Salesforce Earnings Preview: What We Will Be Watching

by Trefis Team
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Salesforce (NYSE:CRM) is scheduled to report its fourth quarter earnings on Tuesday, February 28. The company’s performance was strong for the first three quarters of 2016, and we expect that to continue. Its top line grew by more than 25% in the first three quarters of the fiscal year, and consensus estimates suggest higher growth for the fourth quarter. The fourth quarter has always been the strongest for the company in terms of revenue, and its foray into newer domains such as e-commerce and artificial intelligence along with acquisitions during the first half of the year should allow for strong growth.

Cloud Offerings Likely To Boost Growth

The company generates revenues primarily from subscription fees and support for their services. With customer preferences shifting toward cloud-based products, the company’s enterprise cloud computing solutions – which include apps and platform services, as well as professional services to facilitate the adoption of its solutions – play a primary role in boosting its growth.

The company 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 continued to be the largest contributor to the Subscription and Support segment.

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, per Gartner – witnessed the most growth for the company, with revenues from the region increasing 33% y-o-y to $578 million. The increased focus on the Asian market bodes well for the company in the long run.

Salesforce’s efforts in controlling expenses should boost earnings going forward. Sales and Marketing expenditures, which earlier contributed half of the company’s expenses, grew the least in comparison to other expenses, but are around 50% of gross profits.

However, the continued expansion of services and acquisitions have taken a toll on the company’s operating income and margins, both of which declined marginally this year and will likely remain low in the near term. Given that Salesforce is likely to remain acquisitive going forward, this trend could continue.


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