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Is Salesforce Chasing Growth at the Expense of Margins?

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Key factors working for Salesforce

Earlier in this series, we discussed Salesforce’s (CRM) double-digit revenue growth, geographical performance, and its operating segments’ contribution towards overall revenue. Although Microsoft (MSFT) recently claimed Salesforce’s leadership position in the SaaS (software-as-a-service) space, Salesforce continues to be a leader in the CRM (customer relationship management) space.

Recently, we’ve looked at how Salesforce’s dominance in CRM and SaaS and its decision to back away from the Twitter (TWTR) acquisition fueled Morgan Stanley’s (MS) bullishness on the company’s stock. Let’s have a look at the company’s margins.

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Salesforce failed to expand its operating margin in 3Q17

The graph above shows that the company’s main operating expenses, R&D (research and development) and sales and marketing expenses, have been on a decline. Although R&D rose mildly in 3Q17, sales and marketing expenses fell.

Sales and marketing expenditure as a percentage of revenue fell to 46.5% in fiscal 3Q17, down from 47.8% in fiscal 3Q16. However, despite a slight fall in sales and marketing expenses, the company’s non-GAAP (generally accepted accounting principles) operating margin shrank by 50 basis points to 12.7%.

Salesforce has failed to keep up with the margin expansion trend it’s followed each quarter. Fiscal 2Q17 marked the ninth consecutive quarter of margin expansion for Salesforce. Despite the fall, Salesforce has maintained its hope for a non-GAAP operating margin in the mid-30s in the long term. Later in this series, we’ll discuss why the chances of Salesforce’s margins expanding are slim.

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