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Salesforce (CRM) Q2 Earnings Beat Estimates; Guides Low

The world’s leading CRM platform provider, Salesforce.com Inc. CRM reported better-than-expected second-quarter fiscal 2017 results. The company’s top and bottom-line results not only surpassed the respective Zacks Consensus Estimate but also marked year-over-year improvements.

The company reported adjusted earnings (including stock-based compensation but excluding all one-time items on a proportionate tax basis) of 7 cents per share, surpassing the Zacks Consensus Estimate. Moreover, it marked a year-over-year improvement of 40%.

On GAAP basis, Salesforce’s earnings came in at 33 cents per share, compared with break-even earnings in the second quarter of fiscal 2016. The robust performance was mainly driven by strong top-line growth and stringent cost management.

Quarter in Detail

Salesforce’s revenues of $2.037 billion not only increased 24.6% year over year, but also beat the Zacks Consensus Estimate of $2.02 billion. Moreover, reported revenues came above management’s guided range of $2.005 billion to $2.015 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, 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% from the year-ago quarter to $1.886 billion. Professional Services and Other revenues jumped almost 33% to $150.5 million.

Geographically, the company witnessed revenue growth of 24%, 32% and 29% in the Americas, Europe and Asia, respectively, on a year-over-year basis.

Salesforce’s adjusted gross profit (including stock-based compensation but excluding amortization expenses) came in at $1.537 billion, up 22.9%. However, gross margin contracted 110 basis points (bps) to 75.2%, 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 22.2% from the year-ago quarter to $1.455 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 130 bps to 71.5%.

Salesforce posted adjusted operating income (including stock-based compensation but excluding amortization of acquisition-related intangibles) of $81.2 million compared with the year-ago figure of $59.7 million, while operating margin improved 40 bps to 4%. The year-over-year improvements in adjusted operating income and margin were mainly backed by a higher revenue base and a drop in operating expenses as a percentage of revenues.

Balance Sheet & Cash Flow

Salesforce exited the second quarter with cash and cash equivalents, and marketable securities of $1.174 billion, compared with $2.031 billion in the previous quarter. Accounts receivable were $1.323 billion compared with $1.193 million at the end of first-quarter fiscal 2017. Total deferred revenue, as of Jul 31, 2016, was $3.82 billion, up 26% on a year-over-year basis.

During the first half of fiscal 2017, the company generated operating cash flow of $1.301 billion and free cash flow of $1.122 billion.

Guidance

Despite reporting strong second quarter results, the company disappointed investors with its soft guidance for the third quarter and downbeat non-GAAP earnings per share guidance for fiscal 2017. As a result the stock fell almost 7% in yesterday’s after-hours trading session.

Salesforce projects third-quarter revenues between $2.11 billion and $2.12 billion, representing a 23% to 24% year-over-year increase. However, it remained below the Zacks Consensus Estimate of $2.13 billion. The company expects non-GAAP earnings per share in the 20–21 cents band. On GAAP basis, it projects loss per share in the range of 4 cents to 5 cents.

For fiscal 2017, the company raised its revenue outlook but lowered the non-GAAP earnings per share guidance range. Salesforce now projects non-GAAP earnings to come between 93 cents and 95 cents, down from the earlier guidance of $1.00 to $1.02.

Revenues are anticipated to come in the range of $8.275 billion to $8.325 billion (mid-point $8.30 billion), up from the previous projection of $8.16–$8.20 billion, representing a 24–25% year-over-year increase. However, it was below the Zacks Consensus Estimate of $8.31 billion.

SALESFORCE.COM Price, Consensus and EPS Surprise

 

SALESFORCE.COM Price, Consensus and EPS Surprise | SALESFORCE.COM Quote

Recommendation

Salesforce reported better-than-expected results for the second 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 surpassed the Zacks Consensus Estimate.

However, the company provided a soft outlook for the forthcoming quarter as well as lowered its full fiscal earnings guidance range.

Nonetheless, 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 as 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 IBM, Oracle Corp. ORCL and SAP SE 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).


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