Salesforce (CRM) Q3 Earnings and Revenues Beat Estimates

Salesforce CRM reported strong financial results for the third quarter of fiscal 2023, wherein its revenues and earnings surpassed the respective Zacks Consensus Estimate and marked a solid year-over-year improvement as well.

Despite reporting better-than-expected third-quarter results, shares of this enterprise cloud computing solution provider plunged 6.9% in Wednesday’s extended trading session after the company provided a lower-than-expected revenue forecast for the fourth quarter.

Before delving deeper into guidance, let’s discuss the third-quarter performance.

Salesforce Inc. Price, Consensus and EPS Surprise

Salesforce Inc. Price, Consensus and EPS Surprise
Salesforce Inc. Price, Consensus and EPS Surprise

Salesforce Inc. price-consensus-eps-surprise-chart | Salesforce Inc. Quote

Third-Quarter Fiscal 2023 Performance

Salesforce’s third-quarter fiscal 2023 non-GAAP earnings of $1.40 per share beat the Zacks Consensus Estimate of $1.21. The quarterly earnings included a benefit of 2 cents per share from the mark-to-mark accounting of CRM’s strategic investments at a non-GAAP tax rate of 25%. Moreover, non-GAAP earnings soared 10% from the year-ago quarter’s earnings of $1.27 per share.

Salesforce’s quarterly revenues of $7.84 billion climbed 14% year over year, surpassing the Zacks Consensus Estimate of $7.81 billion. The top line also improved 19% in constant currency (cc).

The company has been benefiting from the robust demand environment as customers are undergoing a major digital transformation. Thus, the rapid adoption of its cloud-based solutions resulted in the better-than-anticipated performance in the fiscal third quarter.

Coming to CRM’s business segments, revenues from Subscription and Support (92% of the total revenues) increased 13% from the year-earlier period to $7.23 billion. Professional Services and Other (8% of total sales) revenues climbed 25% to $604 million.

Under the Subscription and Support segment, Sales Cloud revenues grew 12% year over year to $1.7 billion. Revenues from Service Cloud, one of the company’s largest and fastest-growing businesses, also improved 12% to $1.9 billion.

Marketing & Commerce Cloud revenues jumped 12% to $1.1 billion. Salesforce Platform and Other revenues were up 18% to $1.5 billion. Also, revenues from Data increased 13% year over year to $1 billion.

Geographically, Salesforce registered revenue growth of 16% in America (68.5% of the total revenues), 14% in the Asia Pacific (9.3%) and 10% in the EMEA (22.2%) on a year-over-year basis.

Salesforce’s gross profit came in at $5.75 billion, up 14.5% from the prior-year period. However, the gross margin remained flat at 73%.

Salesforce recorded a non-GAAP operating income of $1.78 billion, up 30.9% year over year. Moreover, the non-GAAP operating margin expanded 290 bps to 22.7% due to lower operating expenses as a percentage of total sales. Operating expenses as a percentage of revenues declined to 67% from 72% in the year-ago quarter.

Salesforce exited the fiscal third quarter with cash, cash equivalents and marketable securities of $11.9 billion, down from the $13.5 billion recorded at the end of the previous quarter.

CRM generated operating cash flow of $313 million and free cash flow of $115 million in the third quarter. In the first nine months of fiscal 2023, the company generated operating and free cash flow of $4.32 billion and $3.75 billion, respectively.

As of Oct 31, 2022, the current remaining performance obligation reflecting revenues under contract for the next 12 months was $20.9 billion, up 11% on a year-over-year basis. In the third quarter, the company bought back shares worth $1.7 billion.

Guidance Update

Salesforce provided fourth-quarter guidance and updated the outlook for fiscal 2023. For the fiscal fourth quarter, Salesforce projects total sales between $7.932 billion and $8.032 billion (midpoint $7.982 billion), which fell short of the Zacks Consensus Estimate of $8 billion at the midpoint.

The revenue guidance includes a $250-million negative impact of unfavorable currency exchange rates. Furthermore, CRM anticipates non-GAAP earnings per share in the band of $1.35-$1.37 for the current quarter.

For fiscal 2023, Salesforce reiterated its revenue guidance range of $30.9-$31 billion. The company forecast that the stronger U.S. dollar against other major currencies would have a $900-million negative impact on total revenues.

The company increased its non-GAAP earnings guidance to the $4.92-$4.94 per share range from the $4.71-$4.73 band projected earlier. It increased the non-GAAP operating margin forecast for the fiscal year to 20.7% from 20.4%. However, CRM reduced the year-over-year operating cash flow growth projection to approximately 16% from the earlier guidance range of 16-17%.

Zacks Rank & Key Picks

Currently, Salesforce carries a Zacks Rank #3 (Hold). Shares of CRM have decreased 36.9% year to date (YTD).

Some better-ranked stocks from the broader technology sector are Celestica CLS, Zscaler ZS and Blackbaud BLKB. Celestica sports a Zacks Rank #1 (Strong Buy) at present, while Zscaler and Blackbaud each carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Celestica’s fourth-quarter 2022 earnings has increased by 9 cents to 53 cents per share over the past 60 days. For 2022, earnings estimates have moved up 9.4% to $1.86 per share in the past 60 days.

CLS' earnings beat the Zacks Consensus Estimate in each of the preceding four quarters, the average surprise being 11.8%. Shares of the company have increased 0.3% YTD.

The Zacks Consensus Estimate for Zscaler's second-quarter fiscal 2023 earnings has been revised 5 cents north to 26 cents per share over the past 90 days. For fiscal 2023, earnings estimates have moved a penny south to $1.17 per share in the past 30 days.

ZS’ earnings beat the Zacks Consensus Estimate in each of the preceding four quarters, the average surprise being 28.6%. Shares of the company have declined 58.5% YTD.

The Zacks Consensus Estimate for Blackbaud's fourth-quarter 2022 earnings has been revised 3 cents southward to 58 cents per share over the past 30 days. For 2022, earnings estimates have moved upward by 4 cents to $2.59 per share in the past 30 days.

Blackbaud's earnings beat the Zacks Consensus Estimate thrice in the preceding four quarters while missing the same on one occasion, the average surprise being 4.9%. Shares of BLKB have slumped 24.9% YTD.

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