Salesforce (CRM) reported better-than-expected fiscal 2023 first-quarter earnings Tuesday.

Revenue of $7.41 billion, up 26% year-over-year in constant currency, exceeded expectations of $7.38 billion, according to FactSet (constant currencies help strip out fluctuations in foreign currency to provide a clearer financial picture). Non-GAAP earnings per share of $0.98 — inclusive of a one-cent benefit from mark-to-market accounting on strategic investments — beat estimates of $0.94. 

Operating margin — which investors are now watching more closely due to the importance of profitable growth at scale — was 0.3% on a GAAP basis and non-GAAP operating margin was 17.6%, edging estimates of 17.4%. Operating cash flow, another line that has become increasingly important with the Federal Reserve raising interest rates, increased 14% from the previous year to $3.68 billion, beating estimates of $3.16 billion. 

Bottom line

• Salesforce reported a great quarter, with beats across the board and commentary that suggests healthy demands remain uninterrupted by the uncertain macro operating environment. What remains clear is that companies cannot afford to cut back on their investment in digitization, and as an indispensable partner in the digital transformation journeys of companies around the world, Salesforce’s revenues should remain far more durable perhaps than what the market is crediting.

• Even though management lowered its full-year revenue outlook, the market should give this a pass because the difference was purely related to foreign exchange rates. The more important part of the guidance was the surprise operating margin performance expected this year. 

• Even though shares jumped more than 7% to roughly $172 per share in after-hour trading, the stock remains in a downtrend. We think the stock price is fair here, about 5 times Price-to-Sales, which in the past has caught bids. However, the Price-to-Earnings remains elevated compared to the broader market. Therefore, CRM is a long-term buy, but don't expect huge returns immediately. 

Companywide results

Breaking down the subscription and support revenue results by cloud:

• Sales cloud revenue increased 20% year over year to $1.63 billion. Some new wins in the quarter include DoorDash (DASH), Stellantis (STLA), and PSA Group. 

• Service cloud revenue increased 19% year over year to $1.76 billion. Management highlighted longtime customer State Farm as a success story. 

• Platform and other (including Slack, which Salesforce acquired on July 21, 2021) revenue increased 58% over the previous year to $1.42 billion. Slack exceeded management’s revenue expectations at $348 million versus guidance of $330 million. This was the fourth consecutive quarter with more than 40% growth in customers spending more than $100,000 with Slack annually. 

• Marketing and commerce revenue increased 24% year over year to $1.09 billion. A few marketing wins in the quarter include Bose and Colgate-Palmolive (CL). Co-CEO Bret Taylor highlighted the importance of Salesforce’s Marketing Cloud to chief marketing officers “as they navigate the significant changes in mobile operating systems and new privacy regulations around the globe.” Yeti and Goodyear (GT) were named as new commerce cloud wins. 

• And data — which includes past acquisitions of Tableau and Mulesoft — revenue increased 15% to $955 million. A few big Tableau wins in the quarter were ADT, Bose, and Lookers Motor Group. Mulesoft’s largest deals included NTT and a deepened relationship with Rocket Mortgage. 

On a geographic basis, in constant currency, sales increased 21% year over year in the Americas, 39% in Europe, the Middle East, and Africa (EMEA) and 32% in the Asia Pacific region (APAC).

Regarding a few other closely watched industry metrics that provide visibility into Salesforce’s revenue in the future:

• The remaining performance obligation (RPO), which represents all future revenue under contract that has not yet been recognized as revenue, ended the quarter at $42 billion, up 20% year over year.  

• The current RPO (cRPO), which represents future revenue under contract that is expected to be recognized as revenue in the next 12 months, ended the quarter at $21.5 billion, up 24% in constant currency and matched estimates. 

• Revenue attrition remained at record lows between 7% to 7.5%.

Other Notes

• Chair and Co-CEO Marc Benioff said on the earnings call with investors that the broader economic volatility has not materially impacted Salesforce. 

• Disciplined decision making and continuing to improve profitability over the long term were reiterated as priorities of management. 

• Benioff reiterated the company has no plans for major acquisitions right now, even with the multiples of many enterprise-software-as-a-service companies down across the board. We think investors will continue to cheer this decision as large scale M&A generally means margin dilution. 

• MuleSoft revenue increased 9% year over year against a strong prior year comparison. The company says it will see the benefits of its ongoing organizational changes in the back half of this fiscal year. 

Guidance  

• On guidance for fiscal year 2023, management slightly lowered its outlook by approximately $300 million to the range of $31.7 billion to $31.8 billion, below estimates of about $32.06 billion. Management lowered its guidance due to an additional $300 million of foreign exchange headwinds. 

• On a more positive note, management slightly raised its GAAP operating margin guidance to roughly 3.8% from 3.6% vs. estimates of 3.2%, and non-GAAP margins of 20.4% from 20% vs. estimates of 19.9%. These may be small bumps, but the market should like this because as we stated earlier, it wants to see profitable growth at scale.

• Non-GAAP earnings per share are expected to be $4.74 to $4.76, nicely above estimates of $4.66 and a big raise from their previous view of $4.62 to $4.64.

• The operating cash flow for fiscal 2023 outlook of a 21% to 22% year-over-year increase was maintained. 

• For the second quarter of fiscal 2023, management expects revenue of $7.69 billion to $7.70 billion, which is slightly below estimates of $7.77 billion. This outlook includes a $200 million year-over-year headwind from foreign exchange rates. 

• Non-GAAP earnings per share is expected to be $1.02 to $1.02, below estimates of $1.14.

• Second quarter cRPO is expected to grow 15% year over year, implying roughly $21.5 billion versus estimates of $22.14 billion.