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Salesforce Earnings: MuleSoft Shines In Another Overall Good Quarter

Raising our fair value estimate for Salesforce stock.

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What We Thought of Salesforce’s Earnings

Salesforce CRM continues to perform well in a measured environment, with upside versus our aggressive expectations for both revenue and profitability for its fiscal third quarter. Guidance was also good, particularly for profitability. Management was enthusiastic to discuss green shoots in the data cloud segment, while we were impressed by the performance in large deals and the acceleration in growth in remaining performance obligation, or RPO.

We also applaud the firm’s continued focus on capital returns, with $1.9 billion in share buybacks this quarter. Based on quarterly upside and updated guidance, we made minor adjustments to our model and raised our fair value estimate to $265 per share from $255. With shares jumping in the aftermarket, we think the stock seems slightly undervalued.

Third-quarter revenue grew 11% year over year (10% in constant currency) to $8.72 billion. Like during the last several quarters, strength was driven by MuleSoft and data cloud, as well as solid execution. Current RPO grew 13% year over year in constant currency, representing an acceleration beyond revenue growth after lagging since the beginning of fiscal 2023, which management indicated was mainly due to a very large customer contract.

Professional services remain subdued, and the overall demand environment remains measured. Multi-cloud deals were strong, with nine of the top 10 deals involving six or more clouds and an impressive 80% growth in deals worth $1 million or more. Offsetting these revenue drivers was softness in transactional type revenue and Slack self-service.

We continue to see a path for margins to expand even as the firm invests in near-term artificial intelligence innovation. Profitability remains impressive, as Salesforce produced a non-GAAP operating margin of 31.2%, versus 22.7% a year ago. Major restructuring actions from January 2023 continue to help boost margins, but the internal cultural shift is evident.

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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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