Salesforce Has The Strength To Push Your Investment Up

Aug.25.14 | About:, Inc. (CRM)


Salesforce’s recent quarter brought double-digit growth in the revenue and Non-GAAP profit.

Salesforce1 is a breakthrough product which holds multi-billion dollar worth for the company.

Integration of acquisitions and reduction in marketing expenditure will convert losses into profit. Inc (NYSE:CRM) is another player besides Oracle (NASDAQ:ORCL) and Microsoft (NASDAQ:MSFT) to compete in the cloud environment taking over the IT sector. The company's stock value has gone up by 36% in a year. As more firms adopt broader suites of cloud computing applications, Salesforce will gather the potential to become a top application and platform vendor.

The company reported its quarterly result this week and as a response, the investors were found cheering. Highlights included a gigantic deal with Philips, in which the company will be building its health applications on the Salesforce platform.

In this article, I will discuss what Salesforce did during the recent period, particularly focusing on the important details. Then I will talk about the future potential of this organization.

Second Quarter

Salesforce reported revenue of $1.32 billion, which not only increased by 37.8% as compared to last year's quarter but also surpassed the analysts' estimate of $1.29 billion. The increase in revenue was due to the fast adoption of the company's cloud-based solutions, the ExactTarget acquisition and a favourable foreign exchange impact.

Gross margin came at 78.3%, down by 134 bps due to the costs related to the acquisition of ExactTarget. Adjusted operating expenses (including stock-based compensation and excluding amortization of acquisition-related intangibles) increased by 32.9% to $1.03 billion, mainly due to the higher investments in research and development, marketing and sales and general and administrative activities. However, as a percentage of revenue, the operating expenses fell by 287 bps from last year's quarter.

The company reported non-GAAP diluted earnings of 13 cents per share, which was 44% up since the second quarter of 2013. All in all, double-digit growth numbers in sales and profit explains that Salesforce's higher marketing expenditure is paying off. Not only the domestic market is responding favorably, but the international market is also showing positive feedback towards the company's products. This is why Salesforce witnessed revenue growth of 39% in America while revenues from Europe and Asia increased by 42% and 25% respectively.

The company's future is now backed by Salesforce1. The product offers businesses such as Facebook (NASDAQ:FB) and Microsoft, with a zoomed-in view of every customer. This enables these companies to deliver tailored content across all the channels and devices. I believe that this product will generate billions in the future.

There are several reasons for this. First, the market for Customer Relationship Management "CRM" is expanding; it is expected to grow to $36.5 billion by 2017 globally. This brings the CAGR of the market to 15%. Secondly, the company is making good use of this expanding market. Through Salesforce1, clients can build and deploy an app on Android, iPhone, and on any tablet all at the same time. This allows companies to run their entire business from their phones. The product is designed to unite various apps and to bring a large number of devices on a single platform. This, in turn, significantly increases mobility for marketing professionals.

The success of this product can already be seen from developers that are currently using it. With 1.7 million developers on the platform and ten times more APIs than before, compared to company's previous development platform, Salesforce has positioned itself well for the growth in mobile CRM applications in the future. Revenue of $346 million, for the first half of 2015, has already been generated through this platform. This makes the annual revenue run-rate to be approximately $700 million for the company.

Other than what is stated above, Salesforce has brought key modifications to its "Journey Finder." The advancements introduced last month are designed to operate in the way marketers think, rather than the way computer systems work. To be precise, the Maps upgrade consists of more activity and journey tracing of the customer. The Triggers will now have the feature of automatic responding to actions in real time. Lastly, the Metrics will include testing and optimization of each and every interaction.

The additional visual analytics are engineered to allow marketers to locate and mark out a customer's journey through almost any digital channel. These channels include email, mobile, and wearable connected devices. The Journey Builder is already accessible to Salesforce1 clients. The Maps, Triggers, and Metrics functions are scheduled for release during the third quarter of the fiscal-year 2015. This will help in sustaining the top-line trend.

Bottom Line

Salesforce currently reports a loss on GAAP basis. The company hasn't given any dividend to date. Yet, these details don't indicate that investors should sell their stake. With time, investors should look for operating expenses as a percentage of sales to decline further, as it did in the recent quarter. The company has been spending more than half of its revenue on marketing. As soon as the promotional activities reduce, the present loss should convert into profit.

Till then, investors should wait, and let Salesforce do what it is doing. The company has its full-year sales guidance up. On average, it has already given sales growth of 35% for three years, much above the industry's 12%. Basing my belief on that, I expect further upward revisions as the acquisitions are integrated into the company, and heavy marketing for innovative products establish brand loyalty for Salesforce. Strong prospects for the company suggest a buy rating.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.