There was a lot to like following news of another strong quarter from salesforce.com (CRM +4.51%). While its stock price has enjoyed a modest 3% pop since announcing earnings on May 20th, fiscal 2016 first quarter results did not exactly put Salesforce on the radar for growth investors, which may prove to be a blessing in disguise for those with a long-term investment horizon.
Of course, when a company beats earnings expectations by generating a meager $0.01 per share in earnings, it is not difficult to find reasons to sit on the sidelines. Rising expenses, new products rollouts that may or may not bear fruit, and a lack of revenue diversification are all challenges Salesforce CEO Marc Benioff and team are facing.
A quick recap
Wall Street expectations and Salesforce internal forecasts called for $1.5 billion in revenue and non-GAAP (excluding one-time items) earnings of $0.14 per share. Both would have been significant improvements over the year-ago period. As it turns out, Salesforce surprised investors, beating revenue estimates and even posting positive earnings for the quarter.
The $1.51 billion in sales was a whopping 23% improvement year-over-year, and earnings came in slightly higher at $0.16, even generating $0.01 per share on a GAAP basis. Salesforce added a little icing on the cake by announcing improved guidance for the second quarter of $1.6 billion in revenues, which amounts to similar 20%-plus growth.
That was then, this is now
Putting together a string of solid quarters is nice, but for long-term investors, the question is: Can Salesforce keep the ball rolling? After all, its forays into other areas of the fast-growing cloud market put it directly in the crosshairs of some of the largest tech players on the planet, and there are still those cost control questions to sort out.
The majority of the nearly $200 million increase in expenses -- cost of revenues and total operating expenditures -- were related to sales and marketing. That is not surprising considering much of the investor conference call was spent discussing new solutions like the analytics cloud and the potential behind it. New products translate into more customers, which in turn requires additional sales personnel and the marketing costs associated with product rollouts.
However, the increased headcount and sales-related expenses are paying dividends. Last quarter, Salesforce saw an "all-time high in seven figure deals," in large part thanks to the expanded suite of services it has to offer. Also, 75% of Salesforce revenue is from customers on annual contracts, that is up from "the high 60's" last year and is part of the reason the company expects margins to improve two percentage points during the second quarter. It simply costs less to service existing customers than to acquire new ones.
And there is more
Though Benioff tried to spin a lack of geographic revenue diversification in a positive light -- 74% of total sales are from the Americas, up from 71% last year -- it is a persistent challenge for the company. However, there is opportunity as well -- Benioff, President Keith Block, and CFO Mark Hawkins see Europe and the Asia Pacific regions as untapped potential, and they set out last week on a "world tour." Of course, Europe is home to SAP, a primary competitor in both the customer relationship management market as well its expanded cloud product suite.
And at $4 billion in quarterly revenues and triple-digit growth in its own cloud sales during the first quarter, SAP poses a real threat. However, Benioff said during the call that Salesforce is talking to "more SAP customers" than ever before. This recognition that "International expansion is a big part of our growth plans," is critical, and management is going all-in, just as it should.
Salesforce is on track to hit a $7 billion annual run-rate for revenue this year. It sets sales records seemingly every quarter, and its new cloud products appear to be a hit with customers. That is a lot of positive momentum.
Is Salesforce stock a buy? For long-term growth investors, the answer is a resounding yes.
