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Salesforce (NYSE:CRM) Reports Q3 In Line With Expectations But Stock Drops On Weaker Guidance


Full Report / November 30, 2021
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Customer relationship management software maker Salesforce (NYSE:CRM) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 26.6% year on year to $6.86 billion. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $7.22 billion at the midpoint, or 0.06% below analyst estimates. Salesforce made a GAAP profit of $468 million, down on its profit of $1.08 billion, in the same quarter last year.

Salesforce (CRM) Q3 FY2022 Highlights:

  • Revenue: $6.86 billion vs analyst estimates of $6.8 billion (0.87% beat)
  • EPS (non-GAAP): $1.27 vs analyst estimates of $0.92 (37.8% beat)
  • Revenue guidance for Q4 2022 is $7.22 billion at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $238 million, up 37.5% from previous quarter
  • Gross Margin (GAAP): 73.1%, down from 74.2% 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 contact their customers and sell to them as efficiently as possible, and that together with the ongoing migration to cloud drives demand for cloud-based CRM solutions 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 $5.41 billion, to $6.86 billion.

Salesforce Total Revenue

This quarter, Salesforce's quarterly revenue was once again up a very solid 26.6% year on year. On top of that, revenue increased $523 million quarter on quarter, a very strong improvement on the $377 million increase in Q2 2022, which shows re-acceleration of growth, and is great to see.

Analysts covering the company are expecting the revenues to grow 22% over the next twelve months, although estimates are likely to change post earnings.

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 73.1% in Q3.

Salesforce Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.73 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop this is still 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.

Key Takeaways from Salesforce's Q3 Results

With a market capitalization of $290 billion, more than $9.39 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.

Salesforce delivered solid revenue growth this quarter. That feature of these results really stood out as a positive. On the other hand, the guidance was weaker than expected and there was a deterioration in gross margin. Overall, this quarter's results could have been better. The company is down 6.95% on the results and currently trades at $265.35 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 think Salesforce is a solid business. Its revenue growth has been solid, and analysts believe that sort of growth is sustainable for now. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its strong gross margins suggest it can operate profitably and sustainably.

Salesforce's price to sales ratio based on the next twelve months is 9.4x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely things to like about Salesforce and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $330.8 per share right before these results, implying that they saw upside in buying Salesforce even in the short term.

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