With 26 percent revenue growth, Salesforce tops $10B annual run rate
Salesforce.com Inc. today beat quarterly sales and earnings estimates, raised its forecast for the third straight quarter and said it surpassed the $10 billion annual revenue run rate milestone faster than any enterprise software company in history.
But investors apparently wanted more as the stock drifted down about 1 percent in after-hours trading, following a 1.3 percent uptick in regular trading today. Update: By midday Wednesday, shares were essentially flat.
The maker of online customer relationship management software reported fiscal second-quarter revenue of $2.56 billion, which slightly beat analyst consensus estimates of $2.52 billion. Earnings per share of 33 cents also topped estimates, by a penny. Not least, Salesforce.com upped its full-year profit forecast by one cent and raised revenue guidance by $100 million to between $10.35 and $10.4 billion.
Chief Executive Marc Benioff (pictured) took a victory lap to celebrate the $10 billion milestone on the company’s earnings call, adding this pointed tweet:
Salesforce won. Oracle lost. Now on to $20 Billion. https://t.co/7ezjD4Z6wt
— Marc Benioff (@Benioff) August 22, 2017
“Many employees customers and partners said there’s no way we’d get there,” he said. Benioff set a new goal of $20 billion in annual sales, which he said the company will reach through organic growth “in very short order,” as evidenced by the $15 billion in deferred and unbilled revenue it currently carries, plus unbilled deferred revenue growth of 30 percent in the quarter.
Where’s the profit?
Despite overall strong numbers, the company reported bottom-line net income of less than $18 million for the quarter, down 92 percent from a year ago. The lion’s share of Salesforce.com’s operating expenses continues to come from sales and marketing, which accounted for more than 63 percent of total expenses.
In fact, percentage growth in that expense line nearly matched revenue growth, making marketing and sales the engine of the company’s growth, said Andrew Bartels, vice president and principal analyst at Forrester Research Inc. “Effectively, for every dollar of revenue that Salesforce is getting, it’s spending about 45 cents on sales and marketing,” he said. “If you spent that much on sales and marketing, you’d be surprised if you didn’t get that kind of revenue growth.”
Bartels called Salesforce.com’s quarterly net income “very weak,” but said that isn’t necessarily a sign of a poor business model. Rather, the company’s strategy is similar to that of Amazon.com Inc., which has lost money on its retail operations for most of its history in the name of building market share through rapid growth. “It’s a peculiar business model,” Bartels said. “It wouldn’t work for most companies.”
But it’s working for Salesforce.com because the company still has so much room to grow, said Sheryl Kingstone, research director for business applications at 451 Research LLC. “There’s so much untapped opportunity not only in their core base, but from services revenue, expansion of license revenue and new markets like e-commerce,” she said. “I still see a massive opportunity for them.”
Salesforce.com executives are clearly aware of profitability concerns as evidenced by figures they chose to highlight on the analyst call. “It’s imperative that we continue to grow our bottom line and our margins while also growing our top line,” Benioff said. “That’s top of mind for everyone on our senior management team.”
Cash generated by operations grew to $331 million in the quarter, an increase of 32 percent. Deferred revenue increased 26 percent to $4.82 billion. The combination of that and unbilled deferred revenue is what put the company over the $10 billion market, totaling $10.4 billion for the year. Bookings grew a strong 39 percent. Salesforce.com also said free cash flow has tripled over past three years on a doubling of revenue, an indication of the business is throwing off increasing amounts of cash.
The company also showed solid growth geographically and across all of its core product lines. Americas revenue rose 24 percent, Europe/Middle East/Africa leaped 34 percent and Asia/Pacific grew 25 percent. The company’s flagship Sales Cloud grew 17 percent. Service Cloud was up 21 percent and the Salesforce Platform spiked 32 percent. Marketing Cloud showed the strongest overall growth at 57 percent.
The growth in platform-related business is a clear sign that the company is executing well on its strategy of broadening from application provider to the nexus of an ecosystem. Being a platform not only drives down attrition rates but accelerates growth into new markets, Benioff said. “When we figure out a market we want to focus on, we can deliver on that quickly because of our platform,” he said.
Analyst Kingstone agreed. “Cookie cutter apps aren’t going to solve the problems companies will face in the future,” she said. “The platform is the key.”
Image: Salesforce.com on Facebook
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