Where Does Salesforce, Inc. (NYSE:CRM) Need Improvement?

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  1. Salesforce beats revenue estimates despite $40 million currency translation hit.
  2. Salesforce relies on North America for more than 73% of revenue.
  3. Salesforce needs to aggressively go for overseas opportunities.

There is no question Salesforce, Inc. (NYSE:CRM) is a growth company, one that has also continued to widen or at least maintain its market share lead over competition in the all-important cloud CRM segment.

The company not only posted incredible growth across all its product categories in its last quarter (3Q2016), but its overall results also far exceeded consensus estimates. Non-GAAP EPS of $0.21 on revenue of $1.712 billion compared with the consensus estimate of EPS of $0.19 on revenue of $1.701 billion. To put that in perspective, Salesforce crashed its own EPS guidance in the band of $0.18-$0.19 for the quarter.

Reported revenue for the quarter also surpassed the guided range of $1.69-$1.7 billion despite a $40 million currency headwind.

On the basis of its growth history, Salesforce, Inc. (NYSE:CRM) is impressive. But the question that begs for immediate answer is whether the company can sustain its robust growth over the long-term?

That question leads to where exactly Salesforce needs most improvement if at all improve is necessary at this juncture. While there are several growth catalysts in the company –including the ongoing product update, portfolio diversification and industry-specific approach –Salesforce’s growth could slow or stall if the company continues to depend on its domestic market for growth.

In the last quarter, Salesforce generated 73% of its revenue from North America with the U.S. contributing 95% of that revenue. North American revenue improved from 72% a year earlier. Europe accounted of 18% of revenue in the latest quarter, the same mark as last year while Asia Pacific region’s revenue contribution to the overall contracted to 9% from 10% in the year ago quarter.

The chart below shows Salesforce’s revenue streams by region:

Capture

Salesforce needs to grow international business

The fact that the U.S. continues to dominate Salesforce, Inc. (NYSE:CRM)’s revenue story is good news to an extent. First, Salesforce’s North American sales are growing at the expense of its overseas operations. For example, European revenue grew only 18% YoY in the latest quarter when a growth of 37% was registered in the region in the same quarter last year.

Second, as Salesforce continues to grow in North America/U.S., it is approaching its peak addressable market there, which would see growth opportunity limited in the near-to-medium future.

Third, intense competition in the U.S. puts Salesforce’s business at greater risk in North American than other markets that it serves.

By not moving fast to unlock opportunities overseas, Salesforce is allowing competition time to catch up or lock it out of lucrative international deals because of first-mover advantage. Oracle Corporation (NYSE:ORCL) is already a lethal competitor at home and internationally and its more regionally diversified business seems to put it at a more favorable position in the next phase of CRM growth than Salesforce. More than 40% of Oracle’s revenue comes from overseas.

Besides Oracle, Salesforce also risks being overtaken by cloud forces such as Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT)and Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) in the cloud race to overseas.

Competitive advantage

Salesforce, Inc. (NYSE:CRM) leads CRM segment primarily because it beats competition when it comes to user-friendly product structure and product functionality. The company also continues to innovate to update its existing line of products to make the more relevant for the modern market and also introduced fresh products to augment its portfolio.

Because of high customer satisfaction levels, Salesforce customers tend to be sticky, allowing the company to extract value from them for a long time. Looking at last quarter’s performance by segment, one gets the impression that Salesforce’s impressive satisfaction rates will continue to unlock more growth.The company reported sales improve across all its product segments.

Therefore, you get see that Salesforce has incredible competitive advantages that it can leverage to keep growing at the expense of rivals and also to rapidly grow abroad and secure its future.

Product update

Salesforce, Inc. (NYSE:CRM) is currently rolling out upgrades for its various clouds including Service Cloud, Sales Cloud and Analytics Cloud. The updates come in the form of simplified user interface and additional features.

Salesforce is also partnering with other cloud providers to improve the value of its products. Box Inc (NYSE:BOX) is one of its strategic partners. For example, the companies recently announced a feature that simplifies working in the different cloud environments.

New Product Announcement

Salesforce, Inc. (NYSE:CRM) has continued to invest in innovation to widen its product portfolio. The company’s new products include Predictive Journeys and Marketing Cloud, which are more about analytics and market intelligence. These new products and several others that Salesforce has in the pipeline are both expanding its addressable market and also promising to boost update of its existing solutions because they complete one another.

4Q2016 outlook

The management of Salesforce, Inc. (NYSE:CRM) is looking for 4Q2016 revenue in the range of $1.782-$1.792 billion, which would suggest 23-24% Y/Y revenue growth. Non-GAAP EPS for the quarter is modeled in the band of $0.18-$0.19.

For fiscal 2016, the management forecasts revenue of $6.64-$6.65 billion. The earlier revenue projection for the full year was $6.600-$6.625 billion.

Non-GAAP EPS for the full year is expected to be $0.74-$0.75, up from the previous forecast of $0.70-$0.72.

News beat

Salesforce, Inc. (NYSE:CRM) recently acquired MinHash at an undisclosed price. However, MinHash is known to have a potentially important technology for Salesforce, especially now that the company is taking industry focused product approach. The startup also boasts talents pulled from established technology companies such as eBay Inc (NASDAQ:EBAY) and Oracle.

Marketers use MinHash’s market intelligence tool called AILA to accurately predict trends to enable them run more successful ad campaigns.

Bottom line

Salesforce, Inc. (NYSE:CRM) has all the ingredients a company of its kind needs to grow or stay relevant for the long haul. However, over-reliance on the U.S. for the bulk of the revenue poses risks to the company’s long-term growth. That explains why more aggressive overseas expansion is important for Salesforce at this juncture.

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.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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