Salesforce shares fell over 16% on Wednesday after reporting mixed earnings and revising its guidance downward. The cloud software company is a high quality stock in a troublesome environment — no less than within the short term. For the three months ended April 30, revenue rose 11% 12 months over 12 months to $9.13 billion, missing the $9.18 billion analysts expected, in response to estimates from LSEG. Adjusted earnings per share of $2.44 rose 44% 12 months over 12 months, beating the $2.38 analysts forecast, in response to data from LSEG. Adjusted operating margin widened to 32.1% within the quarter, but missed the consensus estimate of 32.3%, in response to FactSet. On a GAAP basis, quarterly operating margin was 18.7%, below the 19.3% expected. Salesforce Why We Own It: Salesforce is a number one enterprise software tool for corporations across industries, helping employees communicate higher internally with colleagues and with their customers. The company’s balance of margin improvement and the potential for faster revenue growth should result in strong earnings growth. Competitors: SAP, Microsoft, HubSpot Last Purchase: December 21, 2022 Start Date: June 15, 2018 Bottom Line: This wasn’t the quarter we were hoping for. Salesforce raised its full-year adjusted earnings forecast, however the lowered revenue growth forecast has investors nervous. Is this an indication that Salesforce is maturing and might now not be valued as a growth company? Or is that this just a brief slowdown? Are customers focusing their budgets on investments in artificial intelligence at Nvidia and the hyperscalers (Amazon, Microsoft, Alphabet) and cybersecurity after several recent high-profile attacks? That could cause some near-term turmoil because the longer-term higher rate of interest environment forces enterprise customers to stay hyper-focused on cost-cutting and defer all but crucial investment priorities. The excellent news: Salesforce’s low revenue churn speaks to the critical nature of its offerings to its customers. That bodes well for the corporate as corporate budgets replenish. In the meantime, we like what we’re seeing on money flow, especially given management’s increased concentrate on shareholder returns through dividends and buybacks. The data cloud business continues to beat expectations, driven by accelerating growth at MuleSoft and Tableau. Growth at Slack, which is housed in Platform and Other, also accelerated quarter-over-quarter. While these positives are offset by disappointing results on margins, we’re more focused on the direction of profitability and are reassured that, estimates aside, we have seen healthy expansion year-over-year, especially on a GAAP basis. Wednesday’s CRM aftermarket sell-off can have been overdone, but we also understand that stocks aren’t rewarded when growth slows. Salesforce is not alone. Workday has fallen nearly 19% since reporting earnings on May 23. While we expect growth to eventually reaccelerate, the timing is uncertain, so we’d like to proceed with caution and be patient. We don’t rule out buying more shares, especially if we see signs of improving deal activity. At 23.5 times management’s fiscal 2025 guidance (based on after-hours share price), CRM currently trades on the low end of its range over the past two years. We reiterate our 2 rating on Salesforce, but will lower our price goal to $300 from $340, acknowledging that upside shall be limited within the near term. Quarterly Results On the conference call with investors following the earnings release, Chief Operating Officer Brian Millham said the buying environment stays “measured,” resulting in “extended deal cycles, deal compression and a high degree of budget scrutiny.” This is a theme we have been awaiting the past few years. There are strengths, including the information cloud, as even budget-conscious corporations look for methods to make use of artificial intelligence to enhance efficiency. Non-GAAP operating margin benefited from lower cost of sales, sales and marketing, and general and administrative expenses. CEO Marc Benioff said the corporate’s data cloud business was included in 25% of its $1 million-plus deals for the quarter. The company added 1,000 data cloud customers for the second consecutive quarter. Six of the corporate’s 10 largest deals within the quarter included six or more clouds (reported because the 5 units shown within the table above). Salesforce’s revenue churn rate was roughly according to recent quarters at around 8%. As we have noted prior to now, the relatively low churn rate is an indication that while customers are taking a better take a look at their budgets, they’re hesitant to desert Salesforce’s software and are willing to pay higher prices when their deals come up for renewal. Breaking down the above table a step further, MuleSoft (Integration) is up 27% 12 months over 12 months on a continuing currency basis, while Tableau (Analytics) is up 21%. Slack, which is an element of Platform and Other and has minimal currency exposure, was up 17%. All three results represent accelerating growth rates on a sequential basis. Cash flow was clearly a shiny spot within the quarter. Management returned nearly $2.2 billion to shareholders via buybacks and one other $388 million via dividends. At the top of the quarter, Salesforce had just over $16 billion left under its current authorization to speculate in share buybacks. Forecast For fiscal 2025, Salesforce reiterated total revenue guidance of $37.7 billion to $38 billion, up 8% to 9% year-over-year and barely below analyst consensus expectations of $38.05 billion, in response to FactSet. Management reduced its year-over-year revenue growth forecast for the subscription and support business to slightly below 10%. That’s lower than the previous estimate of 10% and below Wall Street’s 10.3%. On a continuing currency basis, revenue is now expected to grow by about 10%, below the previous estimate of just over 10%. Expected fiscal 12 months operating margin on a GAAP basis was also revised downward: Management is now targeting 19.9%, down from the previous goal of 20.4%. However, the revision is according to Wall Street estimates. The adjusted operating margin goal of 32.5% was reaffirmed, according to expectations. Diluted GAAP earnings at the moment are expected to be within the range of $6.04 to $6.12 per share, up from the previous range of $6.07 to $6.15 per share. However, Salesforce said adjusted earnings should reach $9.86 to $9.94 per share, above the previous range of $9.68 to $9.76 per share and above Wall Street’s estimate of $9.80 per share. For the second quarter, Salesforce expects revenue of $9.2 billion to $9.25 billion, below the estimate of $9.345 billion. Adjusted earnings guidance of $2.34 to $2.36 can be below the consensus estimate of $2.40, in response to FactSet. Salesforce’s current remaining performance obligation is predicted to extend 9% 12 months over 12 months within the second quarter, according to expectations. This metric represents future contracted revenue to be recognized over the following 12 months. (Jim Cramer’s Charitable Trust is long CRM. A full list of stocks will be found here.) 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Signage at a Saleforce office constructing in San Francisco, California, USA, on Tuesday, February 23, 2021.
David Paul Morris | Bloomberg |
Salesforce shares fell greater than 16% on Wednesday after the corporate reported mixed earnings and revised its forecast downward. The cloud software company is a high-quality stock in a troublesome spot — no less than within the near term.
