Global Courant
Salesforce (CRM) exceeded expectations in the first quarter of fiscal 2024, while providing strong guidance for the second quarter and boosting margin guidance for the rest of the year – proving once again that this is a transformed company delivering profitable growth balances on a large scale. Revenue for the three months ended April 30 grew 11% year over year to $8.25 billion, surpassing analysts’ forecasts of $8.18 billion, according to Refinitiv estimates. Non-GAAP* earnings per share (EPS) of $1.69, better than the $1.61 per share analysts had predicted, data from Refinitiv showed. Operating margins were 5% on a GAAP basis and 27.6% on a non-GAAP basis, compared to expectations of 6.5% and 25.9%, respectively, according to FactSet. Operating cash flow increased 22% over the prior year to $4.49 billion, beating estimates of $3.76 billion, FactSet data showed. According to FactSet, free cash flow of $4.25 billion exceeded the $3.55 billion forecast by analysts. However, the guidance boost wasn’t enough for the stock to beat high expectations ahead of its earnings release, with the stock rising 68% this year and trading at a 52-week high. The small hit and increase lead to some profit taking, sending shares down about 6% after hours Wednesday to about $210 each. But with management committed to margin expansion, we’re sticking with the name. * GAAP stands for Generally Accepted Accounting Principles. Bottom line The last time the company reported earnings, the market was amazed at how quickly it met its profitability goals. While the size of the operating margin wasn’t quite as great this time around, we remain impressed with how efficient the company has become in such a short time. It’s no secret that the enterprise software industry is going through a rough patch right now. The best way to offset slow revenue growth is to increase profitability and pick up Salesforce. With CEO Marc Benioff more involved than ever in winning over activists who pushed for hard but necessary change, bringing in new customers and guiding the company into this new phase of generative artificial intelligence (AI), even better times are ahead on for Salesforce. Stocks pull back in after-hours trading, but we don’t see the drop as a reflection of the quarter. Did management need to further raise its full-year outlook after beating this quarter and offering an upside outlook for the second quarter? Probably, but the economic environment is far from easy. More importantly, tonight’s drop is more of a reflection of the big move the stock has made this year in what has become a tough market outside of technology. We have not been technical chasers in the extraordinary runs the group has made in recent weeks. But with our unchanged long-term view of Salesforce, coupled with the pullback from recent highs, we may look more opportunistic. Quarterly Commentary We are pleased to see Salesforce outperforming so many key metrics despite the challenging macroeconomic environment. The deal climate is still less favorable than in recent years, taking much longer to close (extended deal cycles) and smaller in size (deal compression). Still, Salesforce said it continues to see strong adoption of its cloud offering from customers who have a need to reduce complexity and speed up processes relative to value. Geographically, sales grew 10% year-over-year at constant currencies in the Americas, 17% in Europe, the Middle East and Africa (EMEA) and 24% in the Asia-Pacific region (APAC). Despite the difficult business environment, Salesforce’s revenue loss remains quite low at 8%, especially given the slowdown in the global economy. New deals may take longer to close, but the low churn shows that enterprise customers can’t afford to keep Salesforce’s mission-critical software products up and running. They can’t miss that productivity gain. On the margin side, to generate a 1,000 basis point improvement in the short span of 12 months, a company really needs to increase efficiency in every part of its business. Looking under the hood of Salesforce, costs as a percentage of revenue are lower than last year in all major categories. Marketing and sales as a percentage of sales was 32% compared to 38% last year; cost of revenue decreased to 21% of sales compared to 22% last year; research and development is down to 12% compared to 14% last year; and general and administrative is a tick down at 7% versus 8% last year. Reducing the workforce also helps. Salesforce ended the quarter with 72,970 full-time employees, up from 77,810 last year. Backed by increased cash flow from Salesforce, the company fulfilled its promise to buy back stock to offset the dilution of stock-based compensation. The company repurchased $2.1 billion of shares in the quarter, resulting in a 1% decline in diluted shares from last year. The company still has about $13.9 billion left over from a $20 billion share repurchase program. Salesforce management noted Wednesday that the company has integrated generative AI into its products. Whether it’s Einstein GPT, which completed 1 trillion transactions for its customers this week, Slack GPT, which helps users quickly summarize conversations, or Tableau GPT, which simplifies data analysis for its users, Salesforce harnesses the power of AI to make its customers more productive. “The coming wave of generative AI will be more evolutionary than any technological innovation,” CEO Marc Benioff said Wednesday. Salesforce will hold an AI Day event on June 12 to outline more of its strategy around the technology. Outlook Following the strong first-quarter fiscal results, management outlined several positive adjustments to the full-year outlook. While the company left its revenue forecast unchanged, at $34.5 billion to $34.7 billion, the company expects profitability to be better than previously expected. Salesforce now sees its GAAP operating margin at 11.4%, compared to a previous forecast of 10.8%, and its non-GAAP operating margin at 28%, compared to a previous estimate of 27%. With higher margins, the company increased what it expects to earn per share for the year. Salesforce increased its GAAP EPS range from $2.67 to $2.69, from $2.59 to $2.61, and non-GAAP EPS range from $7.41 to $7.43, from $7 .12 to $7.14. Both new EPS ranges are above consensus estimates of $2.67 and $7.17 per share. For the fiscal second quarter, Salesforce forecast revenue to be between $8.51 billion and $8.53 billion, with GAAP earnings per share of 79 cents to 80 cents and non-GAAP earnings per share of $1. 89 to $1.90. Compared to consensus estimates, these numbers are beats across the board. (Jim Cramer’s Charitable Trust is long CRM. 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Marc Benioff, co-founder and CEO of Salesforce, speaks at an Economic Club of Washington luncheon in Washington, DC, on October 18, 2019.
Nicholas Kam | AFP | Getty Images
Sales team (CRM) exceeded expectations in the first quarter of fiscal 2024, while providing strong guidance for the second quarter and boosting margin guidance for the rest of the year – proving once again that this is a transformed company delivering profitable growth at balance on a large scale.
