Q1 Guidance A Bit Light But Fiscal Year Remains Very Strong

Mar. 09, 2019 3:34 PM ETSalesforce, Inc. (CRM)4 Comments9 Likes


  • Salesforce remains in a great long-term position and the recent acquisition of Mulesoft adds another layer of value.
  • Q4 revenue grew 26% as the company is approaching a $15 billion run rate.
  • Q1 guidance was a bit shy of expectations, however FY20 guidance was actually raised slightly from last quarter and still implies 20%-21% growth.
  • Valuation has pulled back a bit post earnings, but provides a great buying opportunity for long-term holders. (NYSE:CRM) reported another strong quarter, although first quarter guidance appeared to be slightly short of consensus expectations. For a company that typically posts a beat-and-raise quarter, investors punished the stock as it traded off ~5% post earnings.

Investors appear to be a bit worried about the weaker than expected guidance, however, I view this as a good buying opportunity. The company eclipsed the $10 billion revenue mark in 2018 in very quick fashion. CRM actually noted they are the fastest enterprise software company to reach this milestone, a rather impressive feat.

Despite falling ~25% from the October high, CRM has rebounded quite nicely and recently surpassed the pre-selloff high. Investors seem to follow this stock like a cult, which is why the post-earnings sell-off provides a great opportunity. Financials remain strong and even the weaker than expected Q1 guidance places the company in a great long-term position

Though CRM is still up nearly 35% year-to-date, they remain down ~10% from their recent highs. Over the long term, CRM is one of the clear leaders in the new hybrid cloud environment and a name that should be held onto for many years.

ChartData by YCharts

CRM has rebounded from the recent lows, as they were once down ~25% from their all-time highs, following the broad market correction. This correction hit SaaS technology stocks especially hard, but their Q3 earnings reinforced CRM’s aggressive growth potential and erased any concerns about fundamental weakness. Although Q4 earnings were strong, Q1 guidance seemed to be a bit light compared to census, thus providing a solid buying opportunity.

Q4 Earnings And Guidance

Prior to third quarter ending, CRM acquired one of the leading back-end infrastructure software companies, MuleSoft, for a massive $6.5 billion, or ~16.5x forward revenue. Historically, CRM has focused on the front-end of applications, however, there continues to be a significant demand for back-end operations. The PaaS space continues to grow and develop as enterprise customers look to integrate front- and back-end applications together. This is a significant opportunity of growth that CRM is in a great position due to their acquisition of MuleSoft.

Source: Company Presentation

During Q4, revenues grew 26% year-over-year to $3.6 billion which was ahead of consensus estimates for 24% year-over-year growth. Q4 revenue growth showed no signs of deceleration from Q3, another impressive feat considering the run-rate revenue of nearly $15 billion. As CRM continues to expand and diversify their revenue, they should be able to maintain strong 20%-plus revenue growth for the next several quarters.

Source: Company Presentation

Platform revenue continues to drive most of CRM's revenue growth, which was up 54% in Q4, well ahead of Service Cloud's 22% growth and Sales Cloud's 11% growth.

Sales Cloud continues to be the largest segment of revenue, representing nearly 31% of total revenue, down from 33% last quarter. However, this segment’s growth remains well below the total company, at just 11%. As this segment continues to grow at a slower pace and become a smaller portion of overall revenue, the higher growth revenue will drive total company revenue growth in the likes of 20%-plus.

By geography, revenue from Europe was up 31% and represented 19% of total revenue. Growth in Asia Pacific also was strong at 25%, thus demonstrating the international revenue base continuing to grow at a healthy pace.

Source: Company Presentation

Over the past few years, CRM has done a great job becoming more profitable. Investors have historically knocked down valuation a bit because of the lack of GAAP profitability from this name. Operating cash flows grew very well at 27% to $1.33 billion and continued strong operating margins drove EPS to $0.70, a 49% growth compared to last year and well ahead of consensus expectations for $0.55.

Source: Company Presentation

For Q1, management expects revenue to grow 22% to $3.67-3.68 billion. The 22% revenue growth is a slight deceleration from the 26% revenue growth in Q4. However, Q1 guidance was slightly below consensus expectations of 23% growth to $3.69 billion. This should not be viewed as a negative for two main reasons. First, CRM is a nearly $15 billion run-rate revenue company and a slight deceleration should be expected for a company growing mid-20s. And second, going off historical trends, CRM could beat their revenue guidance and end up growing closer to 24% in Q1.

The high end of management's guidance is only slightly below consensus expectations, by $10 million. If we assume CRM continues on their quarterly revenue beat pattern, we are likely to see Q1 revenue closer to consensus original expectations.

Management also put out updated FY20 guidance targets, with revenues expecting to grow 20-21% to $15.95-16.05 billion, a slight raise from their prior expectations for $15.9-16.0 billion. The midpoint of FY20 revenue guidance was exactly what consensus expected, $15.99 billion. Despite the weaker than expected Q1 guidance, management remains very confident in the full-year outlook.

EPS guidance of $2.74-2.76 represents flat growth from FY19, another worry investors had. Despite CRM's history of beating bottom line guidance, investors could remain a bit concerned about EPS guidance. However, if we believe revenue will ultimately beat guidance and margins somewhat improve over the year, we could see a nice bottom line performance in FY20.

Where to go from here

After another beat and raise quarter and with management guiding to 20%-21% revenue growth for FY20, investors should be very confident in the long-term trajectory of CRM. Despite coming off a 25% correction in the past few months, CRM has rallied back and was recently trading above their pre-correction highs. Investors took some off the table after receiving lighter than expected Q1 guidance, however, full