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Deferred Revenue Helped Salesforce Increase Its Guidance

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Salesforce reported double-digit growth

Previously in this series, we discussed Salesforce’s (CRM) performance in its recent fiscal 4Q16 and 2016 results. In fiscal 4Q16, Salesforce reported deferred revenue of $4.29 billion. Its unbilled deferred revenue stood at $7.1 billion. The revenues grew 31% and 25%, respectively, in constant currency terms. This indicates improved strength in Salesforce’s sales pipeline.

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Sales pipeline growth

“Deferred revenue” refers to billings to customers for subscription fees. Unbilled deferred revenue shows the amount contracted by the company that hasn’t been billed yet. Customers sign a contract for multiyear periods. The company recognizes the revenues as they happen over the period of the contract. Deferred revenue is one way to gauge a company’s future subscription revenue.

Growth in deferred and unbilled deferred revenue improved Salesforce’s sales pipeline. This enabled it to raise the guidance for fiscal 2017. We’ll discuss this in the next part of the series. As we stated in the past, deferred revenue and unbilled deferred revenue are the two important benchmarks for the company. They will help it achieve the landmark $10 billion in revenue by fiscal 2018.

Increased cloud adoption

Previously in this series, we saw that Salesforce generates more than 90% of its revenue from subscription and support revenue. It dominates the platform-as-a-service and SaaS (software-as-a-service) space. As a result, Salesforce will likely benefit a great deal from increased cloud and SaaS adoption trends.

Amazon (AMZN) leads the overall cloud space. Microsoft (MSFT) recorded the highest growth of 128% in the cloud space in 2015. Google (GOOG) Cloud Platform recorded 108% growth while Salesforce grew 40% in 4Q15.

Investors who want to gain exposure to Salesforce can consider investing in the SPDR S&P 500 ETF (SPY). SPY has an exposure of ~29% to application software. It invests ~0.23% of its holdings in Salesforce.

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