Salesforce.com Inc. (CRM, Financial) reported its third-quarter earnings on Nov. 21. As has been the case for several years, the company reported yet another quarter of above-20% revenue growth year over year.
Salesforce reported earnings per share of 39 cents, beating Wall Street’s expectations by two cents. Revenue of $2.68 billion also beat expectations. Salesforce has now beaten estimates for the past eight quarters and continues to be a mystery for Wall Street analysts in terms of revenue and earnings numbers.
Competition still has no visible impact
Taking a closer look at Salesforce’s growth, it is obvious there is little pressure from competition, aggressive as it may be. This was determined by examining the company’s operating margin and expenditure on customer acquisitions, or marketing and sales in Salesforce’s case.
The third-quarter sales growth of 25% happened despite the other numbers being intact. In fact, they have actually improved.
In the latest quarter, operating expenses were 69% of net revenues. Last year, that figure was 73%. This is not just a one-quarter phenomenon. While general and administrative expenses and research and development remained relatively stable through the first nine months of the current fiscal, marketing and sales expenditures dropped considerably.
The phenomenon was simply more pronounced in the third quarter. Last year, the company reported $997 million in marketing and sales expenditures, making up 46.4% of net revenues; this year it reported $1.184 billion, but it was only 44.19% of net revenues.
Source: Salesforce Q3- Report
I believe what is happening here is marketing and sales expenditures are benefitting from economies of scale as well as company initiatives, such as new product launches. While customer acquisition costs are going up along with net revenues, they are actually coming down in terms of percentage contribution. Simultaneously, add-on products the company recently launched could be leading to higher revenue per customer.
Whatever the reason, it is clear there is now considerable momentum behind Salesforce’s growth, which gives the company the option of once again upping its marketing and sales spend to spur top-line growth to even greater heights.
The stock price dropped nearly 2% after the earnings report as Salesforce’s fourth-quarter profit forecast came in slightly below market expectations. The stock still trades at a hefty eight times sales, so investors should remain cautious about investing at the current price since most of the future growth seems to already be priced in.
Disclosure: I have no positions in the stock and have no intentions of initiating a position in the next 72 hours.
