Salesforce Q3 Shows Solid Results, But Rising Expenses Loom
/ December 4, 2019
The customer-relationship-management software company reported a fiscal third-quarter loss of $109 million, or 12 cents a share, compared with net income of $105 million, or 13 cents a share, in the year-ago period. Adjusted earnings were 75 cents a share. Revenue rose to $4.51 billion from $3.39 billion in the year-ago quarter. Analysts surveyed by FactSet had forecast earnings of 67 cents a share on revenue of $4.45 billion.
For the fourth quarter, Salesforce expects adjusted earnings of 54 cents to 55 cents a share on revenue of $4.74 billion to $4.75 billion, while analysts had forecast earnings of 61 cents a share on revenue of $4.74 billion. Read the full news piece on MarketWatch.
Analyst Take: We are in a market where volatility rules and even good earnings don’t necessarily guarantee a positive market response. In this case, Salesforce delivered its best growth rate since 2014, yet overall the market felt it was pretty unremarkable as the stock dipped and then recovered and then ultimately didn’t move much after the news broke. However, beyond the earnings day reaction itself, the report showed some promise and some reasons for worry for the company that loves software in the cloud and used to serve as the pillar for minimizing complexity for CRM.
The Organic Growth Is Pretty Good
Subscription and support revenues saw a 34% jump to $4.24 Billion while its much smaller professional service and other revenue bucket jumped to $274 million, which was a 22% jump.
These numbers are good, and represent the best growth since mid 2014.
The Organic Growth Isn’t Good Enough
This year, Salesforce proposed to its investors that it will double in revenue by 2024. This is a big goal that isn’t likely achievable through organic growth of its subscription services. This has been the catalyst for acquisitions like Tableau and Mulesoft among others.
So while the large growth this quarter that is the best in 5 years is promising, sustaining this type of organic growth is going to be really hard. This will make Salesforce even more focused on inorganic growth through acquisition if the company intends to meet its very aggressive growth targets.
Overall Impressions: Integration, Competition and A Tough Road Ahead
Salesforce seen such strong results and market response for so long, the fact that the company YTD is trailing the S&P for growth has to be a surprise for many.
However, the company has reached a more mature period in its existence and it now needs to realize that hyper growth through organic channels will be really challenging. This has been clearly realized through acquisitions like Mulesoft and Tableau. However, those acquisitions won’t come without challenges. This is especially true for Tableau. Given the software had a vast majority of its users on-prem, it was anything but a natural fit for Salesforce.
As the company works to integrate Tableau, and then to keep up with growing/continued competition from the likes of Microsoft Dynamics 365, NetSuite and legacy SAP and Oracle offerings, there is also going to be an onslaught of companies that will promise the simplicity that Salesforce once offered. Companies like Zoho or Freshworks come to mind here.
If Salesforce is going to achieve its double in 5 year ambitions, it will need both organic and inorganic growth. But it’s far from a guarantee as rising expenses, difficult hybrid integration and product maturity are all going to be a challenge for the software giant.
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Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.
Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. From Big Data to IoT to Cloud Computing, Newman makes the connections between business, people and tech that are required for companies to benefit most from their technology projects, which leads to his ideas regularly being cited by CNBC, Barrons, Business Insider and hundreds of other sites across the world. A 7x Best-Selling Author including his most recent “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor. MBA and Graduate Adjunct Professor, Daniel Newman is a Chicago Native and his speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
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