Investing Club: Salesforce's earnings beat and raise point to stock rally ahead

Published Tue, Mar 1 20227:22 PM ESTUpdated Wed, Mar 2 20229:24 AM EST

Salesforce reported better-than-expected fiscal 2022 fourth-quarter earnings Tuesday. Revenue of $7.33 billion, up 27% year-over-year in constant currency, exceeded expectations of $7.242 billion. (Constant currencies help strip out fluctuations in foreign currency to provide a clearer financial picture.) Non-GAAP earnings per share of $0.84 — inclusive of a $0.03 benefit from mark-to-market accounting on strategic investments — beat estimates of $0.75. Operating margin — which investors are now closely watching at Salesforce due to the importance of profitable growth at scale — came in at 15%, non-GAAP, topping estimates of 14.7%. Operating cash flow, however, fell 9% from the previous year to $1.98 billion. Still that was better than estimates of $1.625 billion. Bottom line We found a lot to like about Salesforce's great quarter. It was a clean beat all around, plus management raised its revenue outlook for fiscal 2023 and provided an upside view for operating cash flow. Elsewhere, management reiterated its commitment to no material acquisitions, something investors will applaud because large deals are usually dilutive to operating margins. And the demand environment sounded very strong with no indication of a significant pull-forward based on the new wins in the quarter and the ongoing need to digitize. (Regarding pull-forward of demand: Many worried that companies accelerated all their IT spending during the pandemic to the point that there would be a big slowdown now because they invested all that they needed.) Lastly, with sentiment so poor heading into the print — CRM shares were down nearly 18% this year through the March 1 closing price — we think all the ingredients are here for a solid rally higher tomorrow. Companywide results Breaking down the subscription and support revenue results by cloud: Sales Cloud revenue increased 17% year-over-year to $1.6 billion. Service Cloud revenue increased 18% year-over-year to $1.7 billion. State Farm and U.S. Bank expanded its use of the Sales Cloud. Platform & Other (which includes Slack) revenue increased 53% over the previous year to $1.4 billion. The number of customers who spend $100,000 annually with Slack increased 46%. A few notable wins were Carvana (CVNA) and Netflix (NFLX), while PayPal (PYPL) expanded its use of Slack. Marketing & Commerce revenue increased 20% year-over-year to $1 billion. A few wins in the quarter include Humana (HUM) and SunRun (RUN) in marketing, and Ralph Lauren (RL), Bose and Sonos (SONO) for Commerce. And Data — which includes Tableau and Mulesoft — revenue increased 23% to $1.1 billion. A few big Tableau wins in the quarter were Southwest Airlines (LUV), IBM and SunRun (RUN). Some of the large Mulesoft deals include Bose, Deloitte and Ford (F). On a geographic basis, in constant currency, sales increased 23% year-over-year in the Americas, 40% in Europe, the Middle East, and Africa (EMEA) and 28% in the Asia Pacific region (APAC). Regarding a few other closely watched industry metrics: The Remaining Performance obligation (RPO), which "represents all future revenue under contract that has not yet been recognized as revenue," ended the quarter at $43.7 billion, up 21%. The Current RPO (cRPO), which "represents future revenue under contract that is expected to be recognized as revenue in the next 12 months" ended the quarter at $22.0 billion, up 24% in constant currency and higher than estimates of $21.424 billion. RPO and cRPO provide a ton of visibility into Salesforce's future. Revenue attrition continued to improve, ending the quarter between 7% to 7.5% to a new all-time low. Other Notes Founder and Co-CEO Marc Benioff essentially shot down the notion that there has been a big pull-forward of demand for front office applications, explaining that "in many cases, we're in the 10% or 20% or 30% growth areas where we're just beginning of what we can do with these customers." "If they don't digitize, they're not going to grow," Benioff said when talking about Salesforce's customers. And what should come to the delight of investors, management reaffirmed on the call that they have no plans for any material M & A. Integrating Slack remains their top focus. Guidance On guidance for fiscal year 2023, management raised its revenue outlook by about $300 million to the range of $32.0 billion to $32.1 billion from $31.7 billion to $31.8 billion. This new outlook is higher than estimates of $31.781 billion. Management also increased its fiscal-year 2023 GAAP operating margin outlook to 3.6%, though non-GAAP margins of approximately 20% were reiterated. Operating cash flow for fiscal 2023 is expected to increase 21% to 22% year-over-year, implying $7.29 versus estimates of $7.071 billon. For the first quarter of fiscal 2023, Salesforce raised its revenue outlook to the range of $7.37 billion to $7.38 billion from their prior view of $7.215 billion to $7.25 billion. This is higher than estimates of $7.269 billion. However, non-GAAP earnings per share is expected to be $0.93 to $0.94, below estimates of $1.00. First quarter cRPO is expected to grow 21%, implying roughly $21.5 billion versus estimates of $21.110 billion. (Jim Cramer's Charitable Trust is long CRM, F, PYPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Marc Benioff, CEO, Salesforce.com speaking at the World Economic Forum in Davos, Switzerland, Jan. 23, 2020.

Adam Galasia | CNBC