Salesforce’s 2016Q4 Results Could Be The Bellwether For The Cloud Computing Sector

Leading cloud computing service provider Salesforce.com (NYSE:CRM) is scheduled to report its fiscal 2016 fourth quarter results on February 24th. ^[1] (Fiscal years end with January) Following the lackluster results of tangentially competing companies Tableau (NYSE:DATA) and Qlik (NYSE:QLIK), expectations for Salesforce to continue its trailblazing growth are high. Tableau and Qlik’s poor results dragged down Salesforce’s shares by 20% earlier this month to $54.05. They have since recovered to $62.14, but still remain 25% below the 52-week high of $82.90. Salesforce’s performance in the fourth quarter could be crucial in determining the direction of the cloud computing sector – whether the sector is indeed headed for a slowdown or if it is a matter of the competitors’ individual performance.

Salesforce’s fiscal 2016 third quarter performance recap:

• Revenue grew by 24% year on year (27% in constant currency terms) to reach $1.7 billion
• Non-GAAP operating margin improved by 221 basis points year on year to 13.3%
• Non-GAAP diluted EPS was $0.21 compared to $0.14 in the prior year period
• Fiscal 2016 revenue guidance was raised by $25 million, to $6.64 billion to $6.65 billion

Our price estimate of $62.14 for Salesforce.com is slightly higher than its current market price.

See our complete analysis for Salesforce.com here

Diversification in Cloud Computing Likely to Prop Up Revenue Growth

Unlike its smaller counterparts like Tableau and Qlik, Salesforce is present in multiple sub-segments of the cloud computing market. Its Sales Cloud still accounts for over 40% of Salesforce’s revenue, but the proportion has declined steadily in the last few years.   The company now has a significant presence in the Service Cloud, Marketing Cloud, and Cloud Platforms sub-segments. It is also steadily ramping up its presence in the Analytics Cloud, a sector which has so far been dominated by Tableau and Qlik. This organic expansion is further supported by bolt-on acquisitions to further solidify the company’s product portfolio. (Read: Here’s The Reason Behind Salesforce.com’s Acquisition of SteelBrick)

Granted, Salesforce may no longer be able to sustain the over 30% growth that characterized its success in the last few years. Its deferred revenue growth rate also fell below the 30% mark in the third quarter, and is expected to slow to mid-twenties in the fourth. ^[2] Thus over the long term, Salesforce’s top-line is likely to grow at a slowing pace, from mid-twenties in the fourth quarter to less than 15% year on year by 2020. However, its current growth rate is still considerably higher than its peers such as Oracle (NYSE:ORCL) and SAP (NYSE:SAP).

However, Salesforce’s revenue is still heavily concentrated in North America. It derives almost three-quarters of its total revenue from North America, which makes the company heavily susceptible to a spending slowdown in the region. Fortunately, enterprise software spending trends in North America is expected to remain strong. On the other hand, enterprise software growth is expected to weaken in the emerging markets, which were so far widely touted as the key growth driver of the future. ^[3] Therefore, we believe that Salesforce is presently well positioned in the market.

Lastly, Salesforce has improved its non-GAAP operating margin in the previous six consecutive quarters. ^[2] This suggests that the company has turned its focus to the bottom-line and long-term profitability, which is an encouraging prospect for shareholders.

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Salesforce.com Investor Relations [↩]
2. Salesforce.com Fiscal 2016 Third Quarter Earnings Call Transcript, Seeking Alpha, August 20, 2015 [↩] [↩]
3. Worldwide IT Spending Will Reach $2.8 Trillion in 2019…, IDC, February 4, 2016 [↩]