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A month has gone by since the last earnings report for Salesforce.com (CRM). Shares have lost about 3.1% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Salesforce.com due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Salesforce Beats Q1 Earnings, Guidance Raise
Salesforce delivered better-than-expected first-quarter fiscal 2023 results. The company’s first-quarter non-GAAP earnings of 98 cents per share beat the Zacks Consensus Estimate of 93 cents. Quarterly earnings included a benefit of a penny per share from the mark-to-mark accounting of CRM’s strategic investments at a non-GAAP tax rate of 22%. However, non-GAAP earnings declined 19% from the year-ago quarter’s earnings of $1.21 per share.
Salesforce’s quarterly revenues of $7.41 billion climbed 24% year over year, surpassing the Zacks Consensus Estimate of $7.37 billion. The top line also improved 26% in constant currency (cc).
The company has been benefiting from the robust demand environment as customers are undergoing a major digital transformation. Thus, the rapid adoption of its cloud-based solutions resulted in the better-than-anticipated performance in the fiscal first quarter. Also, the recently acquired Slack business boosted revenues and contributed $348 million to total sales in the first quarter.
Quarter in Detail
Coming to CRM’s business segments, revenues from Subscription and Support (93% of total revenues) increased 24% from the year-earlier period to $5.54 billion. Professional Services and Other (7% of total sales) revenues climbed 30% to $555 million.
Under the Subscription and Support segment, Sales Cloud revenues grew 18% year over year to $1.6 billion. Revenues from Service Cloud, one of the company’s largest and the fastest-growing businesses, also improved 17% to $1.8 billion. Marketing & Commerce Cloud revenues jumped 22% to $1.1 billion. Salesforce Platform and Other revenues were up 55% to $1.4 billion. Also, revenues from Data increased 15% year over year to $1 billion.
Geographically, Salesforce registered revenue growth at cc of 21% in America (67% of total revenues), 32% in the Asia Pacific (10%) and 39% in the EMEA (23%) on a year-over-year basis.
Salesforce’s gross profit came in at $5.37 billion, up 22% from the prior-year period. However, the gross margin contracted 200 basis points (bps) to 72%.
Salesforce recorded a non-GAAP operating income of $1.31 billion, up 8% year over year. However, the non-GAAP operating margin contracted 260 bps to 17.6% due to the lower gross margin and increased operating expenses. Operating expenses flared up 32% year over year to $5.35 billion.
Salesforce exited the fiscal first quarter with cash, cash equivalents and marketable securities of $13.5 billion compared with the $10.5 billion recorded at the end of the previous quarter. CRM generated operating cash flow of $3.68 billion and free cash flow of $3.5 billion in the first quarter.
As of Apr 30, 2022, the current remaining performance obligation reflecting revenues under contract for the next 12 months was $21.5 billion, up 21% on a year-over-year basis.
Buoyed by the stronger-than-expected bottom line in the first quarter, Salesforce raised its profit forecast for full fiscal 2023.
For fiscal 2023, the company increased its non-GAAP earnings guidance range to the $4.74-$4.76 per share range from the $4.62-$4.64 band projected earlier. It now anticipates the non-GAAP operating margin for the fiscal year of approximately 20.4% instead of around 20%. The company reiterated its year-over-year operating cash flow growth guidance of 21-22%.
However, CRM lowered its revenue guidance range to the $31.7-$31.8 billion range from the $32-$32.1 billion band due to forex headwinds. The company forecast that the stronger U.S. dollar against other major currencies would have a $600-million negative impact on total revenues. The updated guidance includes expected revenues from the newly acquired Slack business of $1.5 billion.
On its fourth-quarter fiscal 2022 earnings conference call, Salesforce anticipated that the Traction on Demand business acquisition would contribute approximately $75 million to its fiscal 2023 total revenues.
For the fiscal second quarter, Salesforce projects total sales between $7.69 billion and $7.70 billion. The revenue guidance includes a $200-million negative impact of unfavorable currency exchange rates. Furthermore, CRM anticipates non-GAAP earnings per share in the band of $1.01-$1.02 for the current quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
The consensus estimate has shifted -19.66% due to these changes.
At this time, Salesforce.com has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Salesforce.com has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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