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Salesforce (CRM) Up on Q1 Earnings Beat and Upbeat Guidance

Zacks

Shares of salesforce.com Inc. CRM went up in the after-hours trade yesterday following better-than-expected results for first-quarter fiscal 2018. Moreover, an upbeat guidance for fiscal 2018 boosted investors’ confidence over the stock.

The world’s leading CRM platform provider reported adjusted earnings (including stock-based compensation but excluding all one-time items on a proportionate tax basis) of 6 cents per share, a penny ahead of the Zacks Consensus Estimate. However, the figure compared unfavorably with the year-ago quarter’s earnings of 8 cents, mainly due to elevated operating expenses and outstanding number of shares which more than offset benefit from strong top-line growth.

On a GAAP basis, Salesforce reported loss per share of a penny, while in the year-ago quarter it reported earnings of 6 cents. However, on a non-GAAP basis, the company posted earnings of 28 cents per share compared with 24 cents reported in the prior-year quarter.

Looking at the last quarter’s strong results and encouraging outlook for the forthcoming quarter and fiscal 2018, we believe that the stock may see upside movement during today’s trading session. Notably, the stock has outperformed the Zacks categorized Computer-Software industry in the year-to-date period. Salesforce has returned 28.9% during the said period compared with the industry’s gain of 14%.


Quarter in Detail

Although Salesforce disappointed on the earnings front, it continued to witness solid growth in revenues. The company’s revenues of $2.388 billion not only jumped 24.6% year over year, but also beat the Zacks Consensus Estimate of $2.351 billion. Moreover, reported revenues came above the guided range of $2.34–$2.35 billion. The improvement is primarily attributable to rapid adoption of the company’s cloud-based solutions.

Also, higher demand for the Salesforce ExactTarget Marketing Cloud platform, part of the Salesforce1 Customer Platform, drove the year-over-year upside in revenues.

Among its business segments, revenues at Subscription and Support climbed about 24% from the year-ago quarter to $2.201 billion. Professional Services and Other revenues surged almost 32.3% to $186.7 million.

Geographically, the company witnessed constant currency revenue growth of 24%, 29% and 36% in the Americas, Europe and Asia Pacific, respectively, on a year-over-year basis.

Salesforce’s adjusted gross profit (including stock-based compensation but excluding amortization expenses) came in at $1.781 billion, up 23.5%. However, gross margin contracted 60 basis points (bps) to 74.6%, primarily due to increased investment in infrastructure development, including the expansion of the international data center.

Adjusted operating expenses (including stock-based compensation but excluding amortization of acquisition-related intangibles) increased 26.8% from the prior-year quarter to $1.715 billion. This was primarily because of higher investments in research and development, marketing and sales, and general and administrative activities. However, as a percentage of revenues, operating expenses contracted 120 bps to 71.8%.

Salesforce posted adjusted operating income (including stock-based compensation but excluding amortization of acquisition-related intangibles) of $65.3 million compared with the year-ago figure of $89.6 million, while operating margin contracted 200 bps to 2.7%. The year-over-year contractions in adjusted operating income and margin were mainly due to higher costs.

Salesforce.com Inc Price, Consensus and EPS Surprise

Salesforce.com Inc Price, Consensus and EPS Surprise | Salesforce.com Inc Quote

Balance Sheet & Cash Flow

Salesforce exited the quarter with cash and cash equivalents, and marketable securities of $3.22 billion compared with $2.209 billion in the previous quarter. Accounts receivable were $1.439 billion compared with $3.197 million at the end of fourth-quarter fiscal 2017. Total deferred revenue, as of Apr 30, 2017, was $5.04 billion, up 26% on a year-over-year basis.

During the quarter, the company generated operating cash flow of $1.23 billion. Moreover, Salesforce generated free cash flow of $1.073 billion in the fiscal first quarter.

Guidance

Buoyed by better-than-expected fiscal first-quarter results, the company provided an encouraging guidance for the fiscal second quarter and raised outlook for the full fiscal. For the fiscal second quarter, the company anticipates revenues in a range of $2.51–$2.52 billion (mid-point: $2.515 billion), representing a year-over-year increase of 23–24%. The guided range is higher than the Zacks Consensus Estimate of $2.48 billion. Further, the company expects non-GAAP earnings per share in a band of 31–32 cents. On a GAAP basis, the same is anticipated to come between breakeven earnings and a penny.

Furthermore, the company raised its revenues and earnings outlook for fiscal 2018. Revenues are now anticipated to come in the range of $10.25–$10.35 billion (mid-point $10.3 billion), up from the previous projection of $10.15–$10.20 billion (mid-point $10.175 billion), representing 22–23% year-over-year increase. Moreover, it was above the Zacks Consensus Estimate of $10.17 billion.

By completing this target, the company will achieve $10 billion mark in revenues faster than any other enterprise software company.

Similarly, Salesforce now projects non-GAAP earnings to come between $1.28 and $1.30, while GAAP earnings are expected to be in the range of 6–8 cents. This compares with previous guidance range of $1.27–$1.29 on non-GAAP basis and 5–7 cents on GAAP basis.

Our Take

Salesforce started fiscal 2018 on a strong note with better-than-expected results for the fiscal first quarter. In addition, although the company’s adjusted earnings marked a year-over-year decline, we are encouraged by the tremendous growth registered in revenues. The robust revenues were primarily backed by growth across all its business segments and the Salesforce ExactTarget Marketing Cloud platform.

Going ahead, the company’s upbeat outlook for full fiscal signifies that it will continue to witness growth throughout the fiscal. Moreover, the fiscal second-quarter revenue outlook is impressive. We are also encouraged by the fact that the company will achieve $10 billion in sales in fiscal 2018.

The higher number of deal wins and geographical contributions during the quarter were encouraging. We consider the rapid adoption of the Salesforce1 Customer Platform to be a positive. Overall, the company’s diverse cloud offerings and considerable spending on digital marketing remain catalysts. Additionally, strategic acquisitions and the resultant synergies are anticipated to prove conducive to growth over the long run.

In view of increasing customer adoption and satisfactory performances, market research firm, Gartner, acknowledged Salesforce as the leading social CRM solution provider. We believe that the rapid adoption of Salesforce’s platforms indicates solid growth opportunities in the ever-growing cloud computing segment.

Although the company is growing reasonably in the cloud market, growth opportunities have been rationalized to a considerable extent due to intensifying competition from International Business Machines IBM, Oracle Corp. ORCL and SAP SE SAP. Also, currency fluctuations and stepped-up investments in international expansion and data centers could impact near-term results.

Salesforce currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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