Salesforce (CRM) Announced Strong Third Quarter Earning Results

Wednesday, 1 Dec 2021 8:00 AM EST

Portfolio holding Salesforce (CRM) reported better-than-expected third-quarter results Tuesday after the closing bell. Revenue of $6.86 billion (+26% YoY) outpaced expectations of $6.79 billion. Non-GAAP earnings of $1.27 per share (-27% YoY) were better than the $0.92 per share consensus. However, it is important to note that the earnings results include a $0.28  per-share benefit related to the mark-to-market accounting for the company's strategic investments. Even without this boost, the core earnings result of $0.99 per share was still ahead of the consensus.

“We delivered another phenomenal quarter, fueling strong revenue growth, margin and cash flow,” commented CEO Marc Benioff on the release. “Salesforce is more relevant and strategic than ever as every company accelerates their digital transformation journey. Just as we’ve helped our customers navigate the pandemic, we’re now guiding them toward greater growth, customer success, health and safety, and trust. With the tremendous strength of our Customer 360 platform and Slack, we’re on track to reach $50 billion revenue in FY26.”

Additionally, along with the earnings release, the team announced that Bret Taylor — who has served as President and Chief Operating Officer since 2019 (and Chief Product Officer before that) — has been promoted to company Vice Chair and Co-CEO, effective immediately. “Bret is a phenomenal industry leader who has been instrumental in creating incredible success for our customers and driving innovation throughout our company," Benioff said regarding the decision. "He has been my trusted friend for years, and I couldn’t be happier to welcome him as Co-CEO. We’re in a new world and Salesforce has never been more relevant or strategic for our customers. Together, Bret and I will lead Salesforce through our next chapter, while living our shared values of trust, customer success, innovation and equality for all.” When asked whether having a Co-CEO might mean Benioff potentially leaving Salesforce, Benioff refuted "I love Salesforce. I cannot think of a day when I leave this company. You see how I interact with customers; Salesforce is my life." 

While the headline results were positive, shares sold of ~6% after hours as guidance came in mixed.

• Looking to the fourth quarter of this year, management sees sales between $7.224 billion to $7.234 billion, better than expectations of $7.216 billion. However, the team expects earnings of $0.72 to $0.73 per share, below the $0.81 per share expected coming into the print.

  • 1. 1. • That said, company is expected to still be on track to deliver FY22 guidance above expectations, with guidance of $26.39 billion to $26.40 billion sales and $4.68 to $4.69 EPS, respectively. That outpaces expectations of $26.308 billion and $4.39 per share, respectively.

• Looking further out, management also provided sales guidance for first quarter and full year next year. In the first quarter of next year, management expects sales of $7.215 billion to $7.25 billion, which is below the $7.353 billion consensus. As for the full fiscal year, management reiterated their sales target of $31.7 billion to $31.8 billion, right in line with expectations at the midpoint.

Jumping back to the reported quarter, operating margins– which was a focus coming out of the company’s September Investor Day – was solid, as operating margin of 19.8% came in ahead of the 18.3% consensus. Management attributed the strong margin performance to revenue outperformance, work-from-anywhere efficiencies and disciplined spending.

On the call, incoming Co-CEO Taylor took a moment to discuss the recent Slack acquisition, noting that “Slack outperformed our expectations in their first full quarter as a part of the Salesforce family. The number of customers on Slack who spent over $100,000 was up 44% year-over-year and adoption of Slack Connect was up an astonishing 176% year-over-year. Slack is not just a product, Slack is a network, and it's just incredible to see that growth.” Additionally, Taylor and Benioff took some time to discuss the transformation the world is going through in terms of flexible work environment, commenting that “according to Slack's research, 93% of workers are looking for flexibility when they work, and 76% are looking for flexibility where they work.”

Slack combined with Customer 360 “are really powering this transformation” according to Taylor. “You can see in the results of the third quarter for Slack. Slack hit $280 million of revenue, $30 million ahead of guidance. Retailers like Saks and innovative companies like the Grab are relying on Slack every day to collaborate to automate workflows and to connect with their partners.”

Bottom Line:

We think the after-hour sell-off in Salesforce can be attributable to 2 reasons. One, the market was having a bad day, after hearing from a hawkish Federal Reserve. Second, and this is a main reason, that market was choosing to focus on the mixed guidance in the near-term. 

So, how will we approach the stock? Let the sellers shake out. The current quarter’s weak earnings guide coupled with the subsequent quarter’s below consensus sales guide means that there is no rush to step in first thing tomorrow. Instead, wait for shares to settle and consolidate, allow the market to digest today’s commentary from Federal Reserve Chair Jerome Powell and at that point, remember that Salesforce is proving to be a backbone of worker productivity (and therefore their customers’ own success) and then step into pick up some shares.