On Wednesday evening, Salesforce (CRM) , another Sarge fave, released the firm's fiscal first quarter financial results that reflected solid performance, yet sold off overnight.
For the three month period ended April 30th, Salesforce posted an adjusted EPS of $1.69 (GAAP EPS: $0.20) on revenue of $8.247B. Both these top and adjusted bottom line results beat Wall Street rather handily. The revenue print was good enough for year over year growth of 11.3%. The adjustments made were fairly well spread across charges related to restructuring costs, stock-based compensation expense and the amortization of purchased intangibles.
With revenue growth at 11.3%, the cost of those revenues increased just 3.9% to $2.125B, leaving a GAAP gross profit of $6.122B (+14.1%) on a gross margin of 5%, or an adjusted gross margin of 27.6%, which beat expectations. Operating expenses for the quarter increased by 6.8% to $5.71B, producing operating income of $412M up from just $20M for the year ago comp. After accounting for interest and taxes, the firm was left with a GAAP net income of $199M, up from $28M.
Business
Remaining performance obligation was up 11% to $46.7B. Current remaining performance obligation increased 12% to $24.1B.
- Subscription and Support Services generated sales of $7.642B (+11.5%), beating estimates.
- Sales Cloud generated sales of $1.81B (+10.9%).
- Service Cloud generated sales of $1.964B (+11.5%).
- Platform & Other generated sales of $1.567B (+10.4%).
- Marketing & Service generated sales of $1.17B (+7.4%).
- Data generated sales of $1.131B (+18.4%).
- Professional Services and Other drove sales of $605M (+9%), falling just short of consensus.
Guidance
For the current quarter, the firm is projecting revenue of roughly $8.51B to $8.53B in expectations of roughly 10% growth. Wall Street was around $8.49B on this number. The firm also sees GAAP EPS of $0.79 to $0.80 and adjusted EPS of $1.89 to $1.90. Wall Street was down around $1.70 on this, so this is excellent guidance.
For the full year, Salesforce sees revenue of $34.5B to $34.7B, again reflective of an expectation for growth of about 10%. For the year, Salesforce sees GAAP EPS of $2.67 to $2.69 and adjusted EPS of $7.41 to $7.43. Wall Street was down around $7.14 for that number, again reflective of better profitability than the Wall Street had seen coming.
Fundamentals
Cash flows were well ahead of expectations. Operating cash flow for the quarter reported hit the tape at $4.491B. Out of that came $243M in capital expenditures, leaving a whopping $4.428B in free cash flow, which was just about a cool $1B ahead of where Wall Street was on this. Out of that, the firm repurchased $2.054B worth of common stock. The firm does not pay shareholders a dividend.
Let's go to the balance sheet. At quarter's end, Salesforce ran with a cash position of $13.977B and current assets of $21.981B. Current liabilities add up to $21.626B. If taken at face value, the firm ended the period with a current ratio of 1.02, which would barely pass muster. Now, let's consider that within those current liabilities, there is $15.121B in deferred revenues.
I have explained this often. For any new kids, deferred revenues are not financial liabilities. When included in current and quick ratios, they can mislead. Deferred revenues are reflective of goods, services and/or labor yet to be provided, but already paid for. Once provided, this revenue can be recognized as ordinary. Deferred revenues are not financial obligations. Here, they make up 70% of current liabilities.
Total assets amount to $93.541B, including $55.221B in goodwill and other intangibles. At 59% of total assets, I admit to significant discomfort in seeing that number. Total liabilities less equity comes to $36.129B. This includes $9.421B in longer-term debt, which the firm could pay off out of pocket if need be. This balance sheet is healthy. There is no need for the bloated entry for goodwill. Unnecessary.
Wall Street
There is a lot of professional opinion out there concerning Salesforce this morning. I have come across 19 sell-side analysts that are both rated at four stars or better by TipRanks, and have opined on CRM since these earnings were released. Across these 19 analysts, there are 11 "buy" or buy-equivalent ratings, seven "hold" or "hold-equivalent" ratings and one "underperform" rating, which is considered to be "sell-equivalent."
Two of these "holds" did not set target prices, so we are working with 17 targets. The average target price across these 17 analysts is $234.53 with a high of $325 (Kash Rangan of Goldman Sachs) and a low of $153 (Mark Moerdler of Bernstein).
Once omitting these two as potential outliers, the average target across the other 15 analysts drops to $233.93. For those wondering, the average buy rating posted a target of $250.82, while the average hold rating posted a target of $215.
My Thoughts
The activist investors have worked their magic, as has CEO Marc Benioff. Sales growth has stabilized. Margins are up. Cash flows are roaring. Guidance is strong. There's not a lot to dislike in my opinion, except for valuation, which is what I wrote about CrowdStrike (CRWD) this morning. The difference is that CrowdStrike is growing much more rapidly and is valued accordingly.
Salesforce, after this morning's selloff, is now trading at 31 times forward looking earnings. Do 11% sales growth and improved profitability equal a valuation well above the S&P 500 norm? Maybe, if the firm is heavily integrated into the burgeoning new world of artificial intelligence.
The firm's own Einstein GPT conducted 1M transactions for its customers just this past week. The firm is also working AI into its Slack and Tableau offerings. Salesforce will be holding an AI Day on June 12th. I don't think I want to sell my shares of Salesforce ahead of that event. The first chart shows the run that Salesforce has had off of the bottom.
I had taken some shares off at $216, which was my target price. What now that the trend has overrun the breakout from the winter cup with handle pattern? What now? With these shares finally coming in a little bit.
This morning's 5% haircut does not even seem to be making a dent in the upward sloping trend in place. The stock has found some support at its 21 day EMA (exponential moving average), and if that line does crack, the 50 day SMA (simple moving average) has worked in the recent past. We do need a new pattern to take hold.
For now, all we have is this price channel. I would not get out of these shares unless I see that 50 day line break. My net basis is $158.90, so I am not threatened by the pressure this morning. In fact, I would consider writing August 18th $165 puts just in case the market decides that the unfilled gap from early March has to be filled. That would knock a rough $0.90 off of net basis. Temporary upside target? $240 (top of trend) until something more obvious reveals itself.
