Salesforce.com (CRM) Up 4.7% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Salesforce.com (CRM). Shares have added about 4.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Salesforce.com due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

salesforce Q2 Earnings Beat Estimates

salesforce.com delivered second-quarter fiscal 2020 non-GAAP earnings of 66 cents per share, comprehensively exceeding the Zacks Consensus Estimate of 47 cents. However, it declined from the year-ago quarter’s 71 cents.

Management mentioned that the settlement of reseller agreement with Salesforce.org adversely impacted its bottom line.

Meanwhile, revenues of $4.03 billion increased 22% year over year and also surpassed the Zacks Consensus Estimate of $3.95 billion. Moreover, the top line improved 24% in constant currency (cc). While the acquisition of Salesforce.org contributed $54 million to revenues, the same grew 20% in dollar terms and 21% at cc excluding the Salesforce.org buyout.

The company is benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions led to better-than-expected results.

Driven by organic as well as inorganic growth from the acquisitions of Tableau, ClickSoftware and Salesforce.org, the company raised its revenue guidance for fiscal 2020. However, an unfavorable foreign exchange volatility remains an overhang.

Quarter in Detail

Coming to the company’s business segments, revenues at Subscription and Support rose (94% of total revenues) about 22% from the year-earlier period to $3.75 billion. Professional Services and Other revenues (6%) climbed 14% to $252 million.

Sales Cloud revenues ascended 13% year over year to $1.13 billion. Revenues from Service Cloud, one of the company’s largest and the fastest-growing businesses, also improved 22% to $1.09 billion. Moreover, Marketing & Commerce Cloud revenues surged 36% to $616 million.

salesforce’s Platform and Other revenues were up 28% to $912 million, which include Mulesoft’s subscription and support revenues of $159 million.

Geographically, the company witnessed revenue growth of 20% in the Americas (70% of total revenues), 27% in Asia Pacific (10%) and 30% in Europe (20%) on a year-over-year basis.

In the quarter under review, partners were engaged in 68% of its new business.

salesforce’s focus on building Customer 360 platform, both organically as well as through acquisitions, is a key driver. Salesforce Einstein in Customer 360 is boosting customer experience. The addition of AI capabilities like Einstein Translation, Einstein Vision and Einstein Voice to all salesforce applications is a tailwind. The company’s initiative in extending the power of Customer 360 with new services like Salesforce Blockchain and Salesforce Maps is also a positive.

Growing adoption of its free online digital learning platform, Trailhead, is an upside as well. Further, salesforce’s new partnership with Alibaba is making the management optimistic.

Operating Details

salesforce’s non-GAAP gross profit came in at $3.14 billion, up 24.2% from the prior-year quarter. Additionally, gross margin expanded 150 basis points (bps) to 78.5%.

Non-GAAP operating expenses escalated 32% year over year to $2.6 billion. As a percentage of revenues, operating expenses grew 500 bps to 64.2%.

salesforce posted non-GAAP operating income of $573 million, down 2% year over year.  Operating margin too contracted 349 bps to 14.3%

Balance Sheet & Cash Flow

salesforce exited the reported quarter with cash, cash equivalents and marketable securities of $6.04 billion compared with $6.38 billion in the prior reported quarter.

As of Jul 31, 2019, total unearned revenues were $7.6 billion, up 21.4% on a year-over-year basis.

salesforce generated operating cash flow of  $437 million, down from $1.97 billion sequentially. Recent M&A activity coupled with continued FX headwind was a dampener.

Guidance

For fiscal 2020, revenues are now predicted to be between $16.75 billion and $16.9 billion compared with the earlier expectation between $16.1 and $16.25 billion, marking 26-27% growth year over year.

The company projects Salesforce.org to aid its revenue stream by approximately 200 million in fiscal 2020. Tableau is envisioned to generate $500-$600 million while around $25 million is anticipated to be contributed by ClickSoftware. Excluding these integrations, growth is likely to be around 20-21%.

However, strengthening of the U.S. dollar in relation to GBP and the euro is likely to keep revenues as well as the operating margins stressed. The company forecasts more than $200 million of foreign exchange headwinds in the full fiscal.

It assumes non-GAAP operating margins to contract 50 bps on a year-over-year basis. Also, the one-time non-cash settlement charge related to the Salesforce.org reseller agreement of $166 million is a downside.

Moreover, the consolidations of Salesforce.org, Tableau and ClickSoftware are likely to dent margins. Excluding the impact of these acquisitions, the company expects non-GAAP operating margin to expand more than 150 bps.

The company lowered its full-year earnings per share outlook to $2.82-$2.84 per share from the $2.88-$2.9 range envisioned earlier.

Operating cash flow is reaffirmed to increase 20-21% year over year.

Coming to the fiscal third quarter, Tableau and Salesforce.org is likely to generate approximately $300 million and $75 million, respectively, to revenues. Revenues are guided between $4.44 billion and $34.45 billion.

Non-GAAP earnings per share are estimated in the band of 65-66 cents for the fiscal third quarter.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -22.4% due to these changes.

VGM Scores

At this time, Salesforce.com has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Salesforce.com has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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