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Salesforce (NYSE:CRM) Reports Q2 In Line With Expectations But Stock Drops On Weak Guidance


Full Report / September 20, 2022
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Customer relationship management software maker Salesforce (NYSE:CRM) reported results in line with analyst expectations in Q2 FY2023 quarter, with revenue up 21.7% year on year to $7.72 billion. However, guidance for the next quarter was less impressive, coming in at $7.82 billion at the midpoint, being 3.06% below analyst estimates. Salesforce made a GAAP profit of $68 million, down on its profit of $535 million, in the same quarter last year.

Salesforce (CRM) Q2 FY2023 Highlights:

  • Revenue: $7.72 billion vs analyst estimates of $7.69 billion (small beat)
  • EPS (non-GAAP): $1.19 vs analyst estimates of $1.03 (15.7% beat)
  • Revenue guidance for Q3 2023 is $7.82 billion at the midpoint, below analyst estimates of $8.07 billion
  • The company dropped revenue guidance for the full year, from $31.7 billion to $30.9 billion at the midpoint, a 2.51% decrease
  • Free cash flow of $131 million, down 96.2% from previous quarter
  • Gross Margin (GAAP): 72.4%, down from 74.5% same quarter last year

Launched in 1999 from a rented one-bedroom apartment in San Francisco by Marc Benioff and his three co-founders, Salesforce (NYSE:CRM) is a software as a service platform that helps companies access, manage and share sales information.

Over time the company grew into a technology behemoth that now offers tools for complete management of a company’s sales, marketing and customer support efforts. From managing sales teams and designing sales processes, to automating personalised email and digital advertising campaigns to integrating all the data together in the cloud so the customer service knows what the sales promised to the person they just have on the call, Salesforce has it.

The power of Salesforce lies in that it becomes a de-facto operating system of the company’s sales and marketing function, centralising all the data and offering extreme customization, so that companies can adjust the software to exactly fit their internal processes. It now even offers the ability for customers to build new applications on top of the platform using building blocks that Salesforce have pre-made or their own.

Companies need to be able to interact with and sell to their customers as efficiently as possible. This reality, coupled with the ongoing migration of enterprises to the cloud drives demand for cloud-based customer relationship management (CRM) software that integrate data analytics with sales and marketing functions.

While it remains a strong brand in the cloud software space, Salesforce faces competition from Oracle (NYSE:ORCL), SAP (NYSE:SAP), HubSpot (NYSE:HUBS), and Zoho.

Sales Growth

As you can see below, Salesforce's revenue growth has been strong over the last year, growing from quarterly revenue of $6.34 billion, to $7.72 billion.

Salesforce Total Revenue

This quarter, Salesforce's quarterly revenue was once again up a very solid 21.7% year on year. On top of that, revenue increased $309 million quarter on quarter, a very strong improvement on the $85 million increase in Q1 2023, which shows acceleration of growth, and is great to see.

Guidance for the next quarter indicates Salesforce is expecting revenue to grow 14% year on year to $7.82 billion, slowing down from the 26.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 17.1% over the next twelve months.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Salesforce's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 72.4% in Q2.

Salesforce Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.72 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Salesforce's free cash flow came in at $131 million in Q2, down 24.2% year on year.

Salesforce Free Cash Flow

Salesforce has generated $5.68 billion in free cash flow over the last twelve months, an impressive 19.3% of revenues. This extremely high FCF margin is a result of Salesforce asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Salesforce's Q2 Results

With a market capitalization of $175 billion, more than $13.5 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that Salesforce's revenue guidance for the full year missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Salesforce. The company currently trades at $153 per share.

Is Now The Time?

Salesforce may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although Salesforce is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates.

Salesforce's price to sales ratio based on the next twelve months is 5.2x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Salesforce doesn't trade at a completely unreasonable price point.

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