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Can Inc. Keep Up Its Winning Streak in 2016?

By Adam Brownlee – Mar 12, 2016 at 1:00PM

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The cloud-based solutions provider turned in sky-high results for its fiscal year 2016. Now, the question is: will the upward flight continue? (CRM -1.31%), a cloud-based customer relationship management company, recently reported fourth quarter and full-year results that were stratospheric, to say the least. For the quarter, revenue was up 25% to $1.81 billion, operating cash flow grew 38% to $459 million, and non-GAAP diluted earnings per share increased 36% to $0.19.

Pulling back and looking at the full-year, the good news continued: revenue was up 24% to $6.67 billion, operating cash flow was up 37% to $1.61 billion, and non-GAAP diluted earnings per share jumped 44% to $0.75.

Management also raised its fiscal year 2017 revenue guidance in the earnings call to a range of $8.08 billion to $8.12 billion. So what is fueling these strong results?

The recipe for jet fuel
During fiscal year 2016, hit an all-time high in its large transactions category with over 600 million-dollar plus contracts. Excluding its Marketing Cloud and Heroku platforms, total transactions in 2015 reached 585 billion. This growth has carried over into 2017, and its rapid pace can be seen in the revenue breakdown -- for the year, App Cloud grew 39% to $1 billion, Service Cloud grew 38% to $1.8 billion, Marketing Cloud grew 29% to $654 million, and the company's largest channel, Sales Cloud, grew 10.5% to $2.7 billion.

Here's what lies beneath the hood of each segment:

  • App Cloud: includes Analytics Cloud and Salesforce1 platforms, which are used for business intelligence and business app development, respectively.
  • Service Cloud: enables companies to address customer service and support needs.
  • Marketing Cloud: a digital marketing platform that allows companies to plan, personalize, and optimize one-to-one customer interactions.
  • Sales Cloud: a sales force automation platform that allows companies to store data, access customer and prospect information, track leads and progress, forecast opportunities, and collaborate on sales.

According to Keith Block, vice chairman, president, and COO of Salesforce, "The tremendous response to our customer success platform is driving exceptional growth for Salesforce across every region, every cloud, and every industry."

The company also hit a high-point in deferred revenue of $4.3 billion for 2016, growth of 29% over the previous year. This deferred revenue will serve as reserve fuel for 2017 as it has not been recognized yet on confirmed contracts.

Overwhelming and enthusiastic sales, the key to higher margins
Management cited a significant improvement in operating margin and indicated that it would continue to improve for 2017. Per CFO Mark Hawkins, "We increased our non-GAAP operating margin by 177 basis points, which drove outstanding full-year operating cash flow of $1.6 billion, up 37% from a year ago. We expect to continue to drive operating leverage and strong cash flow growth in fiscal 2017."

As a percent of sales, total cost of revenue increased 1% in fiscal 2016, but total operating expenses fell 6%. These savings came from a 1% decrease in research and development costs and a 2% drop in both marketing and sales and general and administrative expenses.

Company management did not expect R&D to drop in 2016. According to the 2015 annual report, these costs were anticipated to increase as a percent of total revenue, but it appears that this metric decreased relative to overwhelming, enthusiastic sales.

Management stated in the annual report that they were committed to using R&D to invest in "building the necessary employee and system infrastructure required to support the development of new, and improve existing, technologies and the integration of acquired businesses and technologies." In absolute dollars, R&D increased 19.3% to $946 million -- that spending is essential to Salesforce as it continues to develop and improve its platforms.

At $3.2 billion for 2016, or 49% of total revenue, Marketing and Sales is the largest expense. It similarly fell as a percent of sales due to the robust sales growth, but in absolute dollar terms, the line item increased 17.5% for the year.

The only category that truly appears to have gained some efficiencies was general and administrative expenses, which also declined 2%. Management expected this cost to increase in absolute terms for 2016 -- which it did -- but that it would remain flat or decrease as it gained scale to fixed cost properties -- which it did.

Clear skies ahead is flying high, but how do things look in fiscal 2017? The company has plenty of momentum, and management has given no indication that growth will slow this year. Relative operating margins should continue to expand, and with deferred revenue sitting at all-time highs, the company should have plenty of fuel left in the tank to drive the stock higher.

Adam Brownlee has no position in any stocks mentioned. The Motley Fool recommends We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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