The Year In Review: Salesforce

Salesforce (NYSE:CRM) continued its stellar performance in 2016, with its top line growing at more than 25% in the first three quarters of the fiscal year and beating market expectations. Additionally, the company’s added focus on improving its bottom line started to pay dividends, with its earnings per share for the first nine months growing appreciably from -$0.03 in 2015 to $0.34 in 2016. Moreover, during the year, Salesforce made a number of acquisitions and made a push in the e-commerce and artificial intelligence domains, opening up avenues for further growth. Apart from this, the company also affirmed its goal of $10 billion in revenues, which it expects to achieve by the end of next year.

Despite a good performance in the first three quarters of the year, Salesforce’s stock is currently trading 12% lower than its price in January, owing to a tougher market environment and relatively soft performance in the second quarter. However, the company raised its full year guidance to $8.365 billion to $8.375 billion and adjusted EPS guidance to $0.97-$0.98. If the company achieves the top end of its revenue guidance, it would represent y-o-y growth of 26%, so the underlying business remains quite strong. Salesforce’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 future growth, both organically and inorganically.

Revenues, Billings Continue To Grow

In the first three quarters, Salesforce witnessed strong revenue growth in its product categories, primarily driven by growth in App Cloud, which grew over 41% year on year in the first nine months of the current fiscal year. Service Cloud and Marketing Cloud also showed healthy growth of around 30% in the same period. Sales Cloud, the company’s flagship product, grew 13% 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.

Geographically, Salesforce continued to perform well in the Americas region – which contributed 74% of total revenues and grew  26% over the same period last year to $4.5 billion. Asia-Pacific – a market which is expected to grow at 12% and reach $11.5 billion by 2018 ^[1] – witnessed the largest growth for the company, with revenues from the region increasing 33% on y-o-y basis to $578 million. The increased focus on the Asian market bodes well for the company in the long run.

Salesforce also focused on its bottom line and tried to control expenses. Sales and Marketing expenditures, which earlier contributed half of the company’s expenses, grew the least in comparison to other expenses. While reining in expenses is a positive sign for the company, continued expansion of services and recent acquisitions have taken a toll on its operating income and margins, both of which declined marginally this year. The company was also able to improve its free cash flows, which crossed $1 billion for the first time this year and were reported at $1.1 billion at the end of the third quarter, a jump of 15% over the same period last year.

Acquisition Spree

Salesforce has been on an acquisition spree in the current year. In the earnings call after the first quarter results, CEO Marc Benioff identified Artificial Intelligence (AI) as a promising growth driver, ^[2] and the company’s acquisitions of Prediction IO (machine learning), Metamind (deep learning), Implisit (data automation) and BeyondCore (machine learning) reiterated its stance on strengthening its AI capabilities. The company showcased this in its annual Dreamforce event when it launched Salesforce Einstein. The company also tapped into the e-commerce sector through its acquisition of Demandware (now Salesforce Commerce Cloud) and improved its data processing and collaboration capabilities through its acquisition of Quip.

This year, Salesforce also bid to acquire LinkedIn and was rumored to have interest in buying Twitter. Though the company did not succeed in acquiring either, the interest signals the company’s plans to diversify its offerings in order to maintain its lead in the tech space. Moreover, in October, a leaked company document identified a host of other companies in which Salesforce had interest in buying. These developments signal the company’s intent on expanding into untapped markets and growing inorganically as well, something that bodes well for the future.

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1. Public Cloud Services In Mature Asia Pacific and Japan Forecast To Reach $7.4 Billion in 2015, Gartner, January 15, 2015 [↩]
2. Salesforce Earnings’ Call, Seeking Alpha, May 18 2016 [↩]