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Salesforce Q3 Earnings Up Y/Y; Gains on Raised FY16 View

Shares of salesforce.com Inc.CRM gained 5.5% in after-hour trade yesterday on decent third-quarter fiscal 2016 top-line results, upbeat full-year fiscal guidance and optimistic outlook for fiscal 2017. Further, although the company's bottom-line results fell short of the Zacks Consensus Estimate, it fared better than the year-ago period figure.

The company reported break-even adjusted earnings (including stock-based compensation but excluding all one-time items on a proportionate tax basis) for the third quarter as against a loss of 2 cents posted in the year-ago period. However, it missed the Zacks Consensus Estimate of 5 cents.

Salesforce.com Inc. (CRM) - Earnings Surprise | FindTheCompany

Salesforce's revenues of $1.712 billion not only increased 23.7% year over year but also beat the Zacks Consensus Estimate of $1.701 billion. Reported revenues also came above management's guided range of $1.69 billion to $1.70 billion. The year-over-year improvement was primarily attributed to rapid adoption of the company's cloud-based solutions.

Also, higher demand for Salesforce ExactTarget Marketing Cloud platform, part of the Salesforce1 Customer Platform, contributed to the year-over-year revenue growth.

During the quarter, the company's cloud-based solutions were selected by a number of companies including AB InBev, ABB Ltd. ABB , Barclays Plc BCS , GlaxoSmithKline Plc GSK , Telefónica, Virgin Media and several other leading companies in Europe.

Among its business segments, revenues from Subscription and Support increased 23.9% from the year-ago quarter to $1.596 billion. Professional Services and Other revenues jumped 21.5% to $115.6 million.

Geographically, the company witnessed revenue growth of 26.4%, 19.7% and 11.7% in the Americas, Europe and Asia, respectively, on a year-over-year basis.

Operating Results

Salesforce's adjusted gross profit (including stock-based compensation but excluding amortization expenses) came in at $1.309 billion, up 22.2% from the year-ago quarter. However, gross margin contracted 100 basis points (bps) to 76.4%, primarily due to increased investment in infrastructure development, including the expansion of international data center.

Adjusted operating expenses (including stock-based compensation but excluding amortization of acquisition-related intangibles) increased 15.9% from the year-ago quarter to $1.226 billion. This was primarily because of higher investments in research and development, marketing and sales and general and administrative activities. However, as a percentage of revenues, operating expenses contracted 480 bps to 71.6%.

Salesforce posted adjusted operating income (including stock-based compensation but excluding amortization of acquisition-related intangibles) of $82.7 million as against the year-ago income of $13.4 million while operating margin improved 380 bps to 4.8%. The year-over-year improvement in adjusted operating income and margin was mainly backed by higher revenue base and a drop in operating expenses as a percentage of revenues.

Balance Sheet & Cash Flow

Salesforce exited the quarter with cash and cash equivalents and marketable securities of $1.358 billion compared with $1.089 billion in the previous quarter. Accounts receivable were $1.061 billion as against $1.068 million at the end of second quarter.

Total deferred revenue, as of Oct 31, 2015, was $2.85 billion, which increased 28% on a year-over-year basis. During the quarter, the company generated $117.9 million in cash from operating activities and a free cash flow of $37.9 million. Moreover, in the first three quarters of fiscal 2016, Salesforce generated $1.153 billion cash from operating activities and a free cash flow of $937.2 million.

Guidance

Buoyed by the decent results, Salesforce raised the fiscal 2016 outlook. The company now expects revenues in the range of $6.640-$6.650 billion, up from $6.600-$6.625 billion, representing a year-over-year increase of 24%. The Zacks Consensus Estimate is pegged at $6.622 billion.

Non-GAAP earnings per share for the fiscal year are now projected within 74-75 cents, up from 70-72 cents, while the Zacks Consensus Estimate is 16 cents.

Apart from providing upbeat guidance for fiscal 2016, the company issued an optimistic revenue outlook for fiscal 2017. Salesforce projects fiscal 2017 revenues to be between $8 billion and $8.1 billion, representing an increase of 20% to 22% year over year.

Going ahead, Salesforce also issued the fourth-quarter guidance. The company expects revenues in the range of $1.782 billion to $1.792 billion, reflecting a year-over-year increase of 23% to 24%. The Zacks Consensus Estimate is pegged at $1.776 billion. The company expects non-GAAP earnings per share in the 18 cents to 19 cents range. The Zacks Consensus Estimate stands at 5 cents.

Recommendation

Salesforce concluded the third quarter of fiscal 2016 on a strong note reporting better-than-expected top line and the bottom line which improved significantly year over year. The robust top line was primarily backed by growth across all its business segments and Salesforce ExactTarget Marketing Cloud platform. The company provided upbeat fiscal 2016 guidance.

The higher number of deal wins and geographical contributions were also encouraging. We consider the rapid adoption of Salesforce1 Customer Platform to be a positive. Overall, the company's diverse cloud offerings and considerable spending on digital marketing remain the catalysts. Moreover, strategic acquisitions and the resultant synergies are expected to benefit over the long run.

In view of the increasing customer adoption and satisfactory performances, market research firm Gartner acknowledged Salesforce as the leading social CRM solution provider. We believe that the rapid adoption of Salesforce's platforms indicate solid growth opportunities in the ever-growing cloud computing segment.

Although the company is growing reasonably in the cloud market, growth prospects have been rationalized to a considerable extent due to intensifying competition from International Business Machines, Oracle Corp. and SAP AG. Moreover, currency fluctuations and stepped-up investments in international expansions and data centers could impact near-term results.

Salesforce has a Zacks Rank #5 (Strong Sell).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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