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Salesforce Delivers Solid Results to Battered Investors, Sees Strong Demand

Although we’re lowering our fair value estimate, the company remains one of our top software picks.

Investors looking for signs of broader enterprise software slowdowns will have to look elsewhere after wide-moat Salesforce reported solid results in the face of a variety of macroeconomic headwinds. Both revenue and non-GAAP operating margin came in a bit better than our expectations, while full-year revenue guidance was lowered slightly entirely due to the surging dollar, and full-year non-GAAP operating margin guidance was raised modestly. Management acknowledged the same macro headline issues we see every day but noted the firm is seeing no weakness in demand and that its pipeline for the year remains robust. Given the macro storm clouds, we are taking our estimates from above previous guidance to more in line with new guidance and are therefore lowering our fair value estimate to $305 per share from $320. Salesforce remains one of our top software picks and we view shares as attractive, as we think investors are overly pessimistic on near-term fears.

Revenue grew 24% year over year to $7.41 billion, compared with FactSet consensus of $7.38 billion. Strength was apparent in all segments and all geographies. On a year-over-year basis, sales cloud grew 18%, service cloud grew 17%, platform/other (including Slack) grew 46%, marketing/commerce cloud grew 22%, and data grew 15%. In fact, sales cloud grew 20% organically in constant currency. We are impressed by sales cloud’s ability to accelerate both year over year and sequentially 23 years after its creation. Management noted strength in all segments, all geographies, and all customer sizes. We see deal sizes continuing to grow, with a 45% year-over-year increase in the number of customers spending $100,000 or more annually. Management noted that Slack continues to outpace expectations and is included in virtually all customer conversations. Churn remained in its best-ever range at 7.0% to 7.5%. CRPO grew 21% year over year to $21.5 billion, which has now lagged revenue growth for the third straight quarter.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Dan Romanoff

Senior Equity Analyst
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Dan Romanoff, CPA, is a senior equity research analyst on the technology, media, and telecommunications team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers software.

Before Joining Morningstar in 2019, Romanoff spent 12 years in buy-side equity research covering the technology and telecommunications sectors, most recently at Holland Capital Management. Prior to that, he spent five years in sell-side equity research as an associate analyst at UBS and a senior analyst at Credit Suisse covering various areas within technology, including hardware, software, and semiconductors. Romanoff also has worked as an auditor and in valuation services for major public accounting firms.

Romanoff holds a bachelor’s degree in accountancy and a Master of Business Administration in finance, both from the University of Illinois at Urbana-Champaign. He also holds the Certified Public Accountant and Accredited in Business Valuation designations.

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