CRM platform provider salesforce.com, Inc. (CRM - Analyst Report) reported better-than-expected third-quarter fiscal 2015 results wherein both the top and bottom-line figures surpassed the Zacks Consensus Estimate and improved year over year. The improvement in earnings was primarily driven by strong revenue growth and lower operating expenses.

Revenues

Salesforce’s revenues of $1.38 billion not only increased 28.6% from the year-ago quarter but also beat the Zacks Consensus Estimate of $1.37 billion. Reported revenues also beat management’s guided range of $1.365 to $1.370 billion. The year-over-year improvement was primarily attributed to rapid adoption of the company’s cloud-based solutions and the ExactTarget acquisition.

Also, higher demand for Salesforce ExactTarget Marketing Cloud platform, part of the Salesforce1 Customer Platform, contributed to the year-over-year revenue jump.

During the quarter, the company’s cloud-based solutions were selected by a number of companies including EMC Corporation, Verizon Communications Inc. and General Electric Company.

Among its business segments, revenues from Subscription and Support increased 28.3% from the year-ago quarter to $1.29 billion. Professional Services and Other revenues increased 33% on a year-over-year basis to $95.1 million.

Geographically, the company witnessed revenue growth of 29.4% in the Americas, while revenues from Europe and Asia increased 29.8% and 21.2%, respectively, on a year-over-year basis.

Operating Results

Salesforce’s adjusted gross profit (including stock-based compensation but excluding amortization expenses) came in at $1.07 billion, up 27.2% from the year-ago quarter. However, gross margin contracted 83 basis points (bps) to 77.4% from the year-ago quarter, primarily due to increased investment in infrastructure development which also include expansion of international data center.

Adjusted operating expenses (including stock-based compensation but excluding amortization of acquisition-related intangibles) increased 18.7% from the year-ago quarter to $1.06 billion, primarily due to higher investments in research and development, marketing and sales and general and administrative activities. However, as a percentage of revenues, operating expenses contracted 634 bps from the year-ago quarter to 76.4%.

Salesforce reported adjusted operating income (including stock-based compensation but excluding amortization of acquisition-related intangibles) of $13.4 million, comparing favorably with year-ago loss of $48.9 million primarily due to higher revenue base and a drop in operating expenses as a percentage of revenues.

Salesforce’s adjusted net income, including stock-based compensation but excluding all one-time items on a proportionate tax basis, came in at $8.3 million as against a net loss of $23.4 million reported in the year-ago quarter.

Balance Sheet & Cash Flow

Salesforce exited the quarter with cash and cash equivalents and marketable securities of $926.1 million compared with $838.8 million in the previous quarter. Accounts receivable were $794.6 million compared with $1.36 billion in the prior-year quarter.

Total deferred revenue as of Oct 31 was $2.22 billion, which increased 28% on a year-over-year basis. During the third quarter, the company generated $122.5 million cash from operating activities and $841.5 million in the first nine months of fiscal 2015.

Guidance

For the fourth quarter of fiscal 2015, the company expects revenues in the range of $1.436 to $1.441 billion, reflecting a year-over-year increase of 25% to 26%. The Zacks Consensus Estimate is pegged at $1.453 billion. The company expects non-GAAP earnings per share in the range of 13 to 14 cents. The Zacks Consensus Estimate (including stock-based compensation expenses) stands at breakeven.

Salesforce raised the lower-end of its full fiscal-year 2015 revenue guidance from $5.340–$5.370 billion to $5.365–$5.370 billion (up 32% year over year). The company also revised the non-GAAP earnings per share guidance from the range of 50–52 cents to 51–52 cents. The Zacks Consensus Estimate for revenues is pegged at $5.371 billion and loss per share (including stock-based compensation expenses) of 4 cents.

Recommendation

Salesforce’s adjusted earnings per share of a penny for fiscal third-quarter 2015 beat the Zacks Consensus Estimate. Revenues also surpassed the consensus mark and increased on a year-over-year basis, primarily backed by growth across all its business segments and Salesforce ExactTarget Marketing Cloud platform. The company provided positive fourth-quarter revenue guidance and raised the fiscal 2015 guidance as well.

The higher number of deal wins was encouraging and so were the geographical contributions. We consider the rapid adoption of Salesforce1 Customer Platform to be a positive. Overall, the company’s diverse cloud offerings and strong spending on digital marketing remain the catalysts. Moreover, strategic acquisitions and the resultant synergies are expected to benefit over the long run.

Considering the increasing customer adoption and satisfactory performances, market research firm Gartner acknowledged Salesforce as the leading social CRM solution provider. We believe that the rapid adoption of Salesforce’ platforms demonstrates its rising opportunities in the ever-growing cloud computing segment.

Although the company is growing reasonably in the cloud market, growth prospects have been rationalized to a considerable extent due to intensifying competition from IBM (IBM - Analyst Report), Oracle Corp. (ORCL - Analyst Report) and SAP AG (SAP - Analyst Report). Moreover, currency fluctuations and an increase in investments in international expansions and data centers could impact near-term results.

Salesforce has a Zacks Rank #2 (Buy).