Salesforce (CRM) topped expectations in the first quarter of its fiscal year 2024, while providing strong guidance for the second quarter and raising its margin outlook for the rest of the year — once again proving that this is a transformed company balancing profitable growth at scale.

• Revenue for the three months ended April 30  grew 11% year-over-year, to $8.25 billion, exceeding analysts’ forecasts of $8.18 billion, (Refinitiv).

• Non-GAAP earnings-per-share (EPS) of $1.69, beat the $1.61-per-share EPS predicted by analysts.

• Operating margins came in at 5% on a GAAP basis, and 27.6% on non-GAAP basis, compared with expectations of 6.5% and 25.9%, respectively.

• Operating cash flow increased 22% from the previous year, to $4.49 billion, beating estimates of $3.76 billion. Free cash flow of $4.25 billion outpaced the $3.55 billion forecasted.

However, the guidance boost was not enough for the stock to overcome lofty expectations ahead of the earnings release, with the stock up 68% this year and trading at a 52-week high. The small beat and raise are prompting some profit-taking, resulting in shares falling roughly 6% after hours Wednesday, to around $210 apiece. But with management committed to margin expansion, growing profitability, we view this as a very good opportunity to add to our position.

Quarterly Commentary

We are pleased to see Salesforce beat across so many key metrics, despite the challenging macroeconomic environment. The deal environment continues to be less favorable than years past, with many taking longer to close (elongated deal cycles) and smaller in size (deal compression). Still, Salesforce said it continues to see strong adoption of its cloud offerings from customers who are in need of reducing complexity and speeding up processes relative to value.

Geographically, on a constant currency basis, sales increased 10% year-over-year in the Americas, 17% in Europe, the Middle East, and Africa (EMEA), and 24% in the Asia Pacific region (APAC).

Despite the difficult operating environment, Salesforce’s revenue attrition remains quite low, at 8%, particularly considering the slowdown in the global economy. New deals may be taking longer to close but the low attrition rates show that enterprise customers can’t afford to leave Salesforce’s mission-critical software products once in use. They can’t afford to miss out on those productivity gains.

On the margin side, in order to generate a 1,000-basis-point improvement in the short span of 12 months, a company must really drive efficiencies across each and every part of its business. Looking under Salesforce’s hood, its expenses as a percent of revenue are down in every major category relative to last year. Marketing and sales as a percent of revenue was 32% compared to 38% last year; cost of revenues is down to 21% of revenue compared to 22% last year; research and development is down to 12% compared to 14% last year; and general and administrative is a tick lower at 7% versus 8% last year. Reducing headcount helps, too. Salesforce ended the quarter with 72,970 full time employees, down from 77,810 last year.

With the support of Salesforce’s increased cash flow, the company made good on its commitment to repurchase stock to offset dilution from stock-based compensation. The company bought back $2.1 billion worth of shares in the quarter, resulting in a 1% decline in its diluted share count from last year. The company still has about $13.9 billion remaining on a $20 billion share-repurchase program.

Salesforce management on Wednesday noted the company has integrated generative AI into its products. Whether it be Einstein GPT, which conducted 1 trillion transactions for its customers this week, Slack GPT, which helps users quickly summarize conversations, or Tableau GPT, which simplifies data analysis for its users, Salesforce is harnessing the power of AI to allow its customers to be more productive.

“The coming wave of generative AI will be more evolutionary than any technology innovation that’s come before,” CEO Marc Benioff said Wednesday.

Salesforce will hold an AI Day event on June 12 to outline more of its strategy around the technology. 

Outlook

Following its strong fiscal first-quarter results, management outlined several positive adjustments to its full-year outlook. Although the company left its revenue prediction unchanged, at $34.5 billion to $34.7 billion, the company expects its profitability will come in better than previously anticipated. Salesforce now sees its GAAP operating margin at 11.4%, compared to a prior outlook of 10.8%, and its non-GAAP operating margin at 28%, compared to a previous estimate of 27%.

With margins higher, the company raised what it expects to earn per share for the year. Salesforce raised its GAAP EPS range to $2.67 to $2.69, up from $2.59 to $2.61, and non-GAAP EPS range to $7.41 to $7.43, up from $7.12 to $7.14. Both new EPS ranges are above the consensus estimates of $2.67 and $7.17 per share.

For its fiscal second quarter, Salesforce guided revenues to be in a range of $8.51 billion to $8.53 billion, with GAAP EPS coming in at 79 cents to 80 cents and non-GAAP EPS at $1.89 to $1.90. Compared to consensus estimates, these figures are beats across the board.

Bottom line

The last time the company reported earnings, the market marveled at how fast it was delivering on its profitability goals. While the magnitude of the operating-margin beat wasn’t as large this time around, we remain impressed with how efficient the company has become in such a short period of time. 

With CEO Marc Benioff more engaged than ever, winning over activists who pressed for tough but necessary changes, securing new customer wins, and shepherding the business into this new stage of generative artificial intelligence (AI), better times are still ahead for Salesforce.

Shares are pulling back in afterhours trading, which we largely attribute to the fact that shares have rallied north of 30% since the start of the year, while management did not raise the full-year outlook more after beating this quarter and providing upside second-quarter guidance. 

We continue to believe in Salesforce's long-term positioning as a core consolidator of front-office functionality and the opportunity for margin expansion supporting an EPS CAGR north of 20% through FY26. In terms of valuation, CRM is expected to earn $9.40/share in its FY2025 (calendar 2024, which the market should start to price in in the coming months). This is an EPS growth of 27% compared to this year. However, with the stock trading at $210/share in after-hours trading, the forward P/E is very attractive at 22.3x. Our rule of thumb is that the Price-to-Earnings-to-Growth Ratio should be around 1. In this case, with the stock price at $210/share and next year's earnings of $9.40/share, we are paying 22 times for earnings growth of 27%. 

We are not alone in our argument that CRM is at an attractive valuation. Analysts at Morgan Stanley (our brokerage firm) have raised the price target for CRM from $240 to $251, remaining overweight in this name.