Even the biggest of bears must admit that salesforce.com (NYSE:CRM) followed up its solid fiscal 2015 fourth quarter with an even stronger Q1 2016 -- and its stock price has risen accordingly. Which raises the question: what will it take for Salesforce to continue its positive momentum? After all, there are always short-term investors to consider, who won't hesitate to take their profits and run.
For investors with a longer time horizon, salesforce.com offers a sound growth opportunity, if it's able to deliver in a few key areas. A feel-good quarter or two is nice, but sustaining those good tidings over time -- a challenge for salesforce.com as it works to deliver on rising growth expectations -- is another thing altogether.
A quick recap
If there's one thing investors and analysts can count on from an earnings call hosted by Salesforce CEO Marc Benioff and team, it's plenty of "rah-rah." Every company spins earnings results in a positive light, of course, but Benioff takes it to a whole new level. However, after the company's fiscal Q1 results, the excitement was certainly warranted.
salesforce.com's $1.51 billion in fiscal Q1 revenue was slightly better than its own and analysts' estimates of about $1.5 billion. What really took the Street by surprise was Salesforce being able to eke out $0.01 in earnings per share (EPS) on a GAAP basis (including one-time items), while most expected a slight loss. Though expenses rose over the year-ago period, the jump in revenue more than compensated.
The news got even better when Salesforce upped its full-year revenue forecast to $6.55 billion on the high end, from the previous quarter's $6.52 billion. Now toss in last quarter's nearly $660 million in free cash flow -- a 60% year-over-year improvement -- and it's no wonder salesforce.com's stock jumped about 7% in the two days following the earnings report.
Despite the spin Benioff attempted to put on the disparity in revenue by geography, the Americas continue to make up the vast majority of total sales, and the gap is getting wider. Over $1.1 billion of salesforce.com's revenue, equal to 74% of the total, came from the Americas, compared to last year's 71%.
Why is that a reason salesforce.com stock could rise? Because it represents a significant opportunity, and one Salesforce is actively pursuing.
Benioff, President Keith Block, and CFO Mark Hawkins are preparing for a "world tour" to jump-start international growth. With less than $400 million in sales last quarter from the combined regions of Europe and Asia Pacific, salesforce.com's focus on global sales could fuel continued growth, and ultimately help drive stock price appreciation.
More is better
One common theme among all the Salesforce execs was the rapid shift to customers buying multiple "clouds" and services. salesforce.com is no longer just a customer relationship management (CRM) provider. Its sales cloud, along with Salesforce's service, marketing, and analytics clouds, are being sold in bunches, which is why it enjoyed "an all-time high of seven-figure deals" in Q1.
Analytics cloud in particular was a point of emphasis, as it's the reason "more SAP (NYSE:SAP) customers are talking to salesforce.com." Benioff made it clear that -- in addition to his objective of reaching $10 billion in revenue -- the plan is to unseat SAP. As Benioff put it when discussing Salesforce's leadership position in sales and service cloud sales: "sorry SAP."
salesforce.com's bevy of products, both new and improved, should be a relatively easy entree for its sales team to upsell existing customers, too. Which, in turn, could help drive revenue to $10 billion, and unseat SAP that much sooner.
Expenses? What expenses?
The development of the aforementioned analytics cloud solution, along with other enterprise-wide tools and enhancing existing services, doesn't come cheap. Nor do the over 2,600 new employees Salesforce now has compared to the year-ago period. Yet its cost of revenues and total operating expenses -- though still up year over year -- rose significantly less than revenue.
Could it be that salesforce.com is beginning to get a handle on overhead; which has been a burden on GAAP earnings for the past several years? It certainly appears that way. This would also explain Salesforce's operating margin increasing by 2 percentage points last quarter.
Improved sales diversification by region, more high-end multiple products sales -- which generate more customer spend and deepen client relationships -- all while becoming a more efficient organization? If salesforce.com can deliver in these key areas, its stock price can continue to climb.