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Salesforce (CRM) Beats on Q3 Earnings, Raises FY19 View

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Salesforce.com Inc. (CRM - Free Report)   reported impressive third-quarter fiscal 2019 non-GAAP earnings of 61 cents per share, which comprehensively exceeded the Zacks Consensus Estimate of 50 cents and also the year-ago quarter’s figure of 39 cents.

Revenues of $3.39 billion increased 26% year over year and also surpassed the Zacks Consensus Estimate of $3.37 billion. Moreover, the top line grew 26% at constant currency (cc). Additionally, the rapid adoption of the company’s cloud-based solutions led to the better-than-expected results. However, foreign exchange volatility remained an overhang.

On the back of stellar third-quarter results, Salesforce raised its fiscal 2019 guidance and further stated that it is on track to achieve $21-$23 billion in annual revenues by fiscal 2022.

Quarter in Detail

Coming to its business segments, revenues at Subscription and Support (93% of total) rose about 16% from the year-earlier period to $3.17 billion. Professional Services and Other revenues (7%) climbed 15% to $224 million.

Sales Cloud revenues ascended 11% year over year to $1.02 billion. Revenues from Service Cloud, one of the company’s largest and fastest-growing businesses, jumped 24% to $917 million. Marketing & Commerce Cloud surged 37% to $489 million. Salesforce’s Platform and other revenues soared 51% to $742 million. Excluding Mulesoft, the same grew 30%. Notably, MuleSoft’s revenues were up 35% to $105 million.

Geographically, the company witnessed revenue growth of 25%, 31% and 26% 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 in turn, is helping it deliver strong growth internationally.

Management mentioned that the digital transformation is driving strategic relationships of the company. Its ability to provide an integrated solution for customers’ business problems is the key growth driver.

Strong momentum in Financial Services Cloud remained a chief catalyst in the reported quarter. Moreover, Salesforce's recently-launched Customer 360 platform is a tailwind.

The number of deals generating more than $1 million increased 46% year over year in the quarter under review.  Moreover, significant growth in the number of $20 million-plus deals is a main channel of growth.

Notably, strengthening relationships with cloud companies, namely Amazon (AMZN - Free Report) , Alphabet’s (GOOGL - Free Report) Google and International Business Machines (IBM - Free Report) among others are a positive.

salesforce.com, inc. Price, Consensus and EPS Surprise

 

salesforce.com, inc. Price, Consensus and EPS Surprise | salesforce.com, inc. Quote

Operating Details

Salesforce’s non-GAAP gross profit came in at $2.6 billion, up 26.6% from the prior-year quarter. Gross margin expanded 60 basis points (bps) to 76.9%, primarily owing to solid revenue growth.

Non-GAAP operating expenses increased 28.5% year over year to $2.04 billion. As a percentage of revenues, operating expenses rose 130 bps to 59.9%.

Salesforce posted non-GAAP operating income of $572 million, up 20.29% year over year.  However, operating margin contracted 70 bps to 16.9% due to higher operating expenses as a percentage of revenues.

Balance Sheet & Cash Flow

Salesforce exited the quarter with cash, cash equivalents and marketable securities of $3.45 billion compared with $3.43 billion in the fiscal second quarter.

As of Oct 31, 2018, total unearned revenues were $5.4 billion, up 26% on a year-over-year basis. The metric increased 26% at CC.

Salesforce generated operating cash flow of $143 million and free cash flow of $7 million.

Guidance

For fourth-quarter fiscal 2019, revenues are projected between $3.551 billion and $3.561 billion, indicating a 25% increase year over year. Non-GAAP earnings are expected in the range of 54-55 cents per share. The company indicates to consistently invest in MuleSoft and other growth initiatives in the fiscal fourth quarter. The company anticipates a $200-million headwind to unearned revenues in the January quarter due to the recent strengthening of dollar.

For fiscal 2019, revenues are now likely to be between $13.23 billion and $13.24 billion, a 26% rise year over year, up from the previous anticipation of $13.125-$13.175 billion.  The outlook includes approximately $375 million of contribution from the acquisition of MuleSoft.

Non-GAAP earnings are envisioned in the range of $2.60-$2.61, up from the past view of $2.50-$2.52 per share.

Operating cash flow is still forecast to increase in the band of 15-16% year over year.  However, the guidance includes a headwind of nearly $150 million related to MuleSoft

The company also issued a revenue guidance for fiscal 2020, which it estimates to be between $15.90 billion and $16 billion, marking 20-21% growth year over year.

Salesforce currently has a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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