The third quarter 2016 earnings season is winding down and there are many takeaways from this round of corporate earnings. According to Thomson Reuters’ Earnings Dashboard from November 21, 2016, 72% of reported earnings have beaten analysts’ earnings estimates, while only 54% of companies reported have beaten analysts’ revenue estimates. Overall, third quarter 2016 earnings have since growth of 4.2% and third quarter revenue has managed to see growth of 2.6%. The most troubling aspect from this round of earnings has been the fact that 64 companies preannounced negative earnings per share, while only 34 companies reported a positive earnings per share preannouncement. While the energy sector was the most notable laggard during the third quarter, overall earnings results have been mostly mixed. Weak revenue results and a surge in negative earnings per share preannouncements were notable weaknesses during the third quarter 2016 earnings reporting cycle.

Taking a deeper look into revenue results, the same Thomson Reuters survey shows that 54% of reported third quarter 2016 revenues have been above analysts’ estimates and 46% of reported revenues came below estimates. Revenue results have lagged compared to historical averages, as the typical quarter since 2002 has shown 60% of companies have beaten estimates, while 40% have missed estimated. Even more frightening is the revenue beat/miss data from over the past four quarters: 49% of companies have beaten estimates and 51% of companies have missed revenue estimates. The underlying continued-weakness in revenue results is certainly a concern, but it appears revenue is beginning to recover compared to the past four quarters.

2016q3_sp500_earningsdashboard_161121-new
2016q3_sp500_earningsdashboard_161121-new

Companies in the U.S. continue to face uncertainties about the future of the economy. Currently, the major sources of future pessimism and uncertainty come from the increasing prospect of a Federal Reserve interest rate hike in December. In addition, while the Donald Trump victory has been embraced with a rallying stock market, there are some companies that continue to worry about uncertainties surrounding his presidency. With all of this uncertainty that lies ahead for the rest of 2016 and heading into 2017, investors need to stick with strong, quality industries.

One of the main industries that has continued to post extremely strong results is cloud computing; specifically, the customer relationship management (CRM) industry.

Gartner: CRM Spending To Reach $40 Billion Annually By 2019

According to the research firm, Gartner, the customer relationship management industry is the fastest growing segment of the cloud computing market. Furthermore, Gartner estimates that the CRM industry will see annual spending grow from a $25 billion market in 2015 to a $40 billion market by 2019.

Source: Gartner Research
Source: Gartner Research

Evidence to support this vast growth can be seen in recent technology giants’ earnings releases during the third quarter 2016 and the jump in M&A activity.

Notable 3Q16 CRM Vendor Earnings

SAP SE (ADR) (NYSE: SAP) reported a third quarter earnings miss on October 21st, but managed to increase its outlook thanks to 28% growth in the company’s cloud business. Close rival, Oracle Corporation (NYSE: ORCL), reported fiscal first quarter earnings on September 15th, which showed total cloud revenues were up 59% during the quarter. Software as a service cloud services saw even better growth of 77% during the first quarter.

Salesforce.com, Inc. (CRM) is considered one of the most prominent pioneers in this new technology. The CRM industry giant reported fiscal third quarter 2017 earnings on November 17, 2016. The company reported earnings per share of $0.24 on revenue of $2.15 billion. Overall, revenue has seen growth of 25% from fiscal Q3 2016 and earnings has seen growth of 14% since the same period last year.

Taking a deeper look into Salesforce.com, Inc.’s revenue results, revenue from cloud sales rose 13% from fiscal third quarter 2016 results. Cloud services revenue climbed 26%, app cloud services revenue jumped 38%, and marketing cloud solutions saw revenue growth of 46%. “I’m delighted to announce that we expect to deliver our first $10 billion year during our fiscal year 2018, which puts us well on the path to reach $20 billion faster than any other enterprise software company,” detailed Salesforce.com, Inc.’s Chairman and CEO, Marc Benioff.

Recent Flurry of CRM M&A Activity Thanks To Strong Growth, Outlook

Salesforce.com, Inc. (NYSE: CRM) is still the single largest holder of market share in the CRM market. According to Gartner’s Market Share Analysis for 2015:

  • com, Inc. (NYSE: CRM) held 19.70% of the total CRM market
  • SAP SE (ADR) (NYSE: SAP) held 10.20% of the market
  • Oracle Corporation (NYSE: ORCL) maintained 7.80% market share
  • Microsoft Corporation (NASDAQ: MSFT) maintained 4.30% market share

However, throughout 2016, the market has seen a rash of M&A activity, which has consolidated the market and shifted the market share balance of power. The largest and most notable deal came when Microsoft Corporation (NASDAQ: MSFT) reached a deal to acquire LinkedIn Corp. (NYSE: LNKD) for $26.2 billion in cash. The deal is a major win for Microsoft, as the company narrowly outbid Salesforce.com, Inc. in the mission to acquire LinkedIn Corp. (NYSE: LNKD). Aside from the Microsoft-LinkedIn deal, other notable 2016 M&A activity includes:

  • Oracle Corporation (NYSE: ORCL)’s $9.3 billion acquisition of NetSuite, Inc. (NYSE: N)
  • Salesforce.com, Inc. (NYSE: CRM)’s $2.8 billion purchase for Demandware, Inc. (NYSE: DWRE)

