Salesforce (CRM, Financial), the $67 billion California-based enterprise software provider, reported a 25% revenue increase to $4.95 billion in the first half compared to the same period last year and a contrasting (-)96.8% drop in profits to $8.53 million (0.2% margin) compared to $268.38 million (6.8% margin) a year earlier.
Salesforce recorded 26% higher overall operating expenses to $3.59 billion resulting in significantly lower profits in the period. Dissecting its operating expenses, Salesforce recorded 38% higher expenses in its research and development, 24.6% higher expenses in marketing and sales and 17.4% higher expenses in general and administrative expenses.
In addition, Salesforce provided its full-year fiscal 2018 guidance figures. The company projects its revenue to be in the range of $10.35 billion and $10.40 billion –Â a 23% to 24% increase year over year. In addition, GAAP diluted earnings per share is projected to be 7 cents to 9 cents (vs. 26 cents in fiscal 2017, a (-)69% decline).
"We had a phenomenal quarter of growth, reaching a huge milestone for the company, becoming the first enterprise cloud software company to break the $10 billion revenue run rate.
"We did this faster than any other enterprise software company in history. Our continued momentum as the leader in CRM, the fastest-growing segment of our industry, combined with more than $15 billion in billed and unbilled deferred revenue, puts us well on the path to $20 billion and beyond."Â –Â Marc Benioff, chairman and CEO, Salesforce
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Valuations
Salesforce generated three recent quarters of losses resulting in no trailing price-earnings (P/E) ratio. Meanwhile, the company had a price-book (P/B) ratio of 7.9 times vs. the industry median of 3.1 times and a price-sales (P/S) ratio of 7.1 times vs. 2.5 times (GuruFocus).
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 6.45 times and 71.8 times.
Total returns
Salesforce outperformed the broader Standard & Poor's 500 index so far this year having generated 37.5% total gains compared to the index's 10.39%.
Salesforce
According to filings, Salesforce was incorporated in February 1999.
Salesforce is a leading provider of enterprise software, delivered through the cloud, with a focus on customer relationship management, or CRM.
Salesforce introduced its first CRM solution in 2000, and the company has since expanded its service offerings into new areas and industries with new editions, features and platform capabilities.
Further, Salesforce's core mission is to empower its customers to connect with their customers in entirely new ways through cloud, mobile, social, Internet of Things (IoT) and artificial intelligence technologies.
Salesforce's service offerings can be deployed rapidly, configured easily and integrated with other platforms and enterprise applications, or apps. The company delivers its service offerings via major internet browsers and on leading mobile devices.
The company sells to businesses of all sizes and in almost every industry worldwide on a subscription basis, primarily through its direct sales efforts and also indirectly through partners.
Salesforce's Customer Success Platform is a comprehensive portfolio of service offerings providing sales force automation, customer service and support, marketing automation, digital commerce, community management, analytics, application development, IoT integration, collaborative productivity tools and the company's professional cloud services.
In 2016, Salesforce generated 74% of its revenue in the Americas, 16% in Europe and 9% in Asia Pacific.
Salesforce has only one reporting segment. Nonetheless, the company's revenue can still be broken into parts: Sales Cloud, Service Cloud, Marketing Cloud, Commerce Cloud, Community Cloud, Analystics Cloud, Salesforce Quip and Salesforce Platform.
Sales Cloud
The Sales Cloud, which was Salesforce's first offering and continues to be the largest contributor to total subscription and support revenues, enables companies to store data, monitor leads and progress, forecast opportunities, gain insights through relationship intelligence and collaborate around any sale on desktop and mobile devices.
In the first half, Sales Cloud revenue increased by 16% year over year to $1.72 billion (38% of sales).
Service Cloud
The Service Cloud, which is Salesforce's second-largest contributor to total subscription and support revenues, enables companies to deliver smarter, faster and more personalized customer service and support.
In the first half, service cloud revenue increased by 21% to $1.35 billion (30% of sales).
Salesforce Platform
The Salesforce Platform (formerly App Cloud) is for building enterprise apps – powering Salesforce's CRM apps with thousands of partner-built apps and millions of custom apps built by customers.
In the first half, Salesforce platform revenue rose by 32% to $897.6 million (20% of sales).
Marketing Cloud
The Marketing Cloud enables companies to plan, personalize and optimize one-to-one customer interactions across email, mobile, social, web and connected products.
In the first half, revenue in Marketing Cloud increased 56% to $606 million (13% of sales).
***Subscription and support revenues from the Analytics Cloud, Community Cloud, IoT Cloud and Salesforce Quip were not significant for the three and six months ended July 31.
Sales and profits
In the past three years, Salesforce had an average revenue growth rate of 27.3%.
Cash, debt and book value
As of July, Salesforce had $1.95 billion in cash and cash equivalents and $1.83 billion in debt/loans with a debt-equity ratio of 0.22 times compared to 0.29 times a year earlier. Overall debt increased $30 million while equity increased by $2.32 billion year over year.
Of Salesforce's $17.42 billion assets 47.4%Â were identified as goodwill and intangibles while book value increased 38.1% year over year to $8.47 billion.
Cash flow
In the first half, Salesforce's cash flow from operations rose 19.9% year over year to $1.56 billion brought by higher cash flow from its depreciation and amortization, amortization of deferred commissions and expenses related to employee stock plans.
Capital expenditures were $284.99 million leaving Salesforce with $1.28 billion in free cash flow compared to $1.12 billion a year earlier. The company also reduced its debt/loans by $275.2 million.
The cash flow summary
In the past three years, Salesforce allocated $1.59 billion in capital expenditures, raised $752 million in debt/loans (net repayments) and generated $3.36 billion in free cash flow.
Conclusion
Salesforce delivered solid and impressive revenue growth as of its recent first half of operations. Nonetheless, profit or making much of it did not reflect in the period. Moreover, the company expects good profit reduction, about 69% as per diluted earnings per share this fiscal year.
Despite the poor profitability, Salesforce has a cash rich balance sheet that could pay of all of its outstanding debt in the recent period. The company also exhibited stability and strong growth in its free cash flow in recent years –Â absent any shareholder payouts (dividends and share repurchases).
Analysts have an average buy recommendation on Salesforce stock with a target price of $106.95 per share vs. $93.85 at the time of writing. Using company revenue estimates multiplied by three-year P/S average divided by outstanding shares at a three-year average growth rate followed by a 12% margin indicated a figure of $87.87 per share.
Salesforce's projection of lower profits this year brought by higher expenses indicated that the company is engaging in either increasingly competitive business operations or just preparing for something bigger (product/offering). At all-time high share prices, it may be actually a good time for Salesforce shareholders to realize some profits but keep some of it as a core holding.
Disclosure: I do not have shares in any of the companies mentioned.
