Analysis: CRM AAPL

After the bell on Tuesday, Salesforce.com (CRM) reported a top and bottom line beat with its fiscal third quarter 2019 result. Revenue of $3.39 billion (up 15% year over year) edged the consensus of $3.365 billion, and adjusted earnings per share of $0.61 (up 45% year over year) exceeded the consensus by $0.11.

"Given the strength of this quarter's results and the incredible customer demand we are seeing, we are again raising our FY19 revenue guidance and initiating our full year fiscal 2020 revenue guidance at $16 billion at the high end of the range," said Keith Block, co-CEO, Salesforce in the press release. "Companies across every industry, in every geography have a mandate to digitally transform their businesses and are turning to Salesforce as a strategic partner."

"I'm thrilled that Salesforce will be the fastest enterprise software company in history to reach $16 billion in revenue," said Marc Benioff, chairman and co-CEO, Salesforce in the press release. "I would like to thank all of our Ohana who make everything we do possible."

Shares are pushing roughly 7% (at the time this was written) after-hours as the company exceeded expectations on several key metrics. Taking a look, non-GAAP unearned revenue increased 26% year over year on a constant currency (CC) basis to $5.409 billion. Gross margin of 76.9% edged the consensus of 76.6%, while non-GAAP operating margins declined 76 basis points to 16.9% but came well above the 15.6% expectation. Also, GAAP operating cash flow increased 14% year over year to $143 million, and we remind members that this quarter (along with its fiscal second quarter) seasonally produces smaller cash flow results due to the timing of collections. By region, revenue on a cc basis increased 25% in the Americas, 31% in Europe, and 26% in the Asia pacific.

Importantly, billings, which represents the portion of revenue generated from new business within the quarter - the remainder of recognized revenues coming from revenue that was previously unrecognized but has now been recognized due to a fulfillment of service obligations - came in at $2.885 billion (+27.4% YoY), outpacing expectations of $2.684 billion. Another key metric we look for when evaluating CRM is its remaining performance obligations (RPO), which represents the difference between bookings and billings - bookings being the amount customers have committed to spending in the future (think contracts signed). Though unchanged sequentially as bookings equaled billings in the quarter, the increase of about 34% from the same time last year means the backlog remains robust.

Digging into each cloud service offering, revenue in the Sales Cloud increased 11% year over year to about $1.0 billion, revenue in the Service cloud increased 24% year over year to about $0.9 billion, the revenue in the Salesforce Platform and Other revenue increased 51% year over year to $0.7 billion, and lastly, revenue from Marketing Cloud & Commerce Cloud increased 37% year over year to $0.5 billion. As for some other business highlights from the quarter, the number of deals generating more than $1 million was up 46% year over year, and management said that the number of +$20 million relationships has grown "significantly." Included in this was the renewed and expanded 9-figure relationship with what management called, "one of the largest financial services institutions in the world."

Regarding MuleSoft, Block named-dropped a few companies (Apple (AAPL) , Deloitte, and WeWork) who have been successful in having their data unlocked from legacy systems thanks to its integration. This process has accelerated their digital transformations, making Salesforce an even more indelible steward to the "Fourth Industrial Revolution."

Taking a look at guidance, management expects fiscal fourth quarter revenue to be in the range of $3.551 billion to $3.561 billion (consensus $3.519 billion). Additionally, adjusted earnings per share is expected to be in the range of $0.54 to $0.55 (consensus $0.57). While the bottom line is a bit lighter than what analysts were forecasting, we think investors should not be fooled. The company just smashed expectations in the third quarter. For the full year fiscal 2019, management raised its view and now expects revenue to be in the range of $13.23 billion to $13.24 billion, which at a midpoint is more than the $13.171 billion consensus view, as well as adjusted earnings per share in the range of $2.60 to $2.61, well ahead of the $2.51 consensus view. Full year fiscal year 2019 expectations of operating cash flow growth in the range of 15% to 16% was unchanged. Salesforce management also provided investors with its initial look into fiscal 2020 revenue guidance, and it did not disappointment. They expect revenues to increase about 20% to 21% to a range of $15.9 billion to $16.0 billion, representing upside to the $15.831 billion consensus. The above consensus guidance was so key as it demonstrates the criticalness of the company's services in the evolving business world and puts them on-track to deliver their goal of $21 billion to $23 billion of revenue in fiscal year 2022, which we add would be faster than any enterprise software company in history. As Block put it during the company's conference call, "We are clearly executing on our vision of transformation and success for our customers and we are doing it at scale. Every company in the world has a mandate to digitally transform its business...The conversation is consistent everywhere I go, it's about digital transformation it's about leveraging our technology, it's about our culture and it's about our values."

Overall, this was a great quarter for the company with solid beats across the board. Not only did the company outpace the customer relationship management market again, but it also continues to gain share. One of the knocks against the stock during its horrific ~20% decline from its October high had been that enterprise spending would slow along with the global macro fears, however, management shut down those fears with its fiscal 2020 guidance. What management is seeing is an importance in transformations at the CEO-level, likely because companies cannot afford to slip in this field or they risk losing touch with their customers and falling behind their competitors. We never really shared that view due to the importance we placed on the demand for Salesforce's solutions that enable digital transformations and were able to add to our position last week here when the stock was in the low-$120s. We found it quizzical that the stock initially traded down after-hours in reaction to the print, but that kind of reaction is just characteristic of this type of market. We'll look for the stock to outperform when it opens on Wednesday, with the potential for positive pin action across many other cloud and technology names.