According to an article by Microsoft Customer Experience Consultant, Matthew King, the Microsoft-LinkedIn integration will likely provide an “end-to-end solution for companies to do just about everything under the sun including:

  1. Artificial intelligence embedded everywhere (e.g. Cortana will: ping you when contacts are active on LinkedIn so you can reach out via Skype or email, build personalized InMail templates for you based on sentiment analysis and psychographic profiles, and down the road you won’t even need to type or manually use the applications but will be able to do it with a hybrid natural language and holographic interface)
  1. Productivity and collaboration tools embedded everywhere (e.g. Sales Navigator leads can be exported to Excel and contacted via Outlook/Skype taking a process that used to take hours down to minutes)
  1. Recruiting and talent management tools for building the best sales, marketing, and customer service teams
  1. Advanced organizational mapping capabilities with real time updates on changes in roles/positions of key business decision makers
  1. Highly targeted B2B/B2C marketing combining the power of Bing advertising, Azure Machine Learning, plus LinkedIn data and advertising solutions
  1. Intelligent and personalized prospecting via a graphic visualization of networks, top-of-mind business goals, and personal causes (HoloLens and Azure Machine Learning will almost certainly play a role in this down the road)
  1. Executive alignment tools for B2B environments (escalation of large sales motions to the executive level faster to enable lower level salespeople to drive larger amounts of revenue via partnerships)” (Matthew King, The Changing Face of CRM Part 1).
Source: Zoho.com
Source: Zoho.com

With merger and acquisition deals heating up in the CRM industry, it is very likely that more activity is likely to follow. Industry leaders are turning to the M&A market to increasingly improve their market share and stance within the CRM industry. This gives smaller, niche cloud computing companies a chance to become potential takeover targets, as the demand for CRM services continues to explode.

3 Smaller CRM Companies That Could Be Future Takeover Targets

  1. Pegasystems, Inc. (NASDAQ: PEGA): PEGA offers a full, proprietary suite of cloud computing solutions through its Pega 7 platform. Among the cloud services offered are customer relationship management. As of November 2016, Pegasystems, Inc. maintains a market cap of $2.56 billion and year to date returns of nearly 22%. Furthermore, the company just reported third quarter 2016 earnings on November 2, 2016. The earnings report showed the cloud provider saw total revenues grow 13%. However, cloud and licensing sales grew 43% and order backlogs were up 11%, during the third quarter. Pegasystems, Inc. is no small company, but compared to the technology giants that command the CRM industry, the company is small enough to be deemed a potential takeover target.
  1. 8×8, Inc. (NASDAQ: EGHT): EGHT is another smaller cloud solutions vendor that offers CRM services, among its suite of solutions. As of November 2016, 8×8, Inc. maintains a market cap value of $1.13 billion and year to date gains of 16.38%. On October 26, 2016, 8×8, Inc. reported fiscal second quarter earnings that were better than estimated. The company reported positive net income of $27,000, compared to losses from the prior fiscal second quarter in 2015. Furthermore, the company reported revenue of $63.2 million during the quarter, which beat analysts’ estimate of $61 million in revenue. EGHT has been attracting quite a bit of attention from big investors. Emerald Mutual Fund Advisors Trust increased its stake in the company by 5.8% during the second quarter and now holds 2,130,524 shares of 8×8, Inc. The Louisiana State Employees Retirement System also decided to increase its stake in 8×8, Inc. during the second quarter 2016 by 1%. Even the Bank of Montreal purchased nearly $9.7 million of 8×8, Inc. during the second quarter. Overall, large investors and hedge funds own around 71.57% of 8×8, Inc., as of November 2016.
  1. bBooth, Inc. (OTCQB: BBTH): bBooth is a relative newcomer that looks to disrupt the entire cloud-based Software-as-a-Service (SaaS) CRM, and sales lead software industry. Rather than interpose some new tweaks on what they describe as the incumbents’ 15 – 20-year-old technology, bBooth claims to have completely re-invented what a CRM, lead-gen tool should be in today’s video-centric social environment. bBooth’s service is based around its proprietary bNotifi technology, which places video front and center in all customer and prospect communications. The bNotifi video is interactive, and as the company claims, more engaging and therefore more effective than competing products.

Using the company’s bNotifi technology, clients are able to cause a 3D-like, spokesperson to walk-out onto targeted recipients’ mobile and desktop screens to explain their product or service, provide sign-up assistance, information gathering, and even induce impulse buying capabilities. The bBooth platform also incorporates a ‘push-to-screen’ component, which allows companies to deliver urgent messages to the screens of their staff, all without the recipients having to open a browser or other program. On another interesting note, Nick Cannon is bBooth’s chief strategy officer and global brand ambassador, and baseball Hall-of-Famer, Frank Thomas, is a member of their advisory board. Mr. Cannon no doubt provides entry into the entertainment and celebrity circles, while Mr. Thomas appears focused on sports related initiatives. As of November 2016, newcomer bBooth maintains a market cap value of less than $10 million. 

Overall, the customer relationship management industry and cloud computing continue to be one of the few very bright spots in the current business environment. Third quarter earnings results have been slightly better than anticipated thus far, but there is a lot of negativity surrounding future earnings. One of the few industries that is able to largely shrug off the uncertainty is customer relationship management and cloud computing. When fear begins to seep into the markets, it is important for investors to stick with industries that continue to show strong growth and earnings outlook.

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