Salesforce Earnings: Margins Shine As New Signs of Pressure Remove Some Luster

Salesforce CRM continues to impress, with another strong quarter with revenue and profitability ahead of our expectations. We fine-tuned our model over the next couple of years with profitability moving tad higher, offset by slightly lower growth, resulting in an unchanged fair value estimate of $245. Shares look attractive especially in light of the modest selloff in the aftermarket, and the stock remains one of our top picks.

For the fiscal year, Salesforce raised its profitability guidance while maintaining revenue. Improved capital returns to shareholders in the form of share buybacks should keep share count flattish this year, as the company repurchased $2.1 billion worth of stock during the quarter. The main blemishes in the quarter were the building pressure in professional services revenue, deceleration in the Americas, and the expected slowdown in current remaining performance obligation, or CRPO, included in guidance.

First-quarter revenue grew 11% year over year (13% in constant currency) to $8.25 billion, versus high end of guidance of $8.18 billion. Strength was driven by MuleSoft, international, and a more buoyant core business. CRPO grew 12% year over year in constant currency, which finally bumped above revenue growth, albeit by a slim margin. Professional services were weak and the overall demand environment remains challenging, with small business notably weaker but vertical solutions stronger. Management noted once again that eight of the firm’s 13 clouds had annual recurring revenue, or ARR, year-over-year growth of 50% or more.

Profitability remains a bright spot, as Salesforce achieved a non-GAAP operating margin of 27.6%, versus 17.6% last year and our estimate of 24.8%. We see margins hitting 30% next year and do not envision artificial intelligence investments as an impediment to meeting this milestone. The major restructuring actions from January provided margin support this quarter and should contribute similarly for the rest of the year.