Analysis: CRM ZM TGT LOW

Salesforce (CRM) reported a top- and bottom-line beat with its second-quarter earnings report that came in after the bell on Wednesday night. Revenue of $6.34 billion (+23% YoY, +21% YoY CC) exceeded consensus estimates of $6.24 billion, and adjusted earnings per share of $1.48 (+3% YoY) topped estimates of $0.92 per share.

The $1.48 figure, however, includes a $0.43 benefit related to the mark-to-market accounting for the company's strategic investments. But even with that amount taken out -- which results in adjusted earnings of $1.05 per share -- the number still topped estimates.

"With companies and governments around the world continuing to accelerate their digital transformations, we delivered our fifth phenomenal quarter in a row," chairman and CEO Marc Benioff said in the release. "Salesforce has never seen better execution or greater momentum. Our Customer 360 platform is now fueled by a herd of unicorns perfectly designed for this all-digital world. Sales, Service, Marketing & Commerce, Platform, Tableau, MuleSoft and now Slack are all billion dollar-plus products delivering customer success like no other company." 

Adjusted operating margins came in at 20.4% (+20 basis points YoY), well above the 18.3% consensus. Meanwhile, operating cash flow of $386 million (-10% YoY) blew past estimates of $167 million and free cash flow of $173 million was well above estimates of $18 million.

The company exceeded its financial expectations in the quarter, added CFO Amy Weaver on the release, noting that it plans to further build on Slack's momentum.

According to the numbers, subscription and support revenue was $5.91 billion (+22% YoY), ahead of estimates of $5.828 billion. Professional services revenue of $426 million (+37% YoY) came in nicely above estimates of $414 million.

Sales cloud revenue, meanwhile, increased 15% YoY to $1.5 billion, and service cloud revenue grew 23% YoY to about $1.6 billion. Growth in Salesforce platform and "other" -- which contains Tableau -- increased 24% year-over-year to $1.9 billion. Lastly, marketing cloud and commerce cloud revenue were up 28% YoY to $1.0 billion.

By region, revenue on a constant currency basis increased 20% in the Americas; 24% in Europe, the Middle East, and Africa; and 25% in the Asia Pacific region.

Billings, which represents the portion of revenue generated from new business within the quarter came in at $6.249 billion, ahead of the 5.91 billion expected.

Billings and other, which represents the portion of revenue generated from new business within the quarter and the impact of foreign currency translation (the "other"), registered at $5.771 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 $36.2 billion, representing an increase of 18% 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 $18.7 billion (+23% YoY cc) and beat expectations of $18.231 billion. 

Additionally, revenue attrition continues to improve, coming at 8% to 8.5%, down nicely from the 9% and 9.5% range we saw last quarter, with Weaver adding, "Attrition has continued to perform better than anticipated. As a reminder, our attrition rate is calculated based on trailing 12-month performance -- and we have now lapped the second quarter of fiscal '21, which was impacted by the early days of the pandemic."

Looking to the third quarter of fiscal 2022, management guidance calls for revenue between $6.78 billion and $6.79 billion, well ahead of the consensus of $6.655 billion and representing growth of about 25% YoY. Adjusted earnings per share are expected to be in the range of $0.91 to $0.92 per share, better than the $0.82 per share that Wall Street was expecting. The current remaining performance obligation is expected to grow by ~22%.

Management also once again (for the fourth time in a row) raised its outlook for the full year. It now expects revenue of $26.2 billion to $26.3 billion, up from the previous outlook of $25.9 billion to $26.0 billion; this includes a ~$530 million contribution from the purchase of Slack, which was completed on July 21. This new outlook is solidly above, with the $25.997 billion consensus estimate. Moving down the line, management expects adjusted operating margins of about ~18.5% and adjusted earnings per share of $4.36 to $4.38, well above estimates of $3.84 per share.

"Sales Cloud has been No. 1 in its category for more than a decade. And this year, we've reimagined the product to be the growth platform for digital sales teams," said chief operating officer, Brett Taylor. "We are already seeing the results as Sales Cloud accelerated to 15% growth year-over-year. Our Service Cloud is also seeing amazing momentum. All aspects of customer service have gone digital, from the contact center to field service to self-service and to bots. The scale of Service Cloud is just incredible. This is a $6 billion business, whose growth has accelerated to 23% year-over-year. Our Marketing and Commerce Cloud also grew 28% year-over-year as every organization in the world is investing in direct, trusted relationships with our customers. And every one of these digital transformations is also a data transformation, which is driving the unprecedented success we're seeing in Tableau and MuleSoft. Tableau is in nine of our top 10 deals this quarter, and MuleSoft was in eight of our top 10 deals. The real power of Salesforce platform is bringing all of these capabilities together into a Customer 360, a single source of truth for your customers."

We believe the dynamic Taylor called out regarding the ability to cross-sell Tableau and MuleSoft is a perfect example of what Salesforce brings to the table when it acquires a company and speaks to what we could see with Slack in the future now that the acquisition is complete.

"With Slack, we're bringing a whole new dimension to Salesforce," said Taylor. "There could not be a more relevant product at a more relevant time for every single one of our customers. If you talk to any CEO, read the headline of any paper or even look around the home office most of you are sitting in right now, you can see the depth of the transformation work has gone through this year. Sales meetings have moved from conference rooms to Slack and to Zoom (ZM) , contact centers used to be buildings. And now they exist entirely in the cloud."

Slack's revenue accelerated to 39% growth year-over-year on a stand-alone basis, added Taylor, noting "great customer wins" at Target (TGT) , Lowe's (LOW) , and several other companies and organizations.

Taylor also talked up Slack Connect, which grew over 200% year-over-year, and its capability to enable users to connect fellow employees, partners, vendors and customers.

The team said a "a ton of Slack innovation" should be expected at this year's Dreamforce event, which will be hosted from Sept. 21 to Sept. 23; members can sign up for the live stream here.

Benioff also spoke to the new work world we are in and how it will affect the company. While some have argued that we would return to a more normal, in-office environment, Benioff shared on the call that this view has largely evolved and that his conversations with customers make it clear that the days of a 5-day work week in the office are gone. In fact, Benioff attributed the strong guidance raise to precisely this dynamic. Benioff noted three CEO priorities that he is seeing: One, a focus on net-zero carbon emission; two, solving supply chain issues; and, three, achieving "success from anywhere in this new world."

Benioff said that in the past, CEOs would call him and say, "Mark, you don't understand it. Everybody is coming back. Everything is going back the way it is, and then it's over."

Now, however, Benioff, said, "those calls have stopped and people realize things have really changed. This pandemic has changed things and work has changed."

That change is why Benioff said that Salesforce was willing to shell out $27 billion to acquire Slack, because "we believe so strongly that the world has changed, that the past is gone, that we are in a new world."

All in, this was a fantastic quarter from Salesforce, with almost nothing to nitpick -- just an across-the-board beat with the guidance to match. We expect analysts all over Wall Street will be raising numbers come Thursday morning. With the Slack acquisition complete, we look forward to hearing more about how the teams plans to leverage its newest unicorn -- as Benioff put it -- at Dreamforce.

The world clearly having undergone a permanent, fundamental shift in the way companies conduct business -- be it full-remote or a hybrid model -- and Salesforce is better positioned than ever to help customers thrive in this new digital world. As a result, we are raising our price target to $300 and reiterate our "One" rating.

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