A month has gone by since the last earnings report for Salesforce.com (CRM). Shares have lost about 9.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Salesforce.com due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Salesforce Q3 Earnings and Revenues Beat Estimates
Salesforce reported strong financial results for the third quarter of fiscal 2023, wherein its revenues and earnings surpassed the respective Zacks Consensus Estimate and marked a solid year-over-year improvement as well.
Third-Quarter Fiscal 2023 Performance
Salesforce’s third-quarter fiscal 2023 non-GAAP earnings of $1.40 per share beat the Zacks Consensus Estimate of $1.21. The quarterly earnings included a benefit of 2 cents per share from the mark-to-mark accounting of CRM’s strategic investments at a non-GAAP tax rate of 25%. Moreover, non-GAAP earnings soared 10% from the year-ago quarter’s earnings of $1.27 per share.
Salesforce’s quarterly revenues of $7.84 billion climbed 14% year over year, surpassing the Zacks Consensus Estimate of $7.81 billion. The top line also improved 19% in constant currency (cc).
The company has been benefiting from the robust demand environment as customers are undergoing a major digital transformation. Thus, the rapid adoption of its cloud-based solutions resulted in the better-than-anticipated performance in the fiscal third quarter.
Coming to CRM’s business segments, revenues from Subscription and Support (92% of the total revenues) increased 13% from the year-earlier period to $7.23 billion. Professional Services and Other (8% of total sales) revenues climbed 25% to $604 million.
Under the Subscription and Support segment, Sales Cloud revenues grew 12% year over year to $1.7 billion. Revenues from Service Cloud, one of the company’s largest and fastest-growing businesses, also improved 12% to $1.9 billion.
Marketing & Commerce Cloud revenues jumped 12% to $1.1 billion. Salesforce Platform and Other revenues were up 18% to $1.5 billion. Also, revenues from Data increased 13% year over year to $1 billion.
Geographically, Salesforce registered revenue growth of 16% in America (68.5% of the total revenues), 14% in the Asia Pacific (9.3%) and 10% in the EMEA (22.2%) on a year-over-year basis.
Salesforce’s gross profit came in at $5.75 billion, up 14.5% from the prior-year period. However, the gross margin remained flat at 73%.
Salesforce recorded a non-GAAP operating income of $1.78 billion, up 30.9% year over year. Moreover, the non-GAAP operating margin expanded 290 bps to 22.7% due to lower operating expenses as a percentage of total sales. Operating expenses as a percentage of revenues declined to 67% from 72% in the year-ago quarter.
Salesforce exited the fiscal third quarter with cash, cash equivalents and marketable securities of $11.9 billion, down from the $13.5 billion recorded at the end of the previous quarter.
CRM generated operating cash flow of $313 million and free cash flow of $115 million in the third quarter. In the first nine months of fiscal 2023, the company generated operating and free cash flow of $4.32 billion and $3.75 billion, respectively.
As of Oct 31, 2022, the current remaining performance obligation reflecting revenues under contract for the next 12 months was $20.9 billion, up 11% on a year-over-year basis. In the third quarter, the company bought back shares worth $1.7 billion.
Guidance Update
Salesforce provided fourth-quarter guidance and updated the outlook for fiscal 2023. For the fiscal fourth quarter, Salesforce projects total sales between $7.932 billion and $8.032 billion (midpoint $7.982 billion).
The revenue guidance includes a $250-million negative impact of unfavorable currency exchange rates. Furthermore, CRM anticipates non-GAAP earnings per share in the band of $1.35-$1.37 for the current quarter.
For fiscal 2023, Salesforce reiterated its revenue guidance range of $30.9-$31 billion. The company forecast that the stronger U.S. dollar against other major currencies would have a $900-million negative impact on total revenues.
The company increased its non-GAAP earnings guidance to the $4.92-$4.94 per share range from the $4.71-$4.73 band projected earlier. It increased the non-GAAP operating margin forecast for the fiscal year to 20.7% from 20.4%. However, CRM reduced the year-over-year operating cash flow growth projection to approximately 16% from the earlier guidance range of 16-17%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
VGM Scores
Currently, Salesforce.com has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Salesforce.com has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Salesforce.com belongs to the Zacks Computer – Software industry. Another stock from the same industry, VMware (VMW), has gained 0.3% over the past month. More than a month has passed since the company reported results for the quarter ended October 2022.
VMware reported revenues of $3.21 billion in the last reported quarter, representing a year-over-year change of +0.7%. EPS of $1.47 for the same period compares with $1.72 a year ago.
VMware is expected to post earnings of $1.98 per share for the current quarter, representing a year-over-year change of -2%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for VMware. Also, the stock has a VGM Score of C.
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