Salesforce Profits Grow Twice as Fast as Revenue

Add in a nice backlog of current and long-term deferred revenue and it looks as if Salesforce will indeed be fastest to $10 billion in sales among enterprise software suppliers.

Tim Beyers
Tim Beyers
Nov 21, 2015 at 10:22AM
Technology and Telecom

SaaSy, Salesforce's mascot, on the stage at the latest Dreamforce conference. Credit: Salesforce.com. 

Salesforce's (NYSE:CRM) profit after adjusting for stock-based compensation and other noncash and one-time items grew more than twice as fast as revenue in the fiscal third quarter, a good sign for a business that wins by booking long-term deals. Here's a closer look at the company's overall fiscal Q3 performance, which it reported Nov. 18:

MetricFQ3 2016 ActualsFQ3 2015 ActualsYOY Growth
Revenue  $1.71 billion  $1.38 billion  23.9%
Non-GAAP income from operations  $140.5 million  $93.6 million  50.1%
Adjusted EPS  $0.21  $0.14  50%
Cash from operations   $117.9 million  $122.5 million  (3.8%)

Sources: S&P Capital IQ and Salesforce press release. 

Commenting on the results, CEO Marc Benioff said in a press release:

Salesforce delivered yet another exceptional quarter with 27% constant currency growth in revenue and 30% constant currency growth in deferred revenue. I'm delighted to announce that we expect to deliver our first $8 billion year during our fiscal year 2017, which puts us well on the path to reach $10 billion faster than any other enterprise software company.

What went right: Profits grew twice as fast as revenue, which still improved nicely even before accounting for currency effects. Currency deferred revenue also jumped 28% to $2.85 billion while contracted-but-unbilled deferred revenue rose 24% to $6.7 billion. Both figures suggest Salesforce is building a nice backlog of business that will keep growth moving along at a healthy pace in the near term, though outsized growth in current deferreds -- up 28% versus up 23.9% for booked revenue -- implies bigger deals. 

Salesforce is also growing revenue far faster than some in its industry. Take NetSuite (NYSE:N), which saw revenue growth for the first nine months of the year slow to just 9.9%. Salesforce improved revenue 23.6% over the same period.

What went wrong: All that top-line and profit growth didn't make it to the cash flow statement. Instead, cash flow from operations fell 4% on what looked like fewer tax benefits from stock options exercise and a smaller deferred revenue adjustment.

NetSuite shines a bit brighter in this area, boosting cash from operations 68.7% year over year in the third quarter. Yet the disparity isn't as big as you might think. For the trailing nine months, Salesforce has improved operating cash flow by 37% year over year versus 47% for NetSuite. 

What's next: Looking ahead, Salesforce is targeting $1.782 billion to $1.792 billion in fiscal-fourth-quarter revenue, a 23% to 24% year-over-year increase. Adjusted earnings are expected to come in between $0.18 and $0.19 a share.Those totals compare with $1.446 billion and $0.14 a share, respectively, in last year's fiscal Q4, S&P Capital IQ reports. 

For all of fiscal 2016, management is forecasting $6.64 to $6.65 billion in revenue -- a 24% year-over-year increase -- and $0.74 to $0.75 a share of adjusted profit. Fiscal 2017 revenue is expected to be in the range of $8 billion to $8.1 billion. Salesforce plans to provide profit and cash flow guidance with fourth-quarter results, which are due in February.

In the meantime, investors should stay focused on the top line and deferred revenue. Continued divergence -- with deferreds growing faster than overall revenue -- would suggest that Benioff will not only make good on his promise to be first to $10 billion but that he's also creating one of the great enterprise software companies of the cloud era.