Salesforce.com Inc. (CRM) has seen some profit-taking after it beat October quarter estimates and issued above-consensus January quarter sales guidance, but issued below-consensus quarterly EPS guidance due to an aggressive spending pace.
That fact that shares were up nearly 60% going into earnings has much to do with the selloff. Here are some takeaways from Salesforce's report and earnings call:
1. Billings momentum remains strong.
Salesforce's closely-watched billings -- defined as revenue plus the sequential change in the deferred revenue balance -- came in at $2.25 billion -- up 24% annually and easily above a $2.02 billion consensus. In addition, the unbilled deferred revenue balance, which consists of deals that are under contract but which Salesforce hasn't yet billed clients for, grew 34% to $11.5 billion. That's faster than the 30% growth seen in the July quarter.
Billings growth slowed slightly from the July quarter's 26%. But the July quarter's growth was boosted by the fact that Salesforce's $2.8 billion purchase of e-commerce software firm Demandware didn't close until late in the July 2016 quarter. The latest billings numbers suggest deal momentum with big enterprises -- including for deals featuring multiple Salesforce products -- remains pretty healthy.
On the earnings call, COO Keith Block talked up a "wall-to-wall" deal with a European automaker and a giant deal with the Department of Homeland Security, among others. And CEO Marc Benioff reiterated Salesforce's goal of organically achieving $20 billion to $22 billion in revenue by fiscal 2022 (ends in Jan. 2022), up from $8.4 billion in fiscal 2018.
It's worth noting that Salesforce did guide for just 19% to 20% January quarter deferred revenue growth. But the company has beaten its deferred revenue guidance by a healthy margin during the last couple of quarters.
2. Share gains continue -- especially in customer support and marketing software.
Salesforce's mainstay Sales Cloud business (salesforce automation software) saw revenue grow 17% to $906.5 million, a rate that's even with the July quarter's. But its Service Cloud business (customer service software) saw revenue growth improve to 23% (sales totaled $738.1 million) from 21%.
And the Marketing and Commerce Cloud unit (marketing automation and e-commerce software) saw revenue rise 40% to $346.2 million. Though annual growth slowed from the July quarter due to the timing of the Demandware deal's closing, it looks as if Salesforce's Marketing Cloud platform saw growth accelerate. And the Salesforce Platform and Other unit, which covers the Heroku and Force.com cloud app development platforms (PaaS), saw growth improve slightly to 34% (sales totaled $495.3 million).
A healthy CRM software market -- benefiting from both strong IT software spending and a shift in IT spending power towards chief marketing officers (CMOs) -- is helping Salesforce's cause. But with the help of "land-and-expand" situations in which Sales Cloud deals are followed by deals for other products, the company is also clearly taking enterprise CRM share from rivals such as Oracle Corp. (ORCL) and SAP SE (SAP) .
3. Initiatives launched over the last three years seem to be paying off.
Since 2014, Salesforce has overhauled the interface/user experience for its core apps via its Lightning platform, launched a machine learning solution (called Einstein) that surfaces insights and recommends actions by analyzing data within Salesforce apps, launched many solutions for verticals such as banking, healthcare and retail, grown its international footprint via aggressive hiring and a deal with Amazon (AMZN) Web Services (AWS) to host Salesforce's apps in overseas data centers and continued adding to its stable of software and IT services partnerships (tie-ups with IBM (IBM) and Alphabet/Google (GOOGL) are among Salesforce's 2017 partnerships).
The growth rates posted by Salesforce's various business segments suggest these moves are bearing fruit. So do some other numbers. EMEA and Asia-Pac revenue respectively rose 33% and 27% in constant currency; 57% of the buyers of Salesforce's vertical offerings are said to be new clients; and over half of all new business is said to stem from partnerships.
4. R&D spending is picking up -- and an executive shakeup suggests it could pick up more.
Salesforce's GAAP R&D spend rose 26% to $394 million, slightly outpacing revenue/billings growth and also topping the 19% growth seen in Salesforce's traditionally-high sales/marketing spend (it totaled $1.18 billion). Investments in things like Einstein, vertical solutions and the Trailhead platform for teaching office workers how to use Salesforce apps are making their presence felt.
And in tandem with its earnings report, Salesforce announced that Bret Taylor, who was once Facebook's (FB) CTO and joined Salesforce via its 2016 acquisition of word-processing app Quip, is now a company president and has been named chief product officer. Alex Dayon, who was previously Salesforce's president and product chief, is now its chief strategy officer and will be "working closely with Salesforce's customers on product direction and transformation."
5. Stock comp remains high.
Salesforce's "stock-based expense" grew 23% to $251.3 million, with substantial expenses incurred for stock awards granted to both R&D and sales/marketing workers. Together with heavy stock comp in prior quarters, this led Salesforce's diluted share count to rise 5% annually to 729.4 million.
The company also guided for stock expenses to have a $0.31 impact on its January quarter GAAP EPS, a forecast that implies expenses of about $226 million based on the October quarter share count. Salesforce's adjusted (non-GAAP) EPS figures, which analyst estimates are based on, don't cover stock expenses. But clearly, it's something that investors looking at the company should take into account.
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Editors' pick: Originally published Nov. 22.