3451

Salesforce (CRM) Research Report: Q1 CY2024 Update


Full Report / May 29, 2024

Customer relationship management software maker Salesforce (NYSE:CRM) reported results in line with analysts' expectations in Q1 CY2024, with revenue up 10.7% year on year to $9.13 billion. On the other hand, next quarter's revenue guidance of $9.23 billion was less impressive, coming in 1.2% below analysts' estimates. It made a non-GAAP profit of $2.44 per share, improving from its profit of $1.69 per share in the same quarter last year.

Salesforce (CRM) Q1 CY2024 Highlights:

  • Revenue: $9.13 billion vs analyst estimates of $9.15 billion (small miss)
  • EPS (non-GAAP): $2.44 vs analyst estimates of $2.38 (2.7% beat)
  • Revenue Guidance for Q2 CY2024 is $9.23 billion at the midpoint, below analyst estimates of $9.34 billion
  • The company reconfirmed its revenue guidance for the full year of $37.85 billion at the midpoint, but LOWERED full year subscription revenue guidance
  • Gross Margin (GAAP): 76.3%, up from 74.2% in the same quarter last year
  • Free Cash Flow of $6.08 billion, up 86.9% from the previous quarter
  • Billings: $6.18 billion at quarter end, up 3.1% year on year (6.0% miss)
  • Market Capitalization: $261.7 billion

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.

Sales Software

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 integrates 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 mediocre over the last three years, growing from $5.96 billion in Q1 2022 to $9.13 billion this quarter.

Salesforce Total Revenue

Even though Salesforce fell short of analysts' revenue estimates, its quarterly revenue growth was still up 10.7% year on year. However, the company's revenue actually decreased by $154 million in Q1 compared to the $567 million increase in Q4 CY2023. Sales also dropped by a similar amount a year ago and management is guiding for revenue to rebound in the coming quarter, which might hint at an emerging seasonal pattern.

Next quarter's guidance suggests that Salesforce is expecting revenue to grow 7.2% year on year to $9.23 billion, slowing down from the 11.4% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 8.5% over the next 12 months before the earnings results announcement.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 76.3% in Q1.

Salesforce Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, 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 $6.08 billion in Q1, up 43.2% year on year.

Salesforce Free Cash Flow

Salesforce has generated $11.33 billion in free cash flow over the last 12 months, an eye-popping 31.7% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Salesforce's Q1 Results

We struggled to find many strong positives in these results. Its revenue guidance for next quarter missed analysts' expectations and its billings missed Wall Street's estimates. Also, full year subscription revenue guidance was lowered. Overall, this was a bad quarter for Salesforce. The company is down 11% on the results and currently trades at $242.21 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. Although its revenue growth has been a little slower over the last three years with analysts expecting growth to slow from here, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Given its price-to-sales ratio of 6.9x based on the next 12 months, the market is certainly expecting long-term growth from Salesforce. There are things to like about Salesforce, and there's no doubt it's a bit of a market darling, at least for some. However, we think there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $335.53 right before these results (compared to the current share price of $242.21).

To get the best start with StockStory, check out our most recent Stock picks, and then sign up for our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released. Especially for companies reporting pre-market, this often gives investors the chance to react to the results before everyone else has fully absorbed the information.