Salesforce (CRM) Beats on Q2 Earnings, Raises FY19 View

Salesforce.com Inc. CRM reported splendid second-quarter fiscal 2019 non-GAAP earnings of 71 cents per share, which comprehensively beat the Zacks Consensus Estimate of 47 cents. The figure increased more than twofold from the year-ago quarter figure of 33 cents.

Revenues of $3.28 billion increased 27% year over year and surpassed the Zacks Consensus Estimate of $3.23 billion. Revenues grew 27% at constant currency (cc). The rapid adoption of the company’s cloud-based solutions led to the better-than-expected results.

Salesforce, on the back of stellar second-quarter results, raised its fiscal 2019 guidance and stated that it is on track to reach $23 billion in annual revenue by fiscal 2022.

Quarter Details

Coming to its business segments, revenues at Subscription and Support increased about 28% from the year-ago quarter to $3.06 billion. Professional Services and Other revenues climbed 14% to $221 million.

Sales Cloud, Service Cloud, Platform and other and Marketing & Commerce Cloud grew 12.7%, 27.4%, 53.8% and 25.9%, respectively. Notably, Sales Cloud surpassed the $1 billion mark in quarterly revenues for the first time this quarter.

In the quarter, the Salesforce platform grew 32% and including MuleSoft, it grew 54%. The company’s acquisition of MuleSoft is a major positive, per management. The buyout has added an impressive integration platform and is off to a great start. The MuleSoft Anytime platform is gaining traction among consumers for digital transformation.

Geographically, the company witnessed revenue growth of 25.2%, 33.5% and 29.2% in the Americas, Europe and Asia Pacific, respectively, on a year-over-year basis. The company continues to win customers in the international market, which is helping it deliver strong growth internationally.

Moreover, Salesforce is performing well across industries, particularly in healthcare and financial services. The launch of Health Cloud for Payers is expected to keep up the momentum in healthcare.

Management is extremely optimistic about enhancement of customer experience that has aided growth of the cloud segment. Artificial intelligence (AI) related innovations have further boosted the same with Einstein Analytics providing helpful insights. Einstein Bots, launched in the quarter, is expected to gain more traction among customers. Moreover, the acquisition of Datorama is another positive.

The company added and strengthened its relationships with a few notable customers during the quarter among which Deloitte is rolling out Salesforce to more than 300K employees.

In the second quarter, the company also extended its strategic alliance with Alphabet’s GOOGL Google to deepen the integration between Google Analytics 360 and Salesforce Marketing Cloud.

Operating Details

Salesforce’s non-GAAP gross profit came in at $2.527 billion, up 27.5% from the year-ago quarter. Gross margin expanded 11 basis points (bps) to 77.02%, primarily owing to solid revenue growth.

Non-GAAP operating expenses increased 23.9% year over year to $1.94 billion. As a percentage of revenues, operating expenses decreased 166 bps to 59.19%.

Salesforce posted non-GAAP operating income of $585 million, up 41.3% year over year. Operating margin expanded 176 bps to 17.8% driven by an improved gross margin base and lower operating expenses as a percentage of revenues.

Balance Sheet & Cash Flow

Salesforce exited the quarter with cash, cash equivalents and marketable securities of $3.43 billion compared with $7.16 billion in the previous quarter.

As of Jul 31, 2018, total unearned revenues were $6.2 billion, up 23.9% on a year-over-year basis.

Salesforce generated operating cash flow of $458 million and free cash flow of $288 million.

Guidance

For fiscal 2019, revenues are now projected between $13.125 billion and $13.175 billion, an increase of 25% year over year, up from the previous expectation of $13.075 billion and $13.125 billion.

Non-GAAP earnings are expected in the range of $2.50–$2.52 per share.

Operating cash flow is anticipated to increase in the range of 15–16% year over year.

For third-quarter fiscal 2019, revenues are projected between $3.355 billion and $3.365 billion, indicating an increase of 24-25% year over year.

Non-GAAP earnings are expected in the range of 49–50 cents per share.

Zacks Rank & Stocks to Consider

Salesforce currently has a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the broader Computer and Technology sector are Qualys, Inc. QLYS and Fortinet, Inc. FTNT, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Qualys and Fortinet is projected to be 8% and 16.8%, respectively.

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