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Salesforce (NYSE:CRM) submitted its earnings card for the second fiscal quarter three days ago which was better than expected regarding revenue and adjusted earnings. What was not better than expected, however, was the revenue and profit outlook for FY 2023 which the cloud-based software company unexpectedly trimmed due to longer purchase cycles in the software market and a stronger USD. Still, Salesforce saved the day by announcing a massive $10B stock buyback that is meant to give investors confidence in the firm’s growth prospects!
Salesforce beat estimates
The relationship management software company reported FQ2’23 revenues of $7.72B and beat quarterly expectations by $23M. On the profit level, Salesforce delivered $1.19 per-share in adjusted earnings vs. a prediction of $1.03 per-share.
Seeking Alpha: FQ2’23 Earnings Results
Regarding commercial performance, FQ2’23 was a good quarter for Salesforce. The company generated 22% year over year top line growth, which was once again led by Salesforce’s platform business. Revenues for FQ2’22 were $7.72B, but if it weren’t for a stronger USD, the company would have reported 26% year over year top line growth. About 93% of Salesforce’s FQ2 revenues came from customers paying for subscriptions.
Salesforce: FQ2’23 Revenue Growth
Robust demand for Salesforce’s products and services is chiefly driven by growth in Salesforce’s platform business. This segment has seen 53% year over year growth to $1.48B in FQ2’23 and it grew more than three times faster than Marketing and Commerce which — with a growth rate of 17% year over year — was Salesforce’s second-fastest growing segment. Salesforce’s platform segment helps clients scale custom-build applications and is seeing strong customer uptake. Because the platform segment is the fastest-growing segment for Salesforce, I continue to expect this business to overtake the Sales and Service businesses by the end of FY 2024 regarding dollar contribution.
Salesforce: FQ2’23 Segment Revenue Breakdown
Free cash flow
Salesforce’s free cash flow (“FCF”) was $131M in FQ2’23, showing a decline of 24% year over year. Salesforce’s free cash flow has proven to be volatile over time and FQ1 and FQ4 are typically the strongest quarters because most companies make their software purchase decisions in those quarters. In FY 2022, Salesforce generated a free cash flow margin of approximately 20% which is what I believe the CRM company can achieve this year as well.
|
$millions |
FQ2’23 |
FQ1’23 |
FQ4’22 |
FQ3’22 |
FQ2’22 |
|
Subscription and Support |
$7,143 |
$6,856 |
$6,828 |
$6,379 |
$5,914 |
|
Professional Services |
$577 |
$555 |
$498 |
$484 |
$426 |
|
Revenues |
$7,720 |
$7,411 |
$7,326 |
$6,863 |
$6,340 |
|
Cash Flow From Operating Activities |
$334 |
$3,676 |
$1,982 |
$404 |
$386 |
|
Capital Expenditures |
($203) |
($179) |
($167) |
($166) |
($213) |
|
Free Cash Flow |
$131 |
$3,497 |
$1,815 |
$238 |
$173 |
|
Free Cash Flow Margin |
1.7% |
47.2% |
24.8% |
3.5% |
2.7% |
(Source: Author)
Assuming a 20% FCF margin, using Salesforce’s new revenue guidance of $30.95B, the CRM company has free cash flow potential of $6.2B in FY 2023.
Guidance for FY 2023
Salesforce guided for $31.7B to $31.8B in revenues for FY 2023 three months ago but trimmed its outlook due chiefly to companies taking longer to review software purchases. The new guidance for the current fiscal year projects $30.9B to $31.0B in revenues, implying a 2.5% down-grade relative to prior guidance.
Regarding profits, the strong USD remains a challenge for Salesforce and the software company now sees adjusted earnings of $4.71-4.73 per-share in FY 2023, a small down-grade from an earlier guidance of $4.74-4.76 per-share.
Salesforce: FY 2023 Guidance
$10B stock buyback
Salesforce announced the approval of its first stock buyback in the amount of $10B which calculates to about 6.1% of the company’s total market cap. Based off of Friday’s stock price of $165.23, Salesforce could repurchase approximately 60.5M shares with this stock buyback volume. The buyback is likely meant to give investors confidence after Salesforce sees stretched out sales cycles, meaning some customers are taking no longer to decide on a purchase of Salesforce’s products and services.
Attractive valuation
Considering that Salesforce is profitable, which is not true for a lot of cloud-based software companies, is likely to generate 20% FCF margins and just announced a $10B stock buyback, I believe the stock is very attractively valued. Based off of a FY 2023 EPS prediction of $5.69, shares of Salesforce currently trade at a P-E ratio of 29 X.
Data by YCharts
Risks with CRM
Weakening customer monetization and slowing top line growth are two big commercial risks for Salesforce and its stock. The stronger USD is also a problem for companies that generate at least some portion of their revenues and earnings in a currency other than the USD… which is the case for Salesforce: the firm generated about 32% of its revenue base (as of FQ2’23) in regions other than the Americas. The appreciation of the USD relative to other currencies makes profits achieved outside the US less valuable to American companies. I would change my mind about Salesforce if the company saw dramatically lower free cash flow margins going forward and were to suspend, for whatever reason, the just announced $10B stock buyback.
Final thoughts
Salesforce’s $10B buyback is a big deal for the cloud-based software company, not only because of its large size, but because it comes at a time when at least some investors are unsettled about Salesforce’s moderating growth. The buyback is likely meant to boost investors’ confidence in the CRM company although Wednesday’s announcement has not done anything for shares of Salesforce yet. Considering that Salesforce is wildly profitable, I believe the risk profile is very attractive here, despite a lowered revenue guidance for FY 2023!
