Salesforce Eyeing Expansion Into Industry Verticals as Q2 Revenues Beat Expectations

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Cloud computing behemoth Salesforce.com (NYSE:CRM) continued to defy its burgeoning scale with its  fiscal 2016 second quarter results, which it reported on August 20th. [1] The company is showing no signs of slowing down, as underscored by the 33% year on year growth (constant currency) in its deferred revenue in the second quarter. In order to maintain the high top-line growth, Salesforce has locked onto the cloud analytics market and industry-specific customer relationship management (CRM) solutions as the next growth frontiers. [2]

In the second quarter, Salesforce beat its own revenue guidance, as well as consensus revenue estimates, by reaching $1.63 billion in revenues, achieving growth of 24% year on year. The commendable revenue growth was accompanied by a 170 basis points expansion in the non-GAAP operating margin through savings in R&D and Selling, General and Administrative expenses. Bolstered by the strong performance in the second quarter, Salesforce raised its full year revenue guidance to $6.600 to $6.625 billion, which is a growth of 23% compared to fiscal 2015.

Our price estimate of $65 for Salesforce.com is about 5% lower than its current market price.

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See our complete analysis for Salesforce.com here

Strong Growth Rate Testimony to Salesforce’s Success Outside CRM

In the second quarter, Salesforce’s Service Cloud expanded by a tremendous 40% year on year, while the Marketing Cloud and Salesforce1 platform grew by 29% and 36% year on year respectively. [1] This suggests that Salesforce’s strength may no longer be restricted to CRM solutions alone. Indeed, it seems to have successfully expanded into a complete package of Sales, Service, Marketing, Analytics and Community cloud offerings, each one of which is gaining momentum.

Of course, Salesforce is the undisputed leader in the global CRM software market with an 18% share in 2014. However, if the current trend continues, the company may be able to make significant inroads into other areas such as Marketing and Analytics as well. As we have previously said, Salesforce considers Cloud Analytics to be one of the key frontiers of its future growth.

The company further stated in the second quarter conference call that it is set to expand into the so-called industry verticals — that is, tailor-made products for specific industries. Its first such product is scheduled to be released later this month. Salesforce is specifically planning to target the public sector, financial services, healthcare and life sciences verticals for the next phase of expansion. [2]

The company currently does not have a presence in the industry verticals cloud computing space, but its well-established roots in the global CRM market provide it a reliable foothold for further expansion. If Salesforce successfully leverages its strength in the CRM market to expand into industry verticals, it may be able to extend its annual revenue growth of over 20% consistently over the medium term.

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Notes:
  1. Salesforce.com Fiscal 2016 Second Quarter SEC Filing [] []
  2. Salesforce.com Fiscal 2016 Second Quarter Earnings Call Transcript, Seeking Alpha, August 20, 2015 [] []