Salesforce’s Revenue and Margin Expansion Likely to Continue in Q2
Salesforce (NYSE:CRM) is likely to report strong revenue growth and margin expansion in its fiscal 2016 second quarter results, which it is scheduled to report on August 20th. [1] The company has been able to achieve year-on-year revenue growth of over 30% each quarter until the first quarter of this year, when it fell to 23%. (read: Salesforce Posts Robust Q1 Results, Raises Fiscal 2016 Guidance) The trend likely continued in the second quarter, with revenue growth of just over 20%. Not satisfied with robust revenue expansion alone, Salesforce has also embarked upon a cost cutting spree to boost its profitability. Accordingly, we expect that the company’s marketing expenses declined as a percentage of sales in the second quarter, as it did in Q1.
Consensus revenue estimates are in line with the company’s guidance of year-on-year growth of just over 20% in the second quarter. Further, Salesforce expects to improve its non-GAAP gross margin by 125 to 150 basis points in fiscal 2016, underscoring the expectations for an uptick in second quarter non-GAAP gross margins. [2] Moreover, its marketing expenditures as a percentage of sales has steadily fallen from 56% in the fourth quarter of fiscal 2014 to 49% in the previous quarter. This trend is likely to continue in the second quarter as well.
Our price estimate of $65 for Salesforce.com is around 10% below its current market price.
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See our complete analysis for Salesforce.com here
How Big is Salesforce’s Next Big Thing?
Salesforce’s Wave Analytics Cloud has taken center stage since it was released last year. The importance of the analytics cloud can be surmised from the fact that Salesforce CEO Marc Benioff stated that the company may be “crossing over from the CRM industry into the analytics industry”. [3] Salesforce has reported strong adoption of its analytics cloud and has already secured several major enterprises as customers.
However, the company has so far not provided numbers around the analytics cloud. Salesforce reports revenues separately for its Sales, Service, and Marketing clouds and the Salesforce1 platform only. As revenues from the analytics and community clouds are not reported separately, it is unclear how far Salesforce has come in its goal of “crossing over to the analytics industry”.
Salesforce’s strength traditionally lies in the CRM space, in which it is the market leader. The Sales cloud accounts for over 40% of the company’s revenues, but its massive scale is preventing it from achieving double digit revenue growth. For the time being, Salesforce’s impressive revenue growth is being driven by the other three divisions. Salesforce will likely need a new major growth driver in order to sustain that growth rate, and the company believes that driver will be cloud analytics.
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More Trefis Research
- Salesforce Investor Relations [↩]
- Salesforce 2016 First Quarter Earnings Call Transcript, Seeking Alpha, May 20, 2015 [↩]
- Salesforce 2015 Fourth Quarter Earnings Call Transcript, Seeking Alpha, February 25, 2015 [↩]