Analysis: CRM WORK

Salesforce (CRM) reported a top- and bottom-line beat with its fourth-quarter report that came in after the bell on Thursday night. Revenues of $5.82 billion (+20% YoY) exceeded consensus estimates of $5.679 billion, and adjusted earnings per share of $1.04 (+57% YoY) topped estimates of $0.75. The $1.04 figure, however, includes a $0.22 benefit related to the mark-to-market accounting for the company's strategic investments. Backing this out, adjusted earnings per share still topped estimates.

"We never could have predicted a year ago what was in store, which makes me incredibly proud of how well we pivoted our company to adapt to this pandemic world," chairman and CEO Marc Benioff said in the release. "We had a record quarter and year by innovating more and faster than ever, enabling our customers to be successful from anywhere, and becoming more relevant and strategic than ever. And we continued to serve all of our stakeholders in a time when they needed it most."

Adjusted operating margins came in at 17.5% (+210 basis points YoY), higher than the consensus of about 16.8%. Meanwhile, operating cash flow of $2.174 billion (+33% YoY) was below estimates of $2.236 billion and free cash flow grew to $2.025 billion, roughly in-line with estimates of $2.066 billion.

Subscription and support revenue was $5.476 billion (+20% YoY) and better than estimates of $5.339 billion. Professional services revenue of $341 million (+18% YoY) was roughly in line with estimates of $314 million.

As for subscription and support revenue by cloud, sales cloud revenue increased 11% YoY to $1.4 billion, and service cloud revenue grew 19% YoY to about $1.4 billion. Growth in Salesforce platform and "other" -- which contains Tableau -- increased 26% year-over-year to $1.8 billion. Lastly, marketing cloud and commerce cloud revenue were up 27% YoY to $0.9 billion.

By region, revenue on a constant currency basis increased 18% in the Americas; 20% in Europe, the Middle East, and Africa; and 21% in the Asia Pacific.

Billings, which represents the portion of revenue generated from new business within the quarter, registered at $10.16 billion (+17.2% YoY). That's a solid beat against expectations for $9.904 billion.

One other closely followed metrics is the remaining performance obligations (RPO), which represents all future revenue under contract that has not yet been recognized as revenue. Total RPO ended the quarter at $36.1 billion, representing an increase of 17% from the year-ago period. More importantly, the current remaining performance obligation, which represents future revenue under contract that is expected to be recognized as revenue in the next 12 months, was $18 billion (+18% YoY cc) and beat expectations of $17.43 billion

Revenue attrition in the fourth quarter was between 9% and 9.5%, and that's better than what management initially assumed. Even in a period when many companies have been forced to rationalize their IT spending, the better than expected attrition rates here is proof that Salesforce's software has become mission critical to everyday operations.

Looking to the first quarter of fiscal 2022, management guidance calls for revenue between $5.875 billion and $5.885 billion, higher than the consensus of $5.719 billion and representing YoY growth of about 21%. Adjusted earnings per share are expected to be about $0.88 to $0.89, and that's much better than the $0.75 the street was expecting. The current remaining performance obligation is expected to grow by about 19%.

Management also raised its outlook for the full year. They now expect revenues of $25.65 billion to $25.75 billion, up from the previous outlook of $25.45 billion to $25.55 billion; this includes a $600 million contribution from Slack (WORK) . This new outlook is roughly in line with the $25.4 billion consensus estimate. Moving down the line, management expected adjusted operating margins of about 17.7% and adjusted earnings per share of $3.39 to $3.41, lower than estimates of $3.49.

Speaking to the pending Slack acquisition, Benioff spent some time on the call reminding us of the strategic benefits of the deal. First, he noted that Salesforce has achieved a 26% improvement in case times and close rates and a 19% improvement in same-day resolution by integrating Slack into its Service Cloud. But what about what Slack + Salesforce will do for their customers?

"We've seen the combination of products like Service Cloud and Slack together just make it so much better for us as a company or for our customers, and we're looking forward to doing so much more of that," he said. "Slack can be the central nervous system for any company, connecting its people and data across systems, apps and devices from anywhere. It's really an enabler of success from anywhere. And once our merger is approved, we're going to build Slack into more of these products that we have used today and conceptualize and make our customers even more productive."

The market may not have liked this deal due to the $27.6 billion purchase price and its dilutive effects, but when it comes to M&A and forward-thinking in enterprise software we have learned to never bet against Benioff. We continue to believe the market is underappreciating the Slack deal.

Overall, Salesforce delivered a strong quarter across the board and raised its outlook for the fiscal year as a sign of confidence in what's to come and the momentum in its pipeline. Even in a pandemic, Salesforce continues to consistently deliver 20% YoY sales growth and their industry-leading software is one of the biggest reasons why their customers have remained successful in a digital, work-from-anywhere environment.

Guidance might be what the market is nit-picking at after hours tonight, but Salesforce is a company that tends to under-promise and over-deliver as it moves through the year.

With the move after-hours pushing shares below their Tuesday low of $229, we think a pullback to these levels represents an opportunity to gradually add to a position over the next couple of days. This is quality on sale. High multiple tech may be toxic right now due to rising interest rates, but investors should take comfort in the fact that CRM is the "value" name in the group with a price-to-sales multiple under 10-times and robust free cash flow growth.

We reiterate our "ONE" rating.

Action AlertsPLUS, which Cramer co-manages as a charitable trust, is long on CRM.