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Salesforce (NYSE:CRM) Surprises With Q2 Sales, Provides Encouraging Quarterly Guidance


Full Report / August 25, 2021
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Customer relationship management software maker Salesforce (NYSE:CRM) reported strong growth in the Q2 FY2022 earnings announcement, with revenue up 23% year on year to $6.34 billion. Salesforce made a GAAP profit of $535 million, down on its profit of $2.62 billion, in the same quarter last year.

Salesforce (CRM) Q2 FY2022 Highlights:

  • Revenue: $6.34 billion vs analyst estimates of $6.24 billion (1.51% beat)
  • EPS (non-GAAP): $1.48 vs analyst estimates of $0.93 (59.4% beat)
  • Revenue guidance for Q3 2022 is $6.78 billion at the midpoint, above analyst estimates of $6.66 billion
  • The company lifted revenue guidance for the full year, from $25.9 billion to $26.2 billion at the midpoint, a 1.15% increase
  • Free cash flow of $173 million, down 94.3% from previous quarter
  • Gross Margin (GAAP): 74.5%, in line with previous quarter

Launched in 1999 from a rented one-bedroom apartment in San Francisco by Marc Benioff and his three co-founders, Salesforce 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 $5.15 billion, to $6.34 billion.

Salesforce Total Revenue

This quarter, Salesforce's quarterly revenue was once again up a very solid 23% year on year. On top of that, revenue increased $377 million quarter on quarter, a very strong improvement on the $146 million increase in Q1 2022, which shows acceleration of growth, and is great to see.

Analysts covering the company are expecting the revenues to grow 21.7% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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, licences, technical support and other necessary running expenses was at 74.5% in Q2.

Salesforce Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.74 left to spend on developing new products, marketing & sales and the general administrative overhead. This is around the average of what we typically see in SaaS businesses, but it is good to see that the gross margin is staying stable which indicates that Salesforce is doing a good job controlling costs and is not under a pressure from competition to lower prices.

Key Takeaways from Salesforce's Q2 Results

Sporting a market capitalization of $252 billion, more than $9.65 billion in cash and with positive free cash flow over the last twelve months, we're confident that Salesforce has the resources it needs to pursue a high growth business strategy.

Salesforce' revenue guidance for the next quarter looks quite a bit better than what the analysts were expecting. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 1.47% on the results and currently trades at $265.25 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 good 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 8.7, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. There is definitely a lot of 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 $282 per share right before these results, implying that they saw upside in buying Salesforce even in the short term.

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