Analysis: CRM

After the bell on Tuesday, Salesforce.com (CRM) reported a strong top and bottom-line beat with its fiscal first-quarter 2020 result. Non-GAAP revenue of $3.798 billion (+26% year over year on a constant currency, or cc, basis) beat the consensus of $3.685 billion, and adjusted earnings per share of $0.63 (which we adjusted to exclude a $0.27 benefit related to the company's required mark-to-market accounting on its strategic investment) exceeded the consensus expectation of $0.61.

In the after-hours market, shares of CRM were tacking on an additional 2.3% gain on top of today's regular session 3.94% result.

"I am thrilled with our results this quarter, and I am especially excited to have delivered record revenue in Q1 and operating cash flow of almost $2 billion, up 34% year-over-year," Co-CEO Marc Benioff said in the press release. "We have a massive opportunity in front of us and are well-positioned for long-term growth as the world's #1 CRM."

"Our strong revenue growth in the quarter reflects the strength of our business and the tremendous demand we're seeing from customers worldwide," Co-CEO Keith Block, added in the release. "Companies of every size and industry are undergoing a digital transformation to better serve their customers and they are choosing Salesforce as their partner."

In addition to the positive headlines, non-GAAP operating margins were 18.2% (+122 basis points year over year). Meanwhile, the $1.96 billion in operating cash flow came in well ahead of the $1.7 billion expectations for a result that Benioff on the call said was "phenomenal."

Digging into each cloud service offering's subscription and support revenue, Sales Cloud increased 11% year over year to about $1.1 billion, Service cloud increased 20% year over year to about $1 billion, Salesforce Platform and Other increased 46% year over year to $800 million, and lastly, Marketing Cloud & Commerce Cloud increased 33% year over year to $600 million.

By region, revenue on a cc basis increased 25% in the Americas, 32% in EMEA, and 27% in the Asia Pacific. Regarding the latter two regions, that's pretty strong growth considering the fears many have had about spending slowdowns and the results speak to the "massive demand for our solutions from both new customers and existing customers across the world, every industry, every market segment," that Block mentioned on the call.

Next, let's take a close look at a few key metrics Salesforce.com reports on that track how much business is in the pipeline. The all-important billings measure, 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 -registered at $2.758 billion (+24.6% YoY), representing a great beat against expectations of $2.212 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). RPO ended the quarter at $24.9 billion, representing an increase of 22% year over year. The company's figure includes approximately $500 million related from MuleSoft. As for the Current Remaining Performance Obligation which represents all future revenue under contract that has not been recognized as revenue yet, Salesforce.com's $11.8 billion figure was in line with expectations.

As for some customer wins/deepened relationships, management discussed on the call their partnerships with large companies such as Dell, Accenture, and Southwest Airlines, and they also talked to the company's role in modernizing aspects of the public sector like The Department of Education. Speaking to some other business highlights from the quarter, once again management spent time on the conference call reminding investors how there has never been an enterprise software company of its size and scale growing at the company's rate. That's a product Salesforce's role in spearheading the digital transformations of many companies across the globe -- but outside of China as management commented that they don't really have business there.

Taking a look at full-year guidance, management passed through the beats on guidance and raised its revenue and non-GAAP EPS expectations. Management now expects revenues to be in the range of $16.1 billion to $16.25 billion, representing an increase of 21% to 22% year over year growth, respectively. This outlook is slightly above the current expectation of $16.13 billion. Moving to the bottom line, full-year non-GAAP earnings per share is expected to be in the range of $2.88 to $2.90 (consensus $2.60 but consider the $0.27 benefit they had this quarter), with operating cash flow growth of 20% to 21%. Thinking longer term, Benioff reaffirmed his view that the company is on path to organically double its revenue in the next four years, delivering a target of $26 billion to $28 billion for fiscal 2023.

Looking at the second fiscal quarter, management expects revenue in the range of $3.94 billion to $3.95 billion, which is right on target with the FactSet consensus of $3.944 million. Meanwhile, adjusted earnings per share are expected to be in the range of $0.46 to $0.47. Although this is well short of the $0.65 per share estimate analysts were targeting, it is important to consider how the company will incur a onetime non-cash accounting charge of approximately $200 million (or $0.20 in non-GAAP EPS) in the second quarter related to the Salesforce.org combination. Backing that figure out puts guidance right in line with the estimates.

Overall, it looks like a pretty clean quarter for Salesforce.com, and it comes at a pivotal moment in time as fears of a global economic slowdown have weighed on the market. But while management was not shy about admitting how they are not "economists," what they did provide was their view on how every modern CEO needs to act as a "Chief Digital Officer" and "Chief Information Office" or else they risk missing out on growth opportunities that come with leveraging Salesforce.com's technologies like the Customer 360 product organization. And the necessity of its products stands well above peers, and we evidence through how the company gained more CRM market share than the other top 15 vendors combined in 2018. The only question out there that remains how the market will view the stock tomorrow, as we have witnessed selloffs in fellow "Cloud King" companies following what were thought to be strong prints. Nevertheless, the quarter, guidance, and management's broader view of the digital transformations taking place across the world reinforces our long-term outlook on the business. After a tough period of dormancy and shares steadily trading lower, we view now as a good time to buy.  We reiterate our ONE rating.