Salesforce shares fell more than 16% on Wednesday after reporting mixed earnings and revised downward guidance. The cloud software company is a quality stock in a tough area — at least in the near term. Revenue rose 11% year over year to $9.13 billion in the three months ended April 30, falling short of the $9.18 billion that analysts had expected, according to estimates compiled by LSEG. Adjusted earnings per share of $2.44 rose 44% year over year and beat the $2.38 that analysts had expected, LSEG data showed. Adjusted operating margin expanded to 32.1% in the quarter, but missed the consensus estimate of 32.3%, according to FactSet. On a GAAP basis, the quarterly operating margin was 18.7%, lower than the expected 19.3%. Salesforce Why we own it: Salesforce is a leading enterprise software tool for companies across all industries, helping employees communicate better with their colleagues internally and with their customers. Balancing the company's margin expansion with the potential for faster revenue growth should lead to strong earnings growth. Competitors: SAP, Microsoft, HubSpot Last Purchased: December 21, 2022 Started: June 15, 2018 Bottom Line: This was not the quarter we were hoping for. Salesforce raised its full-year adjusted earnings forecast, but its lower forecast for sales growth has investors on edge. Is this a sign that Salesforce is maturing and can no longer be valued as a growth company? Or is this just a temporary slowdown? Are clients focusing their budgets on AI investments with Nvidia, major companies (Amazon, Microsoft, Alphabet) and cybersecurity after several recent high-profile attacks? This may lead to volatility in the short term, as a higher rate environment in the long term will force institutional clients to remain overly focused on keeping costs low and driving all but the most important investment priorities. The good news: Salesforce's low revenue attrition rate indicates the critical nature of its offering to its customers. This bodes well for the company as corporate balance sheets return. In the meantime, we like what we're seeing on the cash flow front, especially given management's heavy focus on shareholder returns through dividends and buybacks. The data cloud business continues to exceed expectations, driven by accelerated growth in both MuleSoft and Tableau. Growth at Slack, which is in Platform and Other, has also accelerated sequentially. While these positives are offset by disappointing profit margin results, we are more focused on the profitability trend and are comfortable that, estimates notwithstanding, we saw healthy expansion year over year, especially on a GAAP basis. The CRM sell-off in the post-Wednesday market may be overdone, but we also recognize that stocks are not rewarded when growth slows. Salesforce is not alone. The business day is down roughly 19% since earnings were announced on May 23. We expect growth to eventually accelerate, but the timing is uncertain. Therefore, we must proceed with caution and be patient. We do not rule out buying more shares, especially if we see signs of improved deal activity. At 23.5 times management's FY2025 guidance (based on after-hours share price), CRM is now trading at the lower end of its range over the past two years. We reiterate our 2nd rating on Salesforce but will lower our price target to $300, from $340, in recognition that upside will be limited in the near term. Quarterly Results In a post-earnings call with investors, Chief Operating Officer Brian Milham said the buying environment remains “calculated,” leading to “lengthened deal cycles, deal pressure, and high levels of budget scrutiny.” This is a theme we have seen over the past two years. There are strengths, including the data cloud, where even budget-conscious companies are looking for ways to leverage AI to improve efficiency. Non-GAAP operating margin benefited from lower cost of revenue, sales, marketing, general and administrative expenses. CEO Marc Benioff said the company's data cloud business was included in 25% of its deals worth more than $1 million during the quarter. The company added 1,000 data cloud customers for the second straight quarter. Six of the company's top 10 deals this quarter involved six or more clouds (reported as the five units listed in the table above). Salesforce's revenue attrition rate has been roughly in line with recent quarters at around 8%. As we've noted in the past, a relatively low attrition rate is a sign that while customers may be closely examining budgets, they are reluctant to part with Salesforce and are willing to pay higher prices as their deal's renewal date approaches. Breaking the above table down a step further, MuleSoft (integrations) is up 27% year over year in constant currency, while Tableau (analytics) is up 21%. Slack stock, the “platform and other” part that has minimal exposure to the currency, rose 17%. The three results represent an acceleration in growth rates on a sequential basis. Obviously, cash flow was a bright spot during the quarter. Management returned approximately $2.2 billion to shareholders through buybacks and another $388 million through dividends. As of the end of the quarter, Salesforce still had just over $16 billion available to deploy in stock buybacks under the current authorization. Guidance For fiscal 2025, Salesforce reiterated its total revenue guidance of $37.7 billion to $38 billion, an increase of 8% to 9% from the prior year and a slight miss versus analysts' consensus expectations of $38.05 billion, according to FactSet. Management lowered its revenue growth forecast for the subscription and support business to just under 10% compared to last year. This is lower than the previous estimate of 10%, and lower than the 10.3% on the Street. On a constant currency basis, sales growth is now expected to be around 10%, down from the previous estimate of just over 10%. The expected operating margin for the fiscal year on a GAAP basis has also been revised lower: Management now targets 19.9%, versus the previous target of 20.4%. However, the revision is in line with Street estimates. The revised operating margin target of 32.5% was reiterated and is in line with expectations. GAAP diluted earnings are now expected to be $6.04 to $6.12 per share, down from $6.07 to $6.15 per share previously. However, Salesforce said adjusted earnings should reach $9.86 to $9.94 per share, up from the previous range of $9.68 to $9.76 per share, and ahead of Street estimates of $9.80 per share. For the second quarter, Salesforce estimates revenue at $9.2 to $9.25 billion, below estimates of $9.345 billion. Revised earnings guidance of $2.34 to $2.36 is also below consensus estimates of $2.40, according to FactSet. Salesforce's current remaining performance commitment is expected to grow 9% year over year in the second quarter, which is in line with expectations. This metric represents future revenue under the contract that will be booked over the next 12 months. (Jim Cramer's Charitable Trust is a long CRM. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you'll receive a trade alert before Jim takes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charitable fund's portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. 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A sign on the Saleforce office building in San Francisco, California, US, on Tuesday, February 23, 2021.
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Salesforce shares fell more than 16% on Wednesday after reporting mixed earnings and revised downward guidance. The cloud software company is a quality stock in a tough area — at least in the near term.
