Salesforce Profits Grow Twice as Fast as Revenue

By Tim

SaaSy, Salesforce's mascot, on the stage at the latest Dreamforce conference. Credit:

Salesforce's profit after adjusting for stock-based compensation and other noncash and one-time items grew more than twice as fast as revenue in the fiscal third quarter, a good sign for a business that wins by booking long-term deals. Here's a closer look at the company's overall fiscal Q3 performance, which it reported Nov. 18:

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Metric FQ3 2016 Actuals FQ3 2015 Actuals YOY Growth
Revenue $1.71 billion $1.38 billion 23.9%
Non-GAAP income from operations $140.5 million $93.6 million 50.1%
Adjusted EPS $0.21 $0.14 50%
Cash from operations $117.9 million $122.5 million (3.8%)

Sources: S&P Capital IQand Salesforce press release.

Commenting on the results, CEO Marc Benioff said in a press release:

What went right:Profits grew twice as fast as revenue, which still improved nicely even before accounting for currency effects. Currency deferred revenue also jumped 28% to $2.85 billion while contracted-but-unbilled deferred revenue rose 24% to $6.7 billion. Both figures suggest Salesforce is building a nice backlog of business that will keep growth moving along at a healthy pace in the near term, though outsized growth in current deferreds -- up 28% versus up 23.9% for booked revenue -- implies bigger deals.

Salesforce is also growing revenue far faster than some in its industry. TakeNetSuite , which saw revenue growth for the first nine months of the year slow to just 9.9%. Salesforce improved revenue 23.6% over the same period.

What went wrong:All that top-line and profit growth didn't make it to the cash flow statement. Instead, cash flow from operations fell 4% on what looked like fewer tax benefits from stock options exercise and a smaller deferred revenue adjustment.

NetSuite shines a bit brighter in this area, boosting cash from operations 68.7% year over year in the third quarter. Yet the disparity isn't as big as you might think. For the trailing nine months, Salesforce has improved operating cash flow by 37% year over year versus 47% for NetSuite.

What's next:Looking ahead, Salesforce is targeting $1.782 billion to $1.792 billion in fiscal-fourth-quarter revenue, a 23% to 24% year-over-year increase. Adjusted earnings are expected to come in between $0.18 and $0.19 a share.Those totals compare with $1.446 billion and $0.14 a share, respectively, in last year's fiscal Q4, S&P Capital IQ reports.

For all of fiscal 2016, management is forecasting $6.64 to $6.65 billion in revenue -- a 24% year-over-year increase -- and $0.74 to $0.75 a share of adjusted profit. Fiscal 2017 revenue is expected to be in the range of $8 billion to $8.1 billion. Salesforce plans to provide profit and cash flow guidance with fourth-quarter results, which are due in February.

In the meantime, investors should stay focused on the top line and deferred revenue. Continued divergence -- with deferreds growing faster than overall revenue -- would suggest that Benioff will not only make good on his promise to be first to $10 billion but that he's also creating one of the great enterprise software companies of the cloud era.

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Tim Beyerswishes he was a selling machine. For now, he'll settle for owning shares of The Motley Fool recommends NetSuite and Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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