An Overview Of Salesforce’s Strong 2017
Building on its strong growth momentum over the last few years, Salesforce (NYSE:CRM) reported record revenue ($7.6 billion,+25% year-over-year) for the first three quarters of the year and expects to generate nearly $2.8 billion in the last quarter. Innovation and solid execution has enabled Salesforce to grow faster than the market, expanding its presence and thereby 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. 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.
The company’s revenue expanded through the third 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 period, because of a surge in its revenues and controlled expenses.
Our price estimate for Salesforce stock stands at $102, which is slightly below the market price.
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Increased Adoption Across All Offerings And Geographies
Over the past few years, cloud adoption has gained pace, with companies looking for scalable, cost-effective and innovative solutions. Some large enterprises were initially reluctant to use cloud services due to data security concerns. However, cost considerations and improved security have led large enterprises to shed their existing on-premise deployments for leaner Software as a Service (SaaS) deployments that come without the hefty hardware costs. Moreover, with a SaaS deployment, an enterprise pays only for the services it uses. Going forward, we expect the number of SaaS deployments across business verticals to expand. Per Gartner, the total SaaS market is expected to double from 2016 and reach over $75 billion by 2020. This will directly benefit Salesforce, as it should be able to leverage its strong market position to capture a portion of that growth.
The company saw strong revenue growth across product categories. Sales Cloud – the company’s flagship product – grew 16% over the prior year and remained the largest contributor to the Subscription and Support segment. Service Cloud grew by 22% and Marketing Cloud saw a revenue increase of 50%, 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 23% year-on-year to $5.5 billion through the third 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 25% y-o-y to $724 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 $0.08 through October. Operating expenses grew at over 23% as the company continued to spend extensively on sales and R&D in order to effectively compete with rivals such as SAP and Microsoft.
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 makes sense in the near term.
A declining bottom line over the years has not particularly bothered investors or the company’s management. Salesforce has remained acquisitive, and continues to acquire smaller technology startups in the Internet of Things (IOT), Artificial Intelligence, and e-commerce domains to enhance its product offerings. The company also reportedly had interest in acquiring LinkedIn and Twitter over the past few years. Though Salesforce did not succeed in acquiring either, the interest signals the company’s plans to diversify its offerings in order to drive growth over the long run. The company’s management has clearly indicated that it will continue to follow this strategy of inorganic growth to ensure long-term success. While this could put the bottom line under further pressure in the near term, the overall growth from acquisitions should more than offset the expenses.