Customer relationship management software maker Salesforce (NYSE:CRM) reported results in line with analysts' expectations in Q2 FY2024, with revenue up 11.4% year on year to $8.6 billion. The company also expects next quarter's revenue to be around $8.71 billion, in line with analysts' estimates. Turning to EPS, Salesforce made a non-GAAP profit of $2.12 per share, improving from its profit of $1.19 per share in the same quarter last year.
Salesforce (CRM) Q2 FY2024 Highlights:
- Revenue: $8.6 billion vs analyst estimates of $8.53 billion (0.89% beat)
- EPS (non-GAAP): $2.12 vs analyst estimates of $1.88 (12.5% beat)
- Revenue Guidance for Q3 2024 is $8.71 billion at the midpoint, above analyst estimates of $8.66 billion
- The company slightly raised its revenue guidance for the full year, it stands at $34.8 billion at the midpoint
- Free Cash Flow of $628 million, down 85.2% from the previous quarter
- Gross Margin (GAAP): 75.4%, up from 72.4% in the 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.
As you can see below, Salesforce's revenue growth has been solid over the last two years, growing from $6.34 billion in Q2 FY2022 to $8.6 billion this quarter.
This quarter, Salesforce's quarterly revenue was once again up 11.4% year on year. On top of that, its revenue increased $356 million quarter on quarter, a strong improvement from the $137 million decrease in Q1 2024. This is a sign of acceleration of growth and very nice to see indeed.
Next quarter's guidance suggests that Salesforce is expecting revenue to grow 11.1% year on year to $8.71 billion, slowing down from the 14.2% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 10.1% over the next 12 months before the earnings results announcement.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 75.4% in Q2.
That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Salesforce's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Salesforce's free cash flow came in at $628 million in Q2, up 379% year on year.
Salesforce has generated $7.56 billion in free cash flow over the last 12 months, an impressive 22.7% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Salesforce's Q2 Results
With a market capitalization of $206 billion, a $12.4 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Salesforce has the resources needed to pursue a high-growth business strategy.
It was good to see Salesforce beat revenue, non-GAAP operating profit, and adjusted EPS expectations this quarter. The company also slightly improved its gross margin vs. last year. Those really stood out as positives in these results. What is driving the stock up as well is the slightly increase in full year revenue guidance accompanied by a meaningful increase in profit and cash flow guidance. Zooming out, we think this was a strong quarter, showing that the company is staying on target. The stock is up 6.31% after reporting and currently trades at $228.86 per share.
Is Now The Time?
When considering an investment in Salesforce, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. Although we have other favorites, we understand the arguments that Salesforce isn't a bad business. However, its revenue growth has been a little slower, and analysts expect growth rates to deteriorate from there. But on a positive note, its bountiful generation of free cash flow empowers it to invest in growth initiatives.
The market is certainly expecting long-term growth from Salesforce given its price to sales ratio based on the next 12 months is 5.8x. In the end, beauty is in the eye of the beholder. While Salesforce wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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