The days leading up to Salesforce.com's (CRM -0.57%) fiscal 2016 Q2 earnings news were not confidence inspiring. Trading at $74.04 just three days ago, Salesforce.com stock shed more than 6%, as CEO Marc Benioff and team prepared to share what many expected to be another strong quarter.
What's not to love? Insider selling from Benioff in the days leading up to Q2 earnings raised a few eyebrows -- relatively minor, as it was -- as did a recent survey that suggested the leading competitor of Salesforce.com is now software behemoth Microsoft (MSFT -1.27%).
Salesforce.com's recent stock decline didn't dampen analysts' enthusiasm, however. Consensus estimates called for $1.6 billion in revenue, compared to last year's $1.32 billion. Non-GAAP (excluding one-time items) earnings per share, or EPS, were expected to jump from fiscal 2015's Q2's $0.13 to $0.18.
Many Salesforce.com analysts also reaffirmed their strong buy recommendations recently. Turns out, the bullish analysts got it right.
The specs
Matching expectations heading into Q2 would have been a sound quarter for Salesforce.com: A 21% jump in sales and 38% improvement in EPS are nothing to sneeze at. Turns out, Benioff and team did what they so often do when announcing earnings: beat what were already sky-high estimates.
Fiscal 2016 Q2 revenue rose 24%, to $1.62 billion, and non-GAAP earnings also beat expectations, rising 46%, to $0.19 a share. One of Benioff's pet financials, deferred revenue -- sales that have been billed but haven't hit the income statement yet -- also jumped last quarter, climbing 29%, to just more than $3 billion.
Finally, Salesforce.com announced what virtually every investor and industry pundit loves to hear: It's raising guidance for the balance of its fiscal year above the already increased expectations from last quarter. Benioff said, "We are once again raising our fiscal year 2016 revenue guidance to $6.625 billion at the high-end of our range." That's up from last quarter's guidance of $6.55 billion.
For the current quarter, Benioff said he expects another 23%, give or take, improvement in sales, to about $1.7 billion. Part of Salesforce.com's positive feelings are likely from the strong results of its service cloud unit. Sales cloud, Salesforce 1 platform, and marketing cloud each grew compared to last year, but none could match service cloud's 40% increase in revenue.
Not surprisingly, after-hour buying began almost immediately following Salesforce.com's strong quarter, jumping 3% in the first 30 minutes.
A glass half full
Though hardly enough to dampen Salesforce.com's solid quarter, there are a couple of areas to keep an eye on going forward. As Salesforce.com CFO Mark Hawkins reinforced during Q1, the Europe region will continue to be a focal point. He said, "Business is accelerating," and "it's our fastest-growing region." Geographically diversifying revenues is always a good idea.
Problem is, on a percentage of total sales basis, the Americas continues to carry the revenue growth load. Last quarter, the Europe region grew revenue to $287 million. However, thanks to rapid growth in the Americas, Europe sales now make up just 17% of total revenue, down from 19% last year. Of course, it takes time to kick-start a new geographic region, but it warrants monitoring going forward.
A quick peek at Microsoft's last quarter would seem to justify the survey stating that Salesforce.com needs to keep an eye out for its partner -- and not just its CRM solution. Microsoft Dynamics is beginning to really take off, more than doubling its users last quarter, and growing revenues. But its analytics cloud -- Salesforce.com's "fastest growing new product" -- puts it square in the sight of Microsoft's bevy of cloud-based software analytics solutions.
Those are minor considerations -- at least for now -- and hardly enough to dampen Salesforce.com's strong quarter. It's safe to say that the steep stock price decline heading into Saleforce.com's 2016 fiscal Q2 will be a thing of the past.
