Customer relationship management software maker Salesforce (NYSE:CRM) reported Q4 FY2022 results beating Wall St's expectations, with revenue up 25.9% year on year to $7.32 billion. Guidance for next quarter's revenue was $7.37 billion at the midpoint, which is 1.43% above the analyst consensus. Salesforce made a GAAP loss of $28 million, down on its profit of $267 million, in the same quarter last year.
Salesforce (CRM) Q4 FY2022 Highlights:
- Revenue: $7.32 billion vs analyst estimates of $7.24 billion (1.16% beat)
- EPS (non-GAAP): $0.84 vs analyst estimates of $0.75 (12.1% beat)
- Revenue guidance for Q1 2023 is $7.37 billion at the midpoint, above analyst estimates of $7.27 billion
- Management's revenue guidance for upcoming financial year 2023 is $32 billion at the midpoint, in line with analyst expectations and predicting 20.9% growth (vs 24.5% in FY2022)
- Free cash flow of $1.81 billion, up from $238 million in previous quarter
- Gross Margin (GAAP): 72.5%, down from 74.5% 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.
As you can see below, Salesforce's revenue growth has been strong over the last year, growing from quarterly revenue of $5.81 billion, to $7.32 billion.
This quarter, Salesforce's quarterly revenue was once again up a very solid 25.9% year on year. But the growth did slow down a little compared to last quarter, as Salesforce increased revenue by $463 million in Q4, compared to $523 million revenue add in Q3 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Salesforce is expecting revenue to grow 23.6% year on year to $7.37 billion, in line with the 22.5% 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 $32 billion at the midpoint, growing 20.9% compared to 24.5% increase in FY2022.
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 72.5% in Q4.
That means that for every $1 in revenue the company had $0.72 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, 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.
Cash Is King
If you follow 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 $1.81 billion in Q4, down 10.3% year on year.
Salesforce has generated $5.28 billion in free cash flow over the last twelve months, an impressive 19.9% 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
Sporting a market capitalization of $207 billion, more than $10.5 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.
It was good to see Salesforce provide next quarter revenue outlook exceeding analysts’ expectations. And we were also glad to see good revenue growth. Zooming out, we think this was a good quarter, showing the company is staying on target. The company is up 3.82% on the results and currently trades at $217 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. Although we have other favorites, we understand the arguments that Salesforce is not a bad business. Its revenue growth has been solid. And on top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives.
Salesforce's price to sales ratio based on the next twelve months is 6.5x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. 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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