At first we were aghast to see C-suite talent leave the building at Salesforce (CRM) . Would Marc Benioff hang on? Could Benioff hang on?
We were thrilled to hear names such as Third Point Management, Elliott Management, ValueAct Capital, Inclusive Capital and Starboard Value become invested. All of these activists were of a single mind. Reduce expenses and improve profitability. Not having to be hit over the head in order to spot opportunity, we joined that party.
Since addressing readers on this opportunity back on Feb. 10, the first real test would come on Wednesday afternoon, as Salesforce reported. Somebody give me a beat...
For its fiscal fourth quarter, which ended Jan. 31, Salesforce posted adjusted earnings per share of $1.68 (GAAP EPS: $-0.10) on revenue of $8.38 billion. The adjusted earnings print crushed expectations that were for something much lower. The revenue print managed to beat the street as well.
The adjustments that went into the non-GAAP result were many, so I'll just lay it out there. Restructuring costs amounted to $0.84 per share, stock-based compensation expense worked out to $0.80 per share, and the amortization of purchased intangibles came to $0.48 per share. This was all partially offset by of positive tax related adjustments of $0.34 per share.
Once all of that is factored in, GAAP EPS of -$0.10 becomes non-GAAP $1.68 and a GAAP net loss of $98 million becomes non-GAAP net income of $1.656 billion. Fun with math.
Looking into what is important to Salesforce's now "key" investors, gross income increased 18.3% to $6.284 billion, which beat expectations. Operating margin printed at an adjusted 29.2%, or 4.3% as reported. Both numbers exceeded expectations. RPO (Remaining Performance Obligation) printed at $48.6 billion, while cRPO (current) increased to $24.6 billion.
Segment Performance
Service Cloud...
... generated sales of $1.924 billion (+12.5%, +15% in constant currency)
Sales Cloud...
... generated sales of $1.787 billion (+12.7%, +16% in constant currency)
Platform and Other...
... generated sales of $1.557 billion (+15.3%, +18% in constant currency)
Data...
... generated sales of $1.344 billion (+18.3%, +20% in constant currency)
Guidance
For the current quarter, Salesforce sees revenue of $8.16 billion to $8.18 billion, bringing the low end of the range well above the $8.05 billion or so that Wall Street had in mind. Salesforce also sees GAAP EPS of $0.24 to $0.25 and adjusted EPS of $1.60 to $1.61. Again, this brings the low end of the range well above Wall Street. The street was in a range of $1.30 to $1.35 on this number. Salesforce also expects to grow its cRPO by 11% for the period.
For the full year, Salesforce now sees revenue of $34.5 billion to $34.7 billion. Expectations were for about $34 billion coming in, so this is a huge beat. In terms of profitability, Salesforce sees full year GAAP EPS of $2.59 to $2.61 and adjusted EPS of $7.12 to $7.14. Wall Street was in the $5.80s for this metric. The term "huge beat" does not do this guidance justice. This is a "mega-beat."
Fundamentals
Operating cash flow for the period printed at $2.788 billion (+40%). Out of that came capital expenditures of $218 million to leave free cash flow of $2.57 billion, which was up 41.6% year over year. Salesforce returned $2.3 billion of this free cash flow to shareholders in the form of share repurchases. On that note, on Wednesday night Salesforce announced that its share repurchase program had been increased to $20 billion. This, along with the guidance, are the primary reasons for the surging share price overnight.
Turning to the balance sheet, Salesforce ended the quarter with $12.508 billion and current assets of $26.395 billion, which was up 15.5% over 12 months. Current liabilities added up to $25.891 billion, which would leave Salesforce with a passable current ratio of 1.02. Understand that of those current liabilities, $17.376 billion are in the form of unearned revenue, which is not a financial obligation, but more a liability of labor or service. The company's "current" situation is quite robust.
Total assets amount to $98.849 billion, which does include $55.693 billion in goodwill and other assets. At 56% of total assets, that's probably a bit much. Total liabilities less equity comes to $40.49 billion, which includes $9.419 billion in long-term debt. Including short-term debt, the debt load comes to $10.6 billion, which Salesforce could take care of out of pocket if necessary. This is a strong balance sheet. Bloated goodwill and all.
Wall Street
Since these earnings were released last night, I have found 20 sell-side analysts that are both rated at a minimum of four stars by TipRanks and have opined on CRM. After allowing for changes across these 20 analysts, there are 14 "Buy" or buy-equivalent ratings, five "Hold" of hold-equivalent ratings and one outright "Underperform" rating, which we consider to be sell-equivalent. One of the "holds" did not set a target price, so we are working with 19 targets.
The average target price across these 19 analysts is $221.58, with a high of $320 (Kash Rangan of Goldman Sachs) and a low of $145 (Mark Moerdler of Bernstein). Once omitting the high and low targets as potential outliers, the average target across the other 17 analysts comes to $220.29.
Because you might be interested, the average target across the 14 "buys" came to $234.64 while the average target across the four "holds" that we have comes to an even $195.
My Thoughts
I said a long time ago never to bet against Marc Benioff. For a while there, I was not so sure of my own advice. I think the interest of these activist investors is having a positive impact. They also seem to understand that it's probably best not to try to force a change in leadership at Salesforce. This sort of confirms for me my original thinking here.
Benioff spoke on Wednesday night about accelerating profitability goals and about being openly receptive to input from his new, higher-profile investors. One must love -- or at least I will say that I love -- the way that free cash flow is growing, as are billings as is unearned revenue as is RPO and cRPO. This company is not even close to being in critical condition. Indeed, I would say that Salesforce is closer than one might think to hitting once again on all cylinders. I will give it more time and not take profits on this morning's pop in share price.
The shares traded around $190 at the US open. The pivot remains $179. My target price is $206. As I have mentioned in the past, I intend to add on dips down to the 200-day simple moving average (SMA). I'll worry about a panic point when the 50-day line becomes an issue. We have a winner today, gang. We've been fortunate of late.
