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.
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.
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.