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Salesforce Smashed Its Own Targets Again

By Danny Vena – Nov 30, 2018 at 7:30PM

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The cloud CRM leader continues to exceed its lofty ambitions, much to the delight of investors.

Investors in (CRM 1.40%) have become accustomed to the company's practice of exceeding its forecast and raising its full-year guidance. Having done just that for the first two quarters of fiscal 2019, the stock had risen more than 57% before the recent downturn. Salesforce was able to continue its robust performance in the third quarter.

For the fiscal 2019 third quarter, which ended Oct. 31, 2018, Salesforce reported revenue that grew to $3.39 billion, an increase of 26% year over year, exceeding its forecast, which topped out at $3.365 billion, as well as surpassing analysts' consensus estimates of $3.37 billion. This outperformance continued down to the bottom line, resulting in higher-than-expected profitability, with non-GAAP diluted earnings per share of $0.61, soaring past both the company's guidance and Wall Street's expectations of $0.50.

The entrance to an office building with the Salesforce cloud logo above the door.

Image source: Salesforce.

Broad-based growth

The lion's share of revenue for Salesforce continues to come from its subscription and support services, which increased 26% year over year to $3.17 billion. Professional services and other revenue also saw strong growth to $224 million, up 15% compared to the prior-year quarter.

The company's growing portfolio of products all produced gains. Revenue from the Sales Cloud increased 11% year over year to top $1 billion. Service Cloud revenue grew even more, topping $900 million, up 24% year over year. The two smallest segments enjoyed the largest percentage growth, with the Salesforce Platform and Other up 51% year over year to $700 million, and the Marketing Cloud and Commerce Cloud growing to $500 million, up 37% compared to the prior-year quarter.

Growth was also strong across Salesforce's various geographical regions. The Americas still accounts for the majority of the company's business, generating $2.425 billion, up 25% year over year. Sales in Europe, the Middle East, and Africa (EMEA) grew to $641 million, while revenue in the Asia Pacific region (APAC) climbed to $326 million, up 29% and 25% year over year, respectively.

The company's remaining performance obligation, which is comprised of future revenue that is under contract but has not yet been recognized, grew to $21.2 billion, up 34% year over year. The portion that will be realized over the coming 12 months grew to $10 billion, an increase of 27% compared to the year-ago quarter.

And there's more...

Several other tidbits of information provide additional insight into Salesforce's growing potential. 

On the conference call to discuss the results, co-CEO Keith Block said the company continues to engage with c-suite executives, which is "translating into more strategic relationships than ever." During the third quarter, the number of deals valued at more than $1 million increased 46% year over year, and the number of those above $20 million "continues to grow significantly."

Salesforce co-CEO Keith Block addressing a crowd.

Salesforce co-CEO Keith Block addressing a crowd. Image source: Salesforce.

The company gained Apple as a strategic partner, adding to its already impressive array of household names, including Amazon, Alphabet's Google, and IBM. These partnerships allow customers to deeply integrate Salesforce with the data and capabilities of their partners, which provides greater opportunities for deeper insight and analysis.  

Part of Salesforce's expansion strategy has revolved around acquiring companies whose technology seamlessly integrates with its own, and the company has reported seeing "great returns" from recent acquisitions MuleSoft, Datarama, and Cloud Craze. MuleSoft's ability to unlock data from legacy systems has become an important incentive to potential customers and a component of the company's ongoing growth.

Salesforce pointed out that by 2020, 60% of enterprises will have "fully articulated an organization-wide digital transformation platform strategy," and 90% will use multiple cloud services and platforms. This gives the company a growing opportunity in an expanding cloud market.  

What the future holds

Based on the company's continued strong results, Salesforce boosted its full-year outlook for the third time in as many quarters. The company is anticipating revenue in a range of $13.23 billion to $13.24 billion, which would represent growth of 26% year over year at the midpoint of its guidance, and a $760 million, or 6%, increase from its initial estimates from a year ago. 

Salesforce also released its initial guidance for fiscal 2020 and is forecasting revenue in a range of $15.9 billion to $16 billion, which would represent year-over-year growth of between 20% and 21%. It's also a bit higher than analysts had anticipated, as consensus estimates had pegged revenue at $15.75 billion. In late 2017, Salesforce announced that it planned to more than double its revenue -- from $8.4 billion to $20 billion by 2022. This shows that the company is well on track to achieving its goal.

For the upcoming fiscal fourth quarter, Salesforce is forecasting revenue in a range of $3.551 and $3.561 billion, year-over-year growth of 25% at the midpoint of its guidance. The company is also anticipating GAAP earnings per share of $0.08 to $0.09, and non-GAAP earnings per share of between $0.54 and $0.55.

Salesforce has shown time and again that it can under-promise and over-deliver, and this quarter's beat-and-raise is just another in a long line of stellar performances.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares), Amazon, and Apple and has the following options: long January 2019 $165 calls on IBM. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Apple, and The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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