Key Takeaways From Salesforce’s Q1 Earnings

by Trefis Team
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Following up a strong 2016 performance, Salesforce (NYSE:CRM) sustained its growth momentum with impressive Q1 results and managed to exceed market expectations for revenue and earnings per share (EPS) by nearly 2% and 8%, respectively. Additionally, the company released strong guidance for the second quarter and the full fiscal year. The company’s revenue grew by 25% year-on-year (y-o-y) to $2.39 billion for the quarter, primarily driven by a surge in subscription and support across all its cloud products such as Sales, Service, Marketing and Commerce. Despite the surge in revenues, the company’s bottom line remained under pressure, primarily due to higher cost of revenues and a significant surge in operating expenses. Moreover, during the previous 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. As the company realizes the costs related to these acquisitions over the year ahead, we expect margins to suffer. However, with increased adoption across a varied portfolio of products and services, enhanced with Einstein AI capabilities, we expect the decline in margins to be partially offset by the surge in revenues. The company’s strong growth outlook has also kept investors happy, with the stock price rallying by over 28% since the beginning of the year.

What Went Well?

The company saw strong revenue growth across product categories. Sales Cloud – the company’s flagship product – grew 15% over the prior year and remained the largest contributor to the Subscription and Support segment. Service Cloud grew by 21% and Marketing Cloud saw a revenue increase of 32%, excluding the acquisition of Demandware. The company’s quick move to render cloud services across all its products has allowed it to capture the leading market share in the CRM space. The company’s investments in other innovative products and services such as Einstein will likely drive growth in the future.

Geographically, Salesforce continued to perform well in the Americas region, which contributed 74% of total revenues and grew 24% year-on-year to $1.75 billion for the quarter. Asia-Pacific – where the public cloud market 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 27% y-o-y to $223 million. The increased focus on the Asian market is likely to benefit the company in the long term.

Key Concern

Profitability remains a key area of focus for Salesforce, as its GAAP EPS remained negative at $(0.01) in the quarter, though non-GAAP EPS of $0.28 was up 17% from the prior year. Operating expenses grew at over 28% as the company continued to spend extensively on sales and R&D in order to effectively compete with rivals such as SAP and Microsoft. Microsoft’s Dynamic 265, which is a direct competitor to the company, has witnessed increased adoption of late.

Looking Ahead

Going forward, Salesforce expects its growth momentum to continue into the coming year, as the company expects to generate revenues of over $2.51 billion in Q2 and $10.25-$10.30 billion for the full year. Margins are expected to improve under the likelihood of increased adoption across its diverse product line. We expect an increased adoption rate internationally, as the demand for cloud solutions and integrated end-to-end CRM solutions with AI support grows globally.

See our complete analysis for Salesforce

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