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Why Is Salesforce.com (CRM) Down 13.7% Since Last Earnings Report?

·5 min read

A month has gone by since the last earnings report for Salesforce.com (CRM). Shares have lost about 13.7% in that time frame, underperforming 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 catalysts.

Salesforce Beats Q2 Earnings, Lowers Guidance

Salesforce strong financial results for the second quarter of fiscal 2023, wherein its revenues and earnings surpassed the respective Zacks Consensus Estimate and marked a solid year-over-year improvement as well.

Quarter in Detail

Salesforce’s second-quarter fiscal 2023 non-GAAP earnings of $1.19 per share beat the Zacks Consensus Estimate of $1.02. The quarterly earnings included a benefit of four cents 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 19.6% from the year-ago quarter’s earnings of $1.48 per share.

Salesforce’s quarterly revenues of $7.72 billion climbed 22% year over year, surpassing the Zacks Consensus Estimate of $7.69 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 second quarter. Also, the recently acquired Slack business boosted revenues and contributed $381 million to total sales in the second quarter.

Coming to CRM’s business segments, revenues from Subscription and Support (92.5% of the total revenues) increased 20.8% from the year-earlier period to $7.14 billion. Professional Services and Other (7.5% of total sales) revenues climbed 35.4% to $577 million.

Under the Subscription and Support segment, Sales Cloud revenues grew 15% year over year to $1.7 billion. Revenues from Service Cloud, one of the company’s largest and fastest-growing businesses, also improved 14% to $1.8 billion. Marketing & Commerce Cloud revenues jumped 17% to $1.1 billion. Salesforce Platform and Other revenues were up 53% to $1.5 billion. Also, revenues from Data increased 12% year over year to $1 billion.

Geographically, Salesforce registered revenue growth at cc of 22% in America (68% of the total revenues), 31% in the Asia Pacific (9%) and 35% in the EMEA (23%) on a year-over-year basis.

Salesforce’s gross profit came in at $5.59 billion, up 18.3% from the prior-year period. However, the gross margin contracted 300 basis points (bps) to 72%.

Salesforce recorded a non-GAAP operating income of $1.54 billion, up 19% year over year. However, the non-GAAP operating margin contracted 50 bps to 19.9% due to the lower gross margin. Operating expenses flared up 23% year over year to $5.4 billion.

Salesforce exited the fiscal second quarter with cash, cash equivalents and marketable securities of $13.5 billion, flat with the $13.5 billion recorded at the end of the previous quarter.

CRM generated operating cash flow of $334 million and free cash flow of $131 million in the second quarter. In the first half of fiscal 2023, the company generated operating and free cash flow of $4.01 billion and $3.63 billion, respectively.

As of Jul 31, 2022, the current remaining performance obligation reflecting revenues under contract for the next 12 months was $21.5 billion, up 15% on a year-over-year basis.

Additionally, the company revealed that its board of directors authorized a new share repurchase program worth $10 billion.

Guidance Update

Salesforce trimmed its fiscal 2023 guidance amid unfavorable foreign currency change rates and a weakening IT spending environment.

For fiscal 2023, CRM lowered its revenue guidance range to the $30.9-$31 billion range from the $31.7-$31.8 billion. The company forecast that the stronger U.S. dollar against other major currencies would have a $800-million negative impact on total revenues. The updated guidance includes expected revenues from the newly acquired Slack business of $1.5 billion.

The company decreased its non-GAAP earnings guidance range to the $4.71-$4.73 per share range from the $4.74-$4.76 band projected earlier. It also reduced year-over-year operating cash flow growth projection to 16-17% from the earlier guidance range of 21-22%. However, it reiterated the non-GAAP operating margin forecast for the fiscal year of approximately 20.4%.

For the fiscal third quarter, Salesforce projects total sales between $7.82 billion and $7.83 billion. The revenue guidance includes a $250-million negative impact of unfavorable currency exchange rates. Furthermore, CRM anticipates non-GAAP earnings per share in the band of $1.20-$1.21 for the current quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

The consensus estimate has shifted -5.82% due to these changes.

VGM Scores

At this time, Salesforce.com has a subpar Growth Score of D, a grade with the same score on the momentum front. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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