Can Salesforce.com, Inc. (NYSE:CRM) Continue To Impress?
- Salesforce predicts fiscal 2016 revenue of $6.7 billion.
- Sales Cloud contributed 49% of revenue in fiscal 2015.
- CRM market predicted to be a $49.1 billion economy by 2019.
Salesforce.com, Inc. (NYSE:CRM) reported an impressive F3Q2016 in which revenue was in-line with the consensus target and EPS bested the consensus estimate by a significant margin. The management predicts sales growth to continue in the current quarter with fiscal 2016 expected to end on a positive note with about $6.7 billion in revenue, ahead of $5.4 billion in the previous year.
The last several quarters have seen Salesforce’s sales on a growth trajectory. But can Salesforce sustain its growth, and profitability, over the long-term? If you pose the question to the management of Salesforce, the answer will certainly be “Yes.” But can you independently verify that Salesforce can restock its growth engine for sustained top-line and bottom-line improvements over the coming years?
Salesforce generates its revenues from four major product categories, namely Sales Cloud, Service Cloud, Marketing Cloud and Platform/Others. Sales Cloud contributed the most revenue by percentage in fiscal 2015 – 49%. Besides the four major product areas, the company is also expanding into Analytics.
Salesforce.com, Inc. (NYSE:CRM) targets the CRM market. In recent times, the company has sought to have a more pointed business approach where it targets specific industries. In the new business focus, Salesforce is targeting Healthcare and Financial services sectors.
Besides targeting specific industries, Salesforce is also looking abroad to unlock new growth. In the 3Q, the company’s President/Vice-Chairman, Keith Block, said international expansion was among the growth drivers in the quarter.
What you can deduce from Salesforce’s business strategy is that the company is working hard to be an ecosystem provider rather than just a business application vendor. There is greater hope and more opportunities in the ecosystem approach.
Can Salesforce.com, Inc. (NYSE:CRM) sustain its strong growth? Yes. How? The company has multiple growth opportunities. Global expansion and rollout of industry-specific products are only some of the strategies the company can leverage to keep its topline expanding. The other opportunity is ascending and cross-selling the existing subscriber base. Additionally, the company’s penetration in the larger enterprises market remains low, and it can target the large accounts for more growth.
Salesforce has not done much to deepen ties with system integrators independent software vendors. Moving closer to these partners should unlock new growth opportunities, especially in reaching large enterprise accounts and upselling existing install base.
Not only does Salesforce.com, Inc. (NYSE:CRM) have multiple ways to keep revenues streaming over the next several years, but its addressable market is also expanding. The company already controls about 40% of the cloud-based CRM market.
Gartner predicts that the CRM market alone will be worth $41.9 billion by 2019, up from $23.2 billion in 2014. Combining CRM and Analytics opportunities, Gartner estimates that Salesforce will have a total addressable market of $75 billion, which can expand as the company brings new products to market.
At this juncture, what Salesforce needs to do is project itself as the standard CRM and Analytics provider. It can easily achieve that by improving ties with independent vendors and integrators. Additionally, internal innovation and bolt-on acquisitions could accelerate the realization of that dream. It is worth noting that Salesforce has, in recent years, purchased key assets to bolster its positions in its various product categories.
Market share taker
Salesforce is currently an underdog in the analytics market. Oracle Corporation (NYSE:ORCL) and SAP SE (ADR) (NYSE:SAP) are leading the charge in the business intelligence market. However, Salesforce is actively fighting for its space and continued product innovation should see it start to actively take share from the incumbents.
A large addressable market means nothing without the force to disrupt the market and grab opportunities from the competition. Fortunately, Salesforce.com, Inc. (NYSE:CRM) has revamped its sales organization and it looks fit to go to war and win.
With its vibrant sales organization, Salesforce should be able to rapidly go for the larger enterprise deals, ascend existing install base and increase customer lock-in.
Salesforce.com, Inc. (NYSE:CRM)’s profitability ranks high among the concerns of investors in the company. It worries some investors that Salesforce might be pursuing top-line growth at the expense of margins. The management is aware of the concern and has promised to execute towards margin expansion. The latest quarter in which EPS came in at $0.21 against the consensus target of $0.19 is a testimony to the shift in management sentiment regarding profitability.
Moreover, the management has imposed on itself a target to improve margins by more than 150bps in the current fiscal year and by 100bps-300bps in the coming years. Increased management focus on margins improvement should eliminate profitability concerns, and with the continued strong topline growth, long-term profitability is sustainable.
Salesforce exceeded consensus targets for its F3Q2016 by generating revenue of $1.7 billion and earning $0.21 per share in the quarter. Revenue rose 24% year-over-year. Salesforce’s revenue in the latest quarter was in-line with the consensus estimate while EPS beat the consensus target of $0.19.
The management is predicting revenue of $1.8 billion for the current quarter. Full-year revenue (fiscal 2016) is forecast at $6.65 billion and is expected to jump to $8.1 billion in fiscal 2017.
Shares rose by $4.23, or more than 5 percent, in after-hours trading, to $81.50 after the results were announced.
The company said it expects revenue of about $1.8 billion for the current quarter ending in January, in line with expectations. It expects full-year sales to come in at $6.65 billion and to rise as high as $8.1 billion in the fiscal year ending in January 2017. Both forecasts are in line with expectations. Salesforce has its target on becoming a $10 billion revenue company.
Salesforce finished 3Q with cash and equivalents of $1.1 billion, offset by total debt of $2 billion. Despite the large debt relative to cash, Salesforce’s balance sheet has been strengthening in recent times. The chart below captures balance sheet improvement over the past five quarters.
As much are Salesforce already has growth prerequisites, there are areas that the company will contend with pressures.
Growth of a large company
Growth at large companies tends to slow. Although Salesforce.com, Inc. (NYSE:CRM) is currently growing at the rate of nearly 30%, the growth will certainly cool over time as execution in a large company becomes difficult. While investors can expect that to happen, if growth cools faster than they expect, the stock can come under intense pressure.
Salesforce.com, Inc. (NYSE:CRM) grows organically and through acquisitions. While acquisitions have helped Salesforce to grow faster than it naturally could, acquisitions present integration risks that on a bad day can distract execution and slow down progress.
Sustaining growth and profitability is within reach for Salesforce.com, Inc. (NYSE:CRM). But the company’s future depends on sound management execution.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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