Salesforce's quarterly beat and raise shows Benioff can deliver on profitability

Published Wed, May 31 20237:52 PM EDTUpdated Thu, Jun 1 20236:55 AM EDT

Salesforce (CRM) topped expectations in the first quarter of its fiscal year 2024, while providing strong guidance for the second quarter and raising its margin outlook for the rest of the year — once again proving that this is a transformed company balancing profitable growth at scale. Revenue for the three months ended April 30 grew 11% year-over-year, to $8.25 billion, exceeding analysts' forecasts of $8.18 billion, according to estimates compiled by Refinitiv. Non-GAAP* earnings-per-share (EPS) of $1.69, beat the $1.61-per-share EPS predicted by analysts, Refinitiv data showed. Operating margins came in at 5% on a GAAP basis, and 27.6% on non-GAAP basis, compared with expectations of 6.5% and 25.9%, respectively, according to FactSet. Operating cash flow increased 22% from the previous year, to $4.49 billion, beating estimates of $3.76 billion, FactSet data showed. Free cash flow of $4.25 billion outpaced the $3.55 billion forecasted by analysts, according to FactSet. However, the guidance boost was not enough for the stock to overcome lofty expectations ahead of the earnings release, with the stock up 68% this year and trading at a 52-week high. The small beat and raise are prompting some profit-taking, resulting in shares falling roughly 6% after hours Wednesday, to around $210 apiece. But with management committed to margin expansion, we're sticking by the name. * GAAP denotes generally accepted accounting principles. Bottom line The last time the company reported earnings, the market marveled at how fast it was delivering on its profitability goals. While the magnitude of the operating-margin beat wasn't as large this time around, we remain impressed with how efficient the company has become in such a short period of time. It's no secret that the enterprise software industry is going through a difficult period right now. The best way to offset sluggish revenue growth is by driving profitability higher and Salesforce stepped up to the task. With CEO Marc Benioff more engaged than ever, winning over activists who pressed for tough but necessary changes, securing new customer wins, and shepherding the business into this new stage of generative artificial intelligence (AI), better times are still ahead for Salesforce. Shares are pulling back in afterhours trading, but we don't see the decline as a reflection of the quarter. Did management need to raise the full-year outlook more after beating this quarter and providing upside second-quarter guidance? Probably, but the economic environment is far from simple. More importantly, this evening's decline is more of a reflection of how big of a move the stock has made this year in what has become a difficult market outside of tech. We have not been chasers of tech into the extraordinary runs the group has made over the past few weeks. But with our long-term view on Salesforce unchanged, coupled with the stock backing off its recent highs, we can look to be more opportunistic. Quarterly Commentary We are pleased to see Salesforce beat across so many key metrics, despite the challenging macroeconomic environment. The deal environment continues to be less favorable than years past, with many taking longer to close (elongated deal cycles) and smaller in size (deal compression). Still, Salesforce said it continues to see strong adoption of its cloud offerings from customers who are in need of reducing complexity and speeding up processes relative to value. Geographically, on a constant currency basis, sales increased 10% year-over-year in the Americas, 17% in Europe, the Middle East, and Africa (EMEA), and 24% in the Asia Pacific region (APAC). Despite the difficult operating environment, Salesforce's revenue attrition remains quite low, at 8%, particularly considering the slowdown in the global economy. New deals may be taking longer to close but the low attrition rates show that enterprise customers can't afford to leave Salesforce's mission-critical software products once in use. They can't afford to miss out on those productivity gains. On the margin side, in order to generate a 1,000-basis-point improvement in the short span of 12 months, a company must really drive efficiencies across each and every part of its business. Looking under Salesforce's hood, its expenses as a percent of revenue are down in every major category relative to last year. Marketing and sales as a percent of revenue was 32% compared to 38% last year; cost of revenues is down to 21% of revenue compared to 22% last year; research and development is down to 12% compared to 14% last year; and general and administrative is a tick lower at 7% versus 8% last year. Reducing headcount helps, too. Salesforce ended the quarter with 72,970 full time employees, down from 77,810 last year. With the support of Salesforce's increased cash flow, the company made good on its commitment to repurchase stock to offset dilution from stock-based compensation. The company bought back $2.1 billion worth of shares in the quarter, resulting in a 1% decline in its diluted share count from last year. The company still has about $13.9 billion remaining on a $20 billion share-repurchase program. Salesforce management on Wednesday noted the company has integrated generative AI into its products. Whether it be Einstein GPT , which conducted 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 is harnessing the power of AI to allow its customers to be more productive. "The coming wave of generative AI will be more evolutionary than any technology innovation that's come before," 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 its strong fiscal first-quarter results, management outlined several positive adjustments to its full-year outlook. Although the company left its revenue prediction unchanged, at $34.5 billion to $34.7 billion, the company expects its profitability will come in better than previously anticipated. Salesforce now sees its GAAP operating margin at 11.4%, compared to a prior outlook of 10.8%, and its non-GAAP operating margin at 28%, compared to a previous estimate of 27%. With margins higher, the company raised what it expects to earn per share for the year. Salesforce raised its GAAP EPS range to $2.67 to $2.69, up from $2.59 to $2.61, and non-GAAP EPS range to $7.41 to $7.43, up from $7.12 to $7.14. Both new EPS ranges are above the consensus estimates of $2.67 and $7.17 per share. For its fiscal second quarter, Salesforce guided revenues to be in a range of $8.51 billion to $8.53 billion, with GAAP EPS coming in at 79 cents to 80 cents and non-GAAP EPS at $1.89 to $1.90. Compared to consensus estimates, these figures are beats across the board. (Jim Cramer's Charitable Trust is long CRM. 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, co-founder and CEO of Salesforce, speaks at an Economic Club of Washington luncheon in Washington, DC, on Oct. 18, 2019.

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