Analysts say Salesforce's big billings beat is the 'main highlight for investors' - here's why
- Salesforce reported its quarterly earnings on Wednesday after the bell, posting solid results that beat Wall Street expectations.
- Salesforce analysts were impressed by the company's 28% year-over-year growth on billings, which Barclays called "the main highlight for investors."
- Other analysts warned that this growth came at the expense of margins and profitability for Salesforce.
- Salesforce stock is up almost 3% at the time of writing.
Salesforce CEO Marc Benioff didn't hold back, as he used the company's earnings call to say that the fourth quarter of fiscal 2018 was the "best quarter ever" for the 19-year-old cloud software company.
Investors across the board seemed to agree, judging from the notes that Wall Street analysts sent to their clients on Thursday. And many of those analysts mentioned the company's reported billings as the true highlight of Salesforce's earnings.
Salesforce reported $7.09 billion in deferred revenues, also known as billings, showing an uptick of 28% from the year before. This figure beat analyst expectations by 8.5%. The company also reported $13.3 billion in bookings - or unbilled, but contracted business - which is up 48% from the year before.
Raimo Lenschow at Barclays wrote that this billings growth "will likely be the main highlight for investors" - even in a quarter where Salesforce raised its fiscal year revenue guidance by $150 million. Now, Salesforce expects to post $12.60 billion to $12.65 billion in revenue for its fiscal year 2019.
Lenschow added that Barclays sees Salesforce's Q1 2019 billing guidance as "a conservative starting point for the year." Salesforce gave guidance that its first quarter billings would grow 23% to 24% from the year before.
Salesforce makes the vast majority of its revenue on recurring subscriptions. In the fourth quarter, subscriptions and support were 93% of the company's $2.85 billion in revenue. That makes billings a key metric for analysts, who want to see how Salesforce will perform in the long haul. Many analysts see it as a crystal ball for the quarters to come.
However, as Alex J. Zukin at PiperJaffray and Kirk Materne at Evercore ISI noted, billings growth came at the expense of margins and profitability at the company.
"Salesforce delivered no margin upside in the quarter as sales and marketing expense grew 29% [year-over-year]," Materne wrote. "However, we believe this was driven by strong bookings and billings growth as Salesforce pays out a significant percentage of commissions in the quarter but recognizes revenue over a multi-year period. So some near-term pain, but long-term gain."
"To us, a blow out billings quarter always trumps a little less in quarter margin expansion," he said.
Zukin agreed, adding that "the messaging on the call made it clear that the company is prioritizing growth over profitability in the near term."