Analysis: CRM WORK SAP

Salesforce (CRM) reported a top- and bottom-line beat with its first-quarter report that came in after the bell on Thursday night. Revenues of $5.96 billion (+23% YoY, +20% YoY CC) exceeded consensus estimates of $5.889 billion, and adjusted earnings per share of $1.21 (+73% YoY) topped estimates of $0.88 per share. The $1.21 figure, however, includes a $0.24 benefit related to the mark-to-market accounting for the company's strategic investments. That said, backing this out -- which results in earnings of $0.97 per share -- adjusted earnings per share still topped estimates.

"We had the best first quarter in our company's history," chairman and CEO Marc Benioff said in the release. "We believe our Customer 360 platform is proving to be the most relevant technology for companies accelerating out of the pandemic. With incredible momentum throughout our core business, we're raising our revenue guidance for this fiscal year by $250 million to approximately $26 billion and non-GAAP operating margin to 18 percent. We're on our path to reach $50 billion in revenue in FY26."

Adjusted operating margins came in at 20.2% (+710 basis points YoY), well above the 17.8% consensus. Meanwhile, operating cash flow of $3.23 billion (+74% YoY) blew past estimates of $2.296 billion and free cash flow grew to $3.057 billion, well above estimates of $2.033 billion.

"Our performance in the first quarter was strong across all financial metrics," added CFO Amy Weaver on the release. "We saw record levels of new business and strength across all products, regions, and customer sizes. Our impressive start to this year helps fuel our momentum for the rest of the year as we keep pace toward our goal of $50 billion in revenue in FY26."

Subscription and support revenue was $5.54 billion (+21% YoY), largely in line with estimates of $5.532 billion. Professional services revenue of $427 million (+147% YoY) nicely above estimates of $351 million.

As for subscription and support revenue by cloud, sales cloud revenue increased 11% YoY to $1.4 billion, and service cloud revenue grew 20% YoY to about $1.5 billion. Growth in Salesforce platform and "other" -- which contains Tableau -- increased 28% year-over-year to $1.7 billion. Lastly, marketing cloud and commerce cloud revenue were up 25% YoY to $0.9 billion.

By region, revenue on a constant currency basis increased 22% in the Americas; 17% in Europe, the Middle East, and Africa; and 17% in the Asia Pacific region.

Billings, which represents the portion of revenue generated from new business within the quarter, registered at $4.514 billion, representing a solid beat against expectations for $4.09 billion. 

One other closely followed metric 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 $35.0 billion, representing an increase of 19% 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 $17.8 billion (+20% YoY cc) and beat expectations of $17.26 billion. Additionally, revenue attrition in the first quarter was between 9% and 9.5%, with Weaver adding "we continue to be pleased with the progress made on attrition."

Looking to the second quarter of fiscal 2022, management guidance calls for revenue between $6.22 billion and $6.23 billion, higher than the consensus of $6.167 billion and representing growth of about 21% YoY. Adjusted earnings per share are expected to be in the range of $0.91 to $0.92 per share, better than the $0.87 per share the street was expecting. The current remaining performance obligation is expected to grow by ~20%.

Management also raised its outlook for the full year. It now expects revenue of $25.9 billion to $26.0 billion, up from the previous outlook of $25.65 billion to $25.75 billion; this includes a ~$500 million contribution from the purchase of Slack (WORK) , which is expected to close "near the very end" of the second quarter. This new outlook is solidly above with the $25.755 billion consensus estimate. Moving down the line, management expects adjusted operating margins of about ~18.0% and adjusted earnings per share of $3.79 to $3.81, well above estimates of $3.44 per share. 

Benioff was upbeat on the call about the momentum he is seeing in the business, even going so far as to call out the competition, SAP (SAP) .

Salesforce, he said, is already No. 1 in the CRM market, and is on the verge of passing SAP to become the No. 1 enterprise software applications market. "We can see it's imminent," he said.

"Successful integrations of Tableau and MuleSoft continue to drive these incredible results for our customers and give us so much confidence in this pending Slack acquisition," Benioff added. "We're seeing more and more inclusion of Tableau and MuleSoft in our large deals as customers accelerate their digital transformations. I mean I'm sure it will shock everyone that Tableau -- Tableau -- was part of eight of our Top 10 deals. That really is evidence and the integration we've had with Customer 360 of its success. And MuleSoft was included in 5 of these top 10 deals, it was awesome."

Members may recall, the Tableau and MuleSoft deals were also met with skepticism similar to the Slack deal. Well, given management's ability to leverage these prior acquisitions and cross sell to customers, we think the team is more than deserving of the benefit of the doubt when it comes to acquiring and integrating Slack. On the call, Benioff was as upbeat as ever when discussing how the team plans to build Slack into all of Salesforce's cloud products and really take the platform to the next level by truly making Salesforce a must have for what he sees as a "work-from-anywhere world."

Overall, this was once again, a very solid quarter for Salesforce. The strong guidance, robust cash flows and above all incredible integration we are seeing with Tableau and MuleSoft should serve to quell the Slack pessimists and turn the sentiment in the stock -- seeing as there is clearly no issue with the actual underling fundamentals, those are amazing.

While shares have also no doubt been under pressure in recent weeks due to the rotation out of tech and "COVID winners," we believe that Benioff is spot on when he talks about the new normal in which work can be done from anywhere and we are very excited about the coming integration of Slack as we believe a Slack enabled Salesforce is going to be an absolute necessity for any organization that wishes to compete -- it already was but even more so when considering decentralized work forces.

While Salesforce may indeed have been a "COVID winner," we believe the company to be more so the beneficiary of an acceleration -- rather than a temporary surge in demand -- of the "fourth industrial revolution," and that the business gained over the past year will prove stickier than the recent price action would indicate. Thus, of course, the solid revenue attrition rate and better-than-expected guidance. Ultimately, we believe this may be the clearing event we have been looking for and will look for shares to regain their upward momentum as we work toward finalization of the Slack acquisition.

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