Salesforce Delivers Strong Q3 Results, Stock Down Due To Weak Guidance

by Trefis Team
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Trefis
CRM
Salesforce.com
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Building on its strong growth momentum over the last few years, Salesforce (NYSE:CRM) reported record revenue and earnings for Q3. Innovation and solid execution has enabled Salesforce to grow faster than the market by expanding its presence and gaining share. As demand for cloud solutions and integrated end-to-end CRM solutions with AI support grows globally and the company continues to expand its customer base, Salesforce’s growth momentum is likely to continue in the near future. For Q4, the company expects revenue in the $2.8 billion range (+23% y-o-y).  However, as the company is focused on customer-centric growth and will likely remain acquisitive in the near term, it may continue to see some pressure on its bottom line. Non-GAAP diluted EPS for the current quarter is expected between $0.32 and $0.33.

During the quarter, the company’s revenue grew by 25% year-on-year (y-o-y) to $2.68 billion for the quarter, primarily driven by growth across cloud products such as Sales, Service, Marketing and Commerce, enhanced by Einstein – the company’s artificial intelligence add-on. Despite the surge in revenues, the company’s bottom line remained under pressure, primarily due to higher cost of revenues, a significant surge in operating expenses and cost realizations due to the acquisitions made in the previous year. Operating margins improved significantly during the quarter, because of a surge in its revenues and controlled expenses.

Increased Adoption Across All Offerings And Geographies

The company saw strong revenue growth across product categories. Sales Cloud – the company’s flagship product – grew 17% over the prior year and remained the largest contributor to the Subscription and Support segment. Service Cloud grew by 25% and Marketing Cloud saw a revenue increase of 40%, including Commerce Cloud. The company’s investments in other innovative products and services such as Einstein should help it maintain its lead in the enterprise cloud market.

Geographically, Salesforce continued to perform well in the Americas region, which contributed over 72% of total revenues and grew 21% year-on-year to $1.93 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 steady growth, with revenues from the region increasing 24% y-o-y to $259 million. The increased focus on the Asian market is likely to benefit the company in the long term.

Declining Bottom Line Is A Near-Term Concern

Profitability remains a key area of focus for Salesforce, as its GAAP EPS was just around $0.07 for the quarter, though non-GAAP EPS of $0.39 was up 62%, year-over-year. Operating expenses grew at over 19% 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, has witnessed increased adoption of late.

Sales and R&D expenses, which have continued to grow in absolute terms, have seen a drop as a percentage of revenues over the past few quarters, and we expect that trend to continue. Moreover, with a low attrition rate and an expanding customer base and product portfolio, we believe that the growth in sales and R&D expenditures is justified.

Our price estimate for Salesforce stock is at $102, which is slightly below the market price.

See our complete analysis for Salesforce

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