Salesforce Mid Year Review: Strong Pipeline And Acquisitions To Drive Growth In The Future

+7.41%
Upside
301
Market
323
Trefis
CRM: Salesforce logo
CRM
Salesforce

Salesforce (NYSE:CRM) continued its stellar growth in the first half of fiscal year 2017, with its revenues for the first six months increasing 25% year over year, and beating analysts’ expectations in both quarters. The company’s focus on improving its bottom line has also yielded positive results, with operating income increasing more than twice as fast as revenues. The company’s net income has also risen significantly, primarily due to the tax benefits related to its acquisition of Demandware.

Despite good performance in the first two quarters, its stock dipped 6% after Q2 earnings, owing to the weaker-than-expected guidance for Q3. Salesforce guided its current quarter revenue and EPS at $2.12 billion and $0.20-$0.21, respectively, which was slightly below Reuters’ consensus estimates of $2.13 billion and $0.24. However, the company’s revenue guidance would represent y-o-y growth of 24%, so the underlying business remains quite strong. The company’s top line and bottom line growth remains solid, and with acquisitions to help its businesses and diversify its offerings, it appears well positioned for the future.

Screen Shot 2016-09-07 at 15.30.55

Relevant Articles
  1. Up 69% In The Last Twelve Months, What To Expect From Salesforce Stock?
  2. Up 74% Since The Beginning of 2023, Will Salesforce Stock Continue Its Strong Rally?
  3. Salesforce Stock Is Undervalued
  4. Salesforce Stock To Edge Past The Consensus In Q1
  5. Salesforce Stock Is Trading Below Its Fair Value
  6. What To Expect From Salesforce Stock In Q4?

Screen Shot 2016-09-07 at 15.31.04 Screen Shot 2016-09-07 at 15.31.14 Screen Shot 2016-09-07 at 15.31.22

Revenues Continue to Grow

In the past two quarters, Salesforce has witnessed strong revenue growth in its product categories, primarily driven by growth in App Cloud, which grew over 44% year on year in the first half of the current fiscal year. Service Cloud and Marketing Cloud have also shown healthy growth of around 30% in the same period. Sales Cloud, the company’s flagship product, grew 14% over the prior year and continues to be the largest contributor to the Subscription and Support segment. The company’s billings, measured by adding subscription revenues and changes in deferred revenue, continue to grow on a year-on-year basis, indicating that the order pipeline remains strong.

Salesforce has also focused on its bottom line and tried to control expenses. Sales and Marketing expenditures, which earlier contributed to half of the company’s expenses, have grown marginally in comparison to other expenses. This has resulted in the company improving its operating margin by more than 50 basis points in the first half of the year. The company was also able to improve its free cash flows, which crossed $1 billion for the first time and was reported at $1.2 billion for the first six months of the fiscal year, a jump of 24% over the same period last year.

Acquisition Spree

Salesforce has been on an acquisition spree in the first half of the year. In the earnings call after the first quarter results, CEO Marc Benioff identified Artificial Intelligence (AI) as a promising growth driver.((Salesforce Earnings’ Call, Seeking Alpha, May 18 2016)) The company’s acquisitions of Prediction IO (machine learning), Metamind (deep learning), Implisit (data automation) and BeyondCore (machine learning)  have reiterated its stance on strengthening its AI capabilities, which the company plans to showcase in its annual Dreamforce event. The company signaled its intent to tap into the burgeoning e-commerce sector through its acquisition of Demandware and improved its data processing and collaboration capabilities through its acquisition of Quip. In the last quarter, the company also bid to acquire LinkedIn but eventually lost out to Microsoft. All these acquisitions signal the company’s plans to diversify its offerings in order to maintain its lead in the cloud space.

Outlook for the Year

For the full fiscal year, the company has raised the lower end of its revenue guidance from $8.26 billion to $8.275 billion but has slightly lowered its expectations for earnings per share from $0.21-$0.22 to $0.20-$0.21, owing to acquisition-related expenses.


See our complete analysis for Salesforce

Get Trefis Technology