Salesforce’s Buying Spree

The year 2016 has seen the valuations of quite a few cloud companies drop as they’re unable to grow at quite the frantic pace that investors demand. But bigger companies like Salesforce.com (NYSE: CRM) are milking this opportunity by going on a buying spree.

Salesforce.com’s Acquisitions

Salesforce.com has already spent $4 billion this year on seven deals. Its acquisition strategy has been skewed towards Artificial Intelligence and Machine Learning to fortify its new AI platform Einstein, which is to be unveiled in early October at Dreamforce.

However, during the second quarter, Salesforce.com has acquired companies in other areas as well. The largest of these is its $2.8 billion acquisition in June of e-commerce platform Demandware, which will expand its CRM offering with e-commerce capabilities that its customers have been asking for.

In August, it acquired Quip, a word-processing application for mobile devices, for about $750 million after losing out to Microsoft on the LinkedIn acquisition. It also acquired enterprise analytics platform BeyondCore for an estimated $110 million. BeyondCore is an enterprise analytics tool that bolsters business intelligence with computational and statistical analysis. It was already integrated with the Salesforce platform.

Paul Hamerman, an analyst at Forrester Research suggests that Salesforce.com could get a boost from acquisition targets such as accounting-services firm FinancialForce and Zuora.

Some analysts, on the other hand, are questioning if the acquisitions are masking concerns over its financial health.

Salesforce.com’s Financials

For the second quarter of fiscal 2017, Salesforce’s revenue grew 25% over the year to $2.04 billion, above analyst estimate of $1.84 billion and its guidance. Net income was $229 million or $0.33 per share. Non GAAP EPS was $0.24, beating analyst forecast of $0.22.

By segment, revenues from Subscription and Support services grew 24% over the year to $1.88 billion. Professional services and other revenues were up 33% to $150.5 million.

Salesforce ended the quarter with deferred revenue of $3.82 billion, up 26% y-o-y but down 5% q-o-q. Unbilled deferred revenue ended the second quarter at about $8 billion, up 29% year-over-year, including $300 million related to unbilled deferred revenue from the Demandware acquisition.

Sales Cloud grew 13%, Service Cloud grew 29%, App Cloud and others grew 43%, while Marketing Cloud, which now includes the subscription and support revenue from Demandware, grew 28%. These numbers are marginally down from the previous quarter.

By region, Americas grew 24%, EMEA grew 32% and Asia Pac grew 29%.

Salesforce has raised its full year guidance again. It now expects revenue of $8.275 billion to $8.325 billion, or an increase of 24% to 25%. GAAP EPS is projected to be $0.27 to $0.29, while non-GAAP EPS is projected to be $0.93 to $0.95. Its earlier guidance was for revenue of $8.16 billion to $8.20 billion and non GAAP EPS of $1.00 to $1.02. The market was looking for revenues of $8.31 billion and an EPS of $0.95.

Salesforce expects to end the third quarter with revenue of $2.11 billion-$2.12 billion and non GAAP EPS of $0.20-$0.21. The market had forecast the quarter’s revenues at $2.12 billion and an EPS of $0.24.

Investors are disappointed with the weak billings and third quarter guidance and its shares dropped by 8%. Its stock is currently trading around $75.10 with a market cap of about $51 billion. Its 52-week range is $52.60 – $84.48.

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