Salesforce.com Financials Improve in 1Q16

Lower marketing expenditure contributes to Salesforce.com margin

In 1Q16, Salesforce.com (CRM) Subscription and Support revenue grew to $1.41 billion and Professional Services revenue rose to $106 million. This represents 22% YoY (year-over-year) growth in the first segment and 33% growth in the second.

In fiscal 1Q16, the company’s non-GAAP (generally accepted accounting principles) operating margin expanded by 197 basis points on a YoY basis to reach 11.6%. This makes 1Q16 the fourth consecutive quarter during which Salesforce.com has expanded its margin.Salesforce.com Financials Improve in 1Q16

Lower marketing and administrative expenses are largely responsible for the firm’s wider non-GAAP operating margin. Marketing expenditure as a percentage of revenue declined to 48.8% in 1Q16, down from 52% in 1Q15. Administrative expenses as a percentage of sales also fell by ~1.5%, from 13.2% in 1Q15 to 11.6% in 1Q16.

As the market leader in the CRM (customer relationship management) space, Salesforce.com constantly has to allocate more money for research and development, or R&D, as well as for sales and marketing, to maintain strong customer growth.

The graph above shows that the company’s main operating expenses—R&D and sales and marketing—have been increasing with each passing quarter, except in 1Q16 when sales and marketing declined to a degree. Still, the rising-cost tendency has put the company’s operating profit margin under pressure in multiple quarters.

Salesforce.com: A target?

Owing to its leadership position in the CRM space, the company has attracted significant attention as a target for acquisition by Microsoft (MSFT), Oracle (ORCL), and SAP (SAP) recently.

Future revenues

Deferred revenue is one way to gauge a company’s future subscription revenues. In 1Q16, Salesforce.com reported that its deferred revenues grew to $3 billion, a YoY increase of 31%. In constant currency terms, deferred revenues rose by 36%.

Cash, debt, and free cash flow

As of April 30, 2015, Salesforce.com generated free cash flow of $731 million, a YoY increase of 54%. The company has cash, cash equivalents, and marketable securities worth $1.92 billion.

It has a total debt of $2.04 billion. Salesforce.com doesn’t have any short-term debt. In fiscal 2014, the company reported a working capital deficit of ~$840 million. In 1Q16, this expanded to ~$1.35 billion. All of these figures highlight the company’s poor liquidity. Also, you should note the company doesn’t pay a dividend.

For diversified exposure to Salesforce.com, you can invest in the Technology Select Sector SPDR Fund (XLK). XLK invests about 1.07% of its holdings in Salesforce.com.