Salesforce (CRM) Rises On Strong Q3 Earnings; Lifts Outlook

Shares of salesforce.com Inc. (NYSE:CRM) jumped over 5% in afterhours trade yesterday following its impressive results for the third quarter of fiscal 2017. The world’s leading CRM platform provider’s top and bottom line results marked a strong year-over-year improvement. Also, above expected revenue forecasts for the current quarter as well as fiscal 2017 and fiscal 2018 also boosted investors’ confidence over the stock’s future performance.

For the third quarter, the company reported adjusted earnings (including stock-based compensation but excluding all one-time items on a proportionate tax basis) of 3 cents per share, better than breakeven results reported in the year-ago quarter. Moreover, Salesforce’s adjusted earnings were in line with the Zacks Consensus Estimate.

On a GAAP basis, Salesforce reported a loss per share of 5 cents compared with a loss of 4 cents in the third quarter of fiscal 2016. However, on a non-GAAP basis, the company posted earnings of 24 cents per share compared with 21 cents reported in the year-ago quarter. The robust performance was mainly driven by strong top-line growth.

Quarter in Detail

Salesforce’s revenues of $2.145 billion not only increased 25.3% year over year, but also beat the Zacks Consensus Estimate of $2.116 billion. Moreover, reported revenues came above management’s guided range of $2.11 billion to $2.12 billion. The improvement is primarily attributable to rapid adoption of the company’s cloud-based solutions.

Also, higher demand for the Salesforce ExactTarget Marketing Cloud platform, a part of the Salesforce1 Customer Platform, drove the year-over-year upside in revenues.

Among its business segments, revenues at Subscription and Support surged about 24.3% from the year-ago quarter to $1.984 billion. Professional Services and Other revenues jumped almost 39% to $160.8 million.

Geographically, the company witnessed constant currency revenue growth of 27%, 27% and 29% in the Americas, Europe and Asia Pacific, respectively, on a year-over-year basis.

Salesforce’s adjusted gross profit (including stock-based compensation but excluding amortization expenses) came in at $1.596 billion, up 22%. However, gross margin contracted 200 basis points (bps) to 74.4%, primarily due to increased investment in infrastructure development, including the expansion of the international data center.

Adjusted operating expenses (including stock-based compensation but excluding amortization of acquisition-related intangibles) increased 24.7% from the year-ago quarter to $1.528 billion. This was primarily because of higher investments in research and development, marketing and sales, and general and administrative activities. However, as a percentage of revenues, operating expenses contracted 30 bps to 71.3%.

Salesforce posted adjusted operating income (including stock-based compensation but excluding amortization of acquisition-related intangibles) of $67.8 million compared with the year-ago figure of $82.7 million, while operating margin contracted 160 bps to 3.2%. The year-over-year contractions in adjusted operating income and margin were mainly due to higher cost of revenues, which were partially offset by efficient operating expenses management.

Balance Sheet & Cash Flow

Salesforce exited the third quarter with cash and cash equivalents, and marketable securities of $1.201 billion, compared with $1.174 billion in the previous quarter. Accounts receivable were $1.281 billion compared with $1.323 million at the end of second-quarter fiscal 2017. Total deferred revenue, as of Jul 31, 2016, was $3.50 billion, up 23% on a year-over-year basis.

During the first three quarters of fiscal 2017, the company generated operating cash flow of $1.456 billion and free cash flow of $1.136 billion.

Guidance

Buoyed by strong third quarter performance, the company raised its revenues and non-GAAP earnings outlook for fiscal 2017. Revenues are now anticipated to come in the range of $8.365 billion to $8.375 billion (mid-point $8.37 billion), up from the previous projection of $8.275 billion to $8.325 billion (mid-point $8.30 billion), representing a 25–26% year-over-year increase. Moreover, it was above the Zacks Consensus Estimate of $8.31 billion. Salesforce now projects non-GAAP earnings to come between 97 cents and 98 cents, down from the earlier guidance range of 93 cents to 95 cents.

For the fourth quarter, the company provided encouraging outlook. Salesforce projects fourth-quarter revenues between $2.267 billion and $2.277 billion, representing a 25% to 26% year-over-year increase. Moreover, it was much above the Zacks Consensus Estimate of $2.24 billion. The company expects non-GAAP earnings per share in the 24–25 cents band. On a GAAP basis, it projects loss per share in the range of 9 cents to 10 cents.

Apart from this, Salesforce provided revenue outlook for fiscal 2018. The company anticipates that its target of $10 billion in revenues will be achieved in fiscal 2018. For the fiscal, the company projects revenues in the range of $10.1 billion to $10.15 billion.

Our Take

Salesforce reported encouraging results for the third quarter. The robust revenues were primarily backed by growth across all its business segments and the Salesforce ExactTarget Marketing Cloud platform. Bottom-line results also improved significantly and were in line with the Zacks Consensus Estimate.

Moreover, the company provided a strong outlook for the forthcoming quarter as well as raised its full fiscal revenues and non-GAAP earnings guidance range. We are also encouraged by the company’s announcement of achieving $10 billion in sales in fiscal 2018.

The higher number of deal wins and geographical contributions during the quarter were encouraging. We consider the rapid adoption of Salesforce1 Customer Platform to be a positive. Overall, the company’s diverse cloud offerings and considerable spending on digital marketing remain catalysts. Moreover, strategic acquisitions and the resultant synergies are expected to benefit over the long run.

In view of increasing customer adoption and satisfactory performances, market research firm Gartner acknowledged Salesforce as the leading social CRM solution provider. We believe that the rapid adoption of Salesforce’s platforms indicate solid growth opportunities in the ever-growing cloud computing segment.

Although the company is growing reasonably in the cloud market, growth prospects have been rationalized to a considerable extent due to intensifying competition from International Business Machines (NYSE:IBM) , Oracle Corp. (NYSE:ORCL) and SAP SE (NYSE:SAP) . Moreover, currency fluctuations and stepped-up investments in international expansions and data centers could impact near-term results.

Salesforce currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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