]

Non-GAAP operating margin also improved for the fourth consecutive quarter, expanding by almost 200 basis points to reach 11.6%. The impact of the higher non-GAAP margin trickled down to the non-GAAP EPS also, which reached $0.16 in the first quarter and beat the company’s guidance by two cents. Notably, Salesforce also achieved record cash flow  of $731 million, which is a growth of 54% compared to the same period previous year.

Bolstered by the strong first quarter performance, Salesforce has raised its guidance for fiscal 2016. It now expects fiscal 2016 revenue to range from $6.52 billion to $6.55 billion, which is a year on year growth of 21% – 22%. Salesforce originally guided revenue to reach $6.475 billion to $6.520 billion in fiscal 2016. The non-GAAP EPS guidance has also been revised to $0.69 to $0.71, compared to the original guidance of $0.67 to $0.69. Non-GAAP operating margin guidance remains unchanged at 11.9% to 12.2%. ^[1]

We are currently revising our price estimate of $60 for Salesforce.com to reflect the fiscal 2016 first quarter results.

See our complete analysis for Salesforce.com here

Strong Revenue Growth Across The Board

Revenues from each of Salesforce’s four product categories achieved strong growth in the first quarter. The Sales Cloud, which accounts for almost half of Salesforce’s Subscription and Support revenue, grew by only 9% year on year, which was the lowest growth among the four segments. However, on a constant currency basis, the Sales Cloud grew in double digits as well. The Sales Cloud is on an annual revenue run rate of $2.5 billion, and its burgeoning size may be working against it in terms of revenue growth. Nevertheless, Salesforce’s Sales Cloud continues to be the market leader in Sales Force Automation. ^[1]

Salesforce’s other three smaller segments, including the Analytics Cloud, expanded at near or above a 30% growth rate in the first quarter. The company continues to expound on its Analytics Cloud as the next big thing and has secured several marquee names as customers, including Barclays (NYSE: BCS) and Tyco. A major upgrade to the Analytics Cloud is set to be announced in Salesforce’s Dreamforce conference in September this year. ^[1]

In geographical terms, Salesforce achieved double digit growth in all its three operational regions, namely, the Americas, Europe, and Asia-Pacific. Salesforce’s revenues from the Americas expanded at nearly double the growth rate in Europe and Asia-Pacific. This led to Americas’ revenue share increasing to 74% from 71% a year ago, while revenue share of Europe and Asia-Pacific declined.

Margin Expansion Continues

Salesforce’s non-GAAP operating margin expanded by 197 basis points year on year to reach 11.6% in the first quarter. This marks the fourth consecutive quarter of margin expansion, which is remarkable for a company that has long been derided for its unprofitability. Moreover, the company was able to improve the non-GAAP operating margin despite a decline of 2 percentage points in non-GAAP gross profit margin. The expansion in non-GAAP operating margin was primarily due to lower marketing and administrative expenses.

Marketing expenses as a percentage of revenue, which had historically remained above the 50% mark, declined to 49% in the first quarter. Administrative expenses as a percentage of sales also fell by one percentage point to 12%. Further, reduction in stock-based compensation expenses helped the company achieve positive GAAP operating profit in the first quarter, even though the GAAP operating margin was a nominal 2%. If Salesforce manages to sustain the cost savings throughout the year, it may well be able to shed the “unprofitable company” tag which has accompanied it since the last four years.

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More Trefis Research

1. Salesforce 2016 First Quarter Earnings Call Transcript, Seeking Alpha, May 20, 2015 [↩] [↩] [↩] [↩]