The San Francisco based cloud customer relationship management company, Salesforce (CRM, Financial), reported its third quarter earnings on Nov. 19, declaring a mixed set of numbers that exceeded analysts’ and investors’ expectations in terms of both top and bottom lines. However, a few lingering issues also came up during the discussion which could be good to highlight for investors looking at the stock from the investment perspective. Let’s take a brief look into the major takeaways from the earnings conference, but before that a quick recap of the quarter numbers is provided.
The past quarter
Quarterly revenue stood at $1.383 billion higher than the earlier company guidance of between $1.365 billion and $1.37 billion, and beating the Street forecast which stood at $1.37 billion. Such a candid performance with regard to the top line did give a sense of relief to the investors.
Despite the beat in revenues, the shares of the company was down about 4% in after-hours trading soon after the numbers were made public. This was mainly due to the fall in GAAP earnings which resulted in the loss per share widening to $0.32 per share, from $0.19 per share a year ago due to increase in income tax provisions in fiscal year 2015. Also, the weak revenue guidance shared by company management for the coming fiscal year 2016 affected the stock movement negatively.
The growth rate has slipped in the quarter declining from 37% in Q3 of fiscal year 2014 to 30% in Q3 of this fiscal year. Analysts are of the opinion that such decline in growth metrics was chiefly driven by company-specific factors which acted as a drag on the quarter numbers. Cash at the end of the Q3 quarter of fiscal year 2015 reduced 11% to $123 million, when compared to the similar quarter of last year. Analysts opine that the depletion in cash is because the company still has money left off its books- in fact, the company reported deferred revenue of $2.22 billion and unbilled deferred revenue stood at $5.4 billion which still has not been realized.
Geographical revenue lower than expected, hurts overall quarterly sales
Year-on-year growth in revenue from the American region, which accounts to the largest portion of Salesforce’ overall worldwide sales dropped sharply from 41% in the third quarter of 2014 to 29% in the third quarter of fiscal year 2015. European revenues have also decelerated due to the challenging macroeconomic environment in the Eurozone region. In fact, these two major regions’ sales shortfall has led to a softer quarter report for Salesforce. The company has agreed that the number of subscription renewals was also quite low during the past quarter from the two geographies.
Non-GAAP operating margins to improve with time
Salesforce has been fueling its robust revenue growth by investing heavily in operations, which instead has hit the margins of the company down the years. The company has always prioritized generating revenue over profitability during the past quarter. Non-GAAP operating profit margins have, thus, dropped from 16.5% in 2010 fiscal year to 8.93% in 2014 fiscal year.
However, analysis has confirmed that Customer Relationship Management has been the fastest growing sub-segment and is pegged to grow to $37 billion by 2018. Given this rapid evolution expected in the CRM sector, since Salesforce works actively in this segment, its customer base is predicted to grow manifold in the pursuant years.
This would in turn aid in driving the margins and profitability of the company, as already witnessed in fiscal year 2015 when for the first nine months the operating margin expanded nearly 1% to 10.6%, driven by lower general and administrative expenses. Analysts have opined that the non-GAAP margin will expand to 13% by fiscal year 2021, given the robust growth in the booming CRM market, particularly in the SaaS-based CRM market, that would subsequently help in revival of the operating margin for the company.
Management maintains the optimistic tone
Irrespective of reporting a bigger loss in earnings than predicted, CEO Marc Benioff pointed to the company’s massive Dreamforce conference held last month, and what he had said about the positive feedback for the company’s new SalesForce1 Lightning product that was unveiled during the event.
The CEO maintains that maximum of the investors are interested in consistent performance and that is what the company has tried to achieve consistently in almost every past quarter while looking towards brisk growth in the upcoming quarters. He stated during the call –“You talk to a lot of enterprise software companies, but you aren’t talking to any that are delivering a billion in quarterly revenue that grew 30% and are forecasting $6.5 billion in revenue for next year…”
Guidance for upcoming fiscal soft, yet solid
The CEO said that the company delivered sales improvement during the quarter and promised more to come in the fourth quarter of the fiscal year. Remarkably the company also issued the revenue guidance for coming fiscal year 2016 that stood in the range of $6.45 billion to $6.5 billion, which actually fell slightly short from the consensus Street estimates of about $6.52 billion.
However Benioff reiterated that if Salesforce is able to build its yearly revenue to the level as shared during the earnings call, it could become the first cloud computing company to do so and would then be placed among the top five cloud customer relationship management companies.
Final note
Salesforce.com might have not generated enough profits, but the company strategies look solid for growing both the top and bottom lines in the coming fiscal quarters. As Salesforce’ top brass remain optimistic on the near future, investors can stay tuned and keep watching the company’s next move in the customer relationship management domain.
