Customer relationship management software maker Salesforce (NYSE:CRM) announced better-than-expected results in the Q4 FY2023 quarter, with revenue up 14.4% year on year to $8.38 billion. Guidance for next quarter's revenue was $8.17 billion at the midpoint, which is 1.77% above the analyst consensus. Salesforce made a GAAP loss of $98 million, down on its loss of $28 million, in the same quarter last year.
Salesforce (CRM) Q4 FY2023 Highlights:
- Revenue: $8.38 billion vs analyst estimates of $7.99 billion (4.9% beat)
- EPS (non-GAAP): $1.68 vs analyst estimates of $1.36 (23.4% beat)
- Revenue guidance for Q1 2024 is $8.17 billion at the midpoint, above analyst estimates of $8.03 billion
- Management's revenue guidance for upcoming financial year 2024 is $34.6 billion at the midpoint, beating analyst estimates by 1.39% and predicting 10.4% growth (vs 18.7% in FY2023)
- Free cash flow of $2.57 billion, up from $115 million in previous quarter
- Gross Margin (GAAP): 75%, up from 72.5% 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 two years, growing from quarterly revenue of $5.82 billion in Q4 FY2021, to $8.38 billion.
This quarter, Salesforce's quarterly revenue was once again up 14.4% year on year. We can see that the company increased revenue by $547 million quarter on quarter. That's a solid improvement on the $117 million increase in Q3 2023, so shareholders should appreciate the acceleration of growth.
Guidance for the next quarter indicates Salesforce is expecting revenue to grow 10.2% year on year to $8.17 billion, slowing down from the 24.3% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $34.6 billion at the midpoint, growing 10.4% compared to 18.3% increase in FY2023.
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 75% in Q4.
That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the 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 have followed 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 $2.57 billion in Q4, up 41.6% year on year.
Salesforce has generated $6.31 billion in free cash flow over the last twelve months, an impressive 20.1% 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 Q4 Results
With a market capitalization of $162 billion, more than $12.5 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.
It was good to see Salesforce outperform Wall St’s revenue expectations this quarter and provide a positive outlook. And we were also glad to see the improvement in gross margin. On the other hand, the revenue guidance for next year indicates a slowdown in absolute terms. Zooming out, we think this was good quarter, showing the company is staying on target. The company is up 10% on the results and currently trades at $184.05 per share.
Is Now The Time?
When considering Salesforce, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Salesforce we will be cheering from the sidelines. 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 4.9x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
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