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Shares of, inc. (NYSE:CRM) gained more than 6% in after-hour trade yesterday following strong first-quarter fiscal 2016 results and upbeat fiscal year guidance issued by the company.

The company’s adjusted earnings (including stock-based compensation but excluding all one-time items on a proportionate tax basis) of 2 cents per share came ahead of the Zacks Consensus Estimate of a penny. Moreover, quarterly earnings compared favorably with the year-ago period loss of 7 cents per share.

Salesforce’s revenues of $1.511 billion not only increased 23.2% from the year-ago quarter but also beat the Zacks Consensus Estimate of $1.501 billion. Reported revenues also beat management’s guided range of $1.485 to $1.505 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 Bank of America, Dentsu, Expedia, Hitachi, Japan Post, John Deere, Medtronic, TELUS, T-Mobile, U.S. Citizenship and Immigration Services, Western Union and Zurich Insurance.

Among its business segments, revenues from Subscription and Support increased 22.5% from the year-ago quarter to $1.405 billion. Professional Services and Other revenues jumped 33.2% on a year-over-year basis to $105.9 million.

Geographically, the company witnessed revenue growth of 27.2% in the Americas, while revenues from Europe and Asia increased 12.1% and 14.8%, 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 $1.149 billion, up 19.3% from the year-ago quarter. However, gross margin contracted 250 basis points (bps) to 76% from the year-ago period, 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 14.4% from the year-ago quarter to $1.115 billion, primarily due to higher investments in research and development, marketing and sales and general and administrative activities. However, as a percentage of revenues, operating expenses contracted 570 bps from the year-ago quarter to 73.8%.

The company posted adjusted operating income (including stock-based compensation but excluding amortization of acquisition-related intangibles) of $34.2 million as against the year-ago loss of $11.7 million. The year-over-year improvement in adjusted operating income was mainly due to higher revenue base and a drop in operating expenses as a percentage of revenues.

Salesforce posted adjusted net income (including stock-based compensation but excluding all one-time items on a proportionate tax basis) of $14 million or 2 cents per share. Moreover, it fared better than the year-ago quarter’s net loss of $44.4 million or 7 cents per share.

Balance Sheet & Cash Flow

Salesforce exited the quarter with cash and cash equivalents and marketable securities of $1.019 billion compared with $995.4 million in the previous quarter. Accounts receivable were $1.906 billion compared with $1.906 million at the end of last quarter.

Total deferred revenue, as of Apr 30, 2015, was $3.06 billion, which increased 31.5% on a year-over-year basis. During the quarter, the company generated $730.9 million cash from operating activities and a free cash flow of $659.8 million.


Buoyed by better-than-expected first-quarter results, the company raised its fiscal 2016 outlook. Salesforce now expects revenues in the range of $6.52–$6.55 billion, up from the $6.475–$6.520 billion range. The upbeat revenue guidance represents a year-over-year increase of 21% to 22%. The Zacks Consensus Estimate is pegged at $1.506 billion.

Non-GAAP earnings per share for the fiscal year are now projected within 69 to 71 cents per share, up from 67–69 cents. The Zacks Consensus Estimate is pegged at 12 cents.

Going ahead, the company issued guidance for the second quarter. The company expects revenues in the range of $1.59 to $1.60 billion, reflecting a year-over-year increase of 21%. The Zacks Consensus Estimate is pegged at $1.591 billion. The company expects non-GAAP earnings per share in the range of 17 to 18 cents. The Zacks Consensus Estimate (including stock-based compensation expenses) stands at 3 cents.

Our Take

Salesforce started fiscal 2016 on a strong note wherein the top line and the bottom line for the first quarter not only came ahead of expectations but improved significantly from the year-ago quarter levels. Moreover, the company’s robust top-line performance was an encouraging factor. Revenues surpassed the consensus mark and increased on a year-over-year basis, primarily backed by growth across all its business segments and Salesforce ExactTarget Marketing Cloud platform. The company provided positive second-quarter and fiscal 2016 guidance.

The higher number of deal wins was encouraging as were the geographical contributions. 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.

Considering 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’ 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 increase in investments in international expansions and data centers could impact near-term results.

Salesforce has a Zacks Rank #3 (Hold).

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