Salesforce's ( CRM) CEO Marc Benioff has, according to Business Insider, taken several steps to remake the company's top management team shortly after reporting a quarter -- a little more than a week ago -- that beat both top- and bottom-line expectations. Wall Street had believed that as CRM had posted an adjusted gross margin for the quarter of 27% -- which approaches the stated goal of 30% -- the activist investors who had been all over Benioff had backed off. Maybe not. The 11.3% sales growth for the quarter was the company's slowest growth since 2010, even with all of the acquisitions made in recent years.
One: Miguel Milano has been appointed Chief Revenue Officer. Milano is part of Benioff's old guard, having worked at Salesforce for 10 years previously before moving on to Celonis. He now returns.
Two: Ariel Kelman takes over as Chief Marketing Officer. Kelman has previous experience at both Amazon ( AMZN) Web Services and Oracle ( ORCL) .
Three: Kendal Collins, formerly of Okta ( OKTA) and Cisco ( CSCO) will now fill the role of Chief of Staff for the CEO.
Four: Current Salesforce President and Chief Operating Officer Brian Millham will keep those titles as well as take over marketing (even though there will be a chief marketing officer, see above), employee success, and business technology. Approximately 70% of the entire firm will now report to Millham. A memo that served as the basis for the story at Business Insider, suggests that Millham is now a likely top contender to succeed Benioff whenever that time comes.
Remember, Elliott Management, ValueAct, Inclusive Capital and Starboard Value are all known activist investors who have taken a stake in Salesforce and have advocated for operational improvement to include more efficiency in controlling the cost side of the business. The 27% was not exactly 30%, and left unadjusted that 27% became just 5%.
Looking Ahead
CRM reported that remaining performance obligation (RPO) was up 11% to $46.7 billion and current remaining performance obligation (cRPO) increased 12% to $24.1 billion. Growth, but modest. The subscription and support services sector generated sales of $7.642 billion (+11.5%) that beat estimates, but no single business within the largest segment in the firm really outperformed the rest. The much smaller professional services (and Other) segment drove sales of just $605 million(+9%), falling short of consensus.
As far as guidance goes, for the current quarter, CRM projected revenue of $8.51 billion to $8.53 billion, which would still be rough growth of just 10%. It also expects to see unadjusted EPS of $0.79 to $0.80 and adjusted EPS of $1.89 to $1.90. That was better than the $1.70 that Wall Street had in mind, so there is an expectation within the firm for margin expansion.
For the full year, Salesforce saw revenue of $34.5 billion to $34.7 billion, again reflective of growth of about 10%, which is disappointing. For the year, Salesforce sees GAAP EPS of $2.67 to $2.69 and adjusted EPS of $7.41 to $7.43. The street had been down around $7.14 for that number. Again reflective of internal expectations for improved margin.
The Guts of This Business
Cash flows, as I mentioned when these results were released, were well ahead of expectations. Operating cash flow hit the tape at $4.491 billion, resulting in free cash flow of $4.428 billion. That crushed expectations. Out of that, the firm did repurchase $2.054 billion worth of common stock.
The balance sheet is in better shape than you think, but there is some room for improvement. Salesforce ended the quarter just reported, with a cash position of $13.977 billion and current assets of $21.981 billion. Current liabilities added up to $21.626 billion. That left the firm with a current ratio of just 1.02, which barely passes muster in Sarge's world. But within those current liabilities, there is an entry for $15.121 billion in deferred revenues.
Deferred revenues are not financial liabilities. When included in current and quick ratios, they often mislead. Deferred revenues are reflective of goods, services and / or labor yet to be provided, but already paid for. Once these services or goods are provided, this revenue can then be recognized as ordinary. Deferred revenues are not financial obligations. Here, they make up 70% of current liabilities. This means that the balance sheet is stronger than it looks.
Total assets amount to $93.541 billion, including $55.221 billion in goodwill and other intangibles. At 59% of total assets, I see that as excessive. Total liabilities less equity comes to $36.129 billion. This includes $9.421 billion in longer-term debt, which the firm could simply pay off out of pocket if it chose to do so. Make no mistake though. This balance sheet is healthy.
The Stock
The stock has continued to find some support at its 21-day exponential moving average. Trading lower in the wake of this news, the level will likely be tested Wednesday for a fifth consecutive session. Either the door opens or the stock stops ringing the doorbell. I see the continued pressure of the above-mentioned activists as a positive.
Should that 21-day line crack, the 50-day simple moving average has been supportive in the semi-recent past. This stock, in my opinion, needs to base or consolidate. With the exception of the past few days, these shares have meandered higher in almost unorganized fashion since breaking out of that cup with handle pattern this past February.
My plan? I am willing to add down to the $200, which is where I would have to admit that the 50-day SMA has broken. I would not add though, unless we see the shares move away from that 21-day EMA, in either direction. One way? Discount. The other way? Momentum. My price target remains $240 until some more obvious pattern reveals itself.
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