Salesforce shrugs off growth concerns as reenergized CEO Benioff lifts guidance

Published Wed, Aug 30 20237:14 PM EDT

Salesforce (CRM) once again flexed its ability to boost profits while also growing at scale. The cloud software company topped expectations in its second quarter and provided an upbeat view for the rest of the year — sending shares up about 6% in after-hours trading. Revenue for the three months ended July 31 increased 11% year-over-year, to $8.60 billion, exceeding analysts' forecasts of $8.53 billion, according to estimates compiled by Refinitiv. Non-GAAP earnings-per-share (EPS) of $2.12 grew 78% from last year and beat the $1.90-per-share EPS predicted by analysts, Refinitiv data showed. Operating margin expansion was on display in the quarter. GAAP margins were 17.2% while non-GAAP margins were 31.6% handily beating expectations of 13.8% and 28.4%, respectively, according to FactSet. Operating cash flow increased 142% from the previous year to $808 million, beating estimates of $538 million, FactSet data showed. Free cash flow of $628 million outpaced the $326 million forecasted by analysts, according to FactSet. The July quarter is seasonally Salesforce's lowest cash flow generating quarter. Bottom line Salesforce delivered a terrific quarter Wednesday and continued to show discipline on margins. While the solid margin beat and upside to earnings are similar to what Salesforce reported back in May, one key difference this time was the increased revenue outlook. We can't say we are surprised to see the slight reinvigoration in top-line trends. After the stock slumped last quarter in reaction to the slowest quarterly revenue growth rate since 2010, CEO Marc Benioff shuffled up some of his top leaders, appointing a new chief revenue officer and chief marketing officer. This change up is already paying dividends with the revenue guide above consensus and the uptick in the current remaining performance obligation (cPRO) growth rate. This represents future revenue under contract that is expected to be recognized as revenue in the next 12 months and is a great measure of the health of the business. Additionally, we recently saw some prominent analysts turn bearish around Salesforce, noting that the weak macro environment would limit revenue upside and that the margin-expansion catalyst has largely played out. This quarter should disprove the bearish thesis — at least for now — as management once again materially raised its operating margin outlook on both a GAAP and non-GAAP basis. Salesforce's annual Dreamforce conference coming up next month, an event where the company plans to show off its new AI innovations, which should result in many new business wins. Advancements in AI and the potential it has to transform the customer relationship management industry clearly has reenergized Benioff, and we are excited to see what the company has in store. Quarterly commentary Salesforce beat across so many key metrics, despite the challenging macroeconomic environment. Like many other enterprise software companies, Salesforce is seeing elongated sales cycles, additional deal scrutiny, and deal compression. This isn't new or revelatory. Even though these industry headwinds persist, Salesforce continues to see strong adoption of its cloud offerings from customers who are consolidating their technology platforms to reduce complexity and drive efficiency and growth. As proof, six of its top ten wins in the quarter included five or more different Salesforce clouds. The company's success led to a 12.1% increase in its cRPO, topping estimates of 10% growth. At the same time, the company's revenue attrition rate stayed low at 8%, a sign that enterprise customers can't afford to leave Salesforce's mission-critical software products once in use and risk losing those efficiency gains. Geographically, on a constant currency basis, sales increased 10% year over year in the Americas, 11% in Europe, the Middle East, and Africa (EMEA), and 24% in the Asia Pacific region (APAC). On the margin side, the 1,1170-basis-point improvement (see chart above) in the short span of 12 months showed management took a disciplined approach to spending and removed complexity from every part of its business. Looking under Salesforce's hood, you can tell where it is driving efficiencies. Compared to the second quarter last year on a non-GAAP basis, marketing and sales as a percent of revenue dropped to 30% from 37%, research and development as a percent of revenue declined to 20% from 23%, general and administrative expenses as percent of revenue dipped to 11% from 13% while market and sales expenses held steady at 7%. Reducing headcount helps, too. Salesforce ended the quarter with 70,456 full-time employees, down from 72,980 in the prior quarter. As Salesforce's free cash flow continues to grow, it has an easier time making good on its commitment to repurchase stock to offset dilution from stock-based compensation. The company bought back $1.9 billion worth of shares in the quarter, resulting in a 1% decline in its diluted share count from last year. The company still has about $8.1 billion remaining on a $20 billion share repurchase program. Salesforce is also a big believer that it will pioneer AI and lead the industry through this transformation cycle. "We're democratizing generative AI, making it very easy for our customers to implement every job, every business in every industry," CEO Marc Benioff said. "Every customer I met within the quarter made it clear they are laser-focused on driving greater productivity, quick time to value and business growth. We see AI CRM as the answer…to those priorities, and we're making it easier and faster for our customers to unleash the power of trusted generative AI safely and at scale," Co-President Brian Millham later added. Outlook Following its strong first half of the year, management made several positive revisions to its full-year outlook. The company nudged up its full-year-revenue outlook above the consensus of $34.66 billion. It now expects to hit $34.7 billion to $34.8 billion, up from $34.5 billion to $34.7 billion. Salesforce also expects the year to be much more profitable than previously thought, with management raising its GAAP operating margin outlook to 13.3% from 11.4% and non-GAAP outlook to 30% from 28%. Additionally, free cash flow is now expected to increase 22% to 23% from last year's figure. Previously, Salesforce expected free cash flow to be up 16% to 17%. Getting to 30% margins is quite the milestone for the company. With margins higher and revenues tweaked up, the company materially raised what it expects to earn per share for the year. Salesforce raised its GAAP EPS range to $3.50 to $3.52, up from $2.67 to $2.69, and non-GAAP EPS range to $8.04 to $8.06, up from $7.41 to $7.43. Both new EPS ranges are above the consensus estimates of $2.69 and $7.42 per share. For its fiscal third quarter, Salesforce guided revenues to be in a range of $8.70 billion to $8.72 billion vs. estimates of $8.67 billion, with GAAP EPS coming in at $1.02 to $1.03 and non-GAAP EPS at $2.05 to $2.06 compared to estimates of $0.79 and $1.84, respectively. Salesforce also expects its cPRO to grow slightly above 11% from last year and that's slightly better than estimates of 10.8% growth. (Jim Cramer's Charitable Trust is long CRM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Marc Benioff, cofounder and CEO of Salesforce, attends a session at the Congress centre during the World Economic Forum in Davos, Switzerland, on January 17, 2023.

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