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Salesforce Pleases Investors Post Multibillion-Dollar Spending Spree

By Nicholas Rossolillo - Aug 23, 2019 at 1:19PM

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The cloud software provider continues to impress, touting strong second-quarter earnings and an improved outlook for the rest of 2019.

The second quarter was a highly anticipated one for salesforce.com (CRM 0.68%) investors. After dropping billions of dollars this year on several high-profile acquisitions -- including $1.35 billion on ClickSoftware and $15.7 billion for Tableau Software -- the Salesforce community was keen to see how results would turn out. They didn't disappoint.

Q2 by the numbers

First, it must be noted that due to U.K. antitrust regulators deciding to review the takeover of Tableau, management was not able to discuss specifics of the big tie-up. Nevertheless, co-CEO Marc Benioff and the rest of the management team did report revenue of $4.0 billion, a 22% increase and well above the guidance given a few months back for $3.95 billion. In addition, $0.66 in adjusted earnings per share handily topped guidance for $0.46 to $0.47.  

Adding Q1 and Q2 together, this software giant is having another incredible year -- especially for its already massive size -- with the top line still going well above 20%, a rising gross profit margin, and adjusted earnings increasing in spite of heavy spending to maximize sales growth.

Metric

Six Months Ended July 31, 2019

Six Months Ended July 31, 2018

Change

Revenue

$7.73 billion

$6.29 billion

23%

Gross profit margin

75.7%

74.3%

1.4 pp

Operating profit

$268 million

$306 million

(12%)

Earnings per share

$0.61

$0.84

(27%)

Adjusted earnings per share

$1.59

$1.45

10%

Pp = percentage point. Data source: Salesforce.  

Acquisitions add fuel to the Salesforce rocket ship

Salesforce is pressing on to its goal of $26 billion in annual revenue by the 2023 fiscal year, and it looks well on track to deliver on the lofty target. Full-year guidance just got another upgrade: Revenue is now expected to be $16.75 billion to $16.9 billion, representing as much as 27% year-over-year growth. As is often the case, though, that could be conservative as third-quarter revenue is expected to notch a 31% increase over the same period a year ago.

The recent acquisitions of Tableau and ClickSoftware are the biggest reason for the upgrade, but existing business growth was still called out as an expected 20% to 21% annualized increase for the full-year period. Benioff thinks the wave of digital transformation sweeping the world is only just beginning. Salesforce is in prime position to help because, as Benioff often points out on the earnings calls, his company finds that all transformation "begins and ends with the customer."

A man in a suit holding a tablet. An illustrated brain made of electrical connections hovers above the tablet, signifying artificial intelligence.

Image source: Getty Images.

To that end, Salesforce isn't just customer relationship management anymore. Its suite of services encompasses low-code app development, data monitoring and analytics powered by artificial intelligence, merchant services, and Salesforce blockchain. There are a myriad of tools in the Salesforce toolkit, and though the largest sales cloud segment is slowing, it's the newer segments that are carrying the torch now.

Segment

Revenue for Six Months Ended July 31, 2019

Increase (YOY)

Sales cloud

$2.20 billion

12%

Service cloud

$2.11 billion

21%

Platform and other

$1.75 billion

36%

Marketing and commerce cloud

$1.18 billion

35%

YOY = year over year. Data source: Salesforce.

Salesforce stock jumped after the second-quarter report due to the rosy outlook -- always a welcome outcome every three months. But investors should be looking long term here. Wall Street can get hung up by the bottom line from time to time, and the recent spending spree at the customer-centric software company is likely to come back up again sooner rather than later. When that happens, just remember the many billions of dollars being spent by organizations around the globe to update their operations for the 21st century.

Salesforce is at the heart of that growing movement, and shareholders are likely to be richly rewarded if they hang on through the frequent turbulence over the next decade and beyond.

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