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Salesforce Earnings: Margins Shine As New Signs of Pressure Remove Some Luster

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Salesforce CRM continues to impress, with another strong quarter with revenue and profitability ahead of our expectations. We fine-tuned our model over the next couple of years with profitability moving tad higher, offset by slightly lower growth, resulting in an unchanged fair value estimate of $245. Shares look attractive especially in light of the modest selloff in the aftermarket, and the stock remains one of our top picks.

For the fiscal year, Salesforce raised its profitability guidance while maintaining revenue. Improved capital returns to shareholders in the form of share buybacks should keep share count flattish this year, as the company repurchased $2.1 billion worth of stock during the quarter. The main blemishes in the quarter were the building pressure in professional services revenue, deceleration in the Americas, and the expected slowdown in current remaining performance obligation, or CRPO, included in guidance.

First-quarter revenue grew 11% year over year (13% in constant currency) to $8.25 billion, versus high end of guidance of $8.18 billion. Strength was driven by MuleSoft, international, and a more buoyant core business. CRPO grew 12% year over year in constant currency, which finally bumped above revenue growth, albeit by a slim margin. Professional services were weak and the overall demand environment remains challenging, with small business notably weaker but vertical solutions stronger. Management noted once again that eight of the firm’s 13 clouds had annual recurring revenue, or ARR, year-over-year growth of 50% or more.

Profitability remains a bright spot, as Salesforce achieved a non-GAAP operating margin of 27.6%, versus 17.6% last year and our estimate of 24.8%. We see margins hitting 30% next year and do not envision artificial intelligence investments as an impediment to meeting this milestone. The major restructuring actions from January provided margin support this quarter and should contribute similarly for the rest of the year.

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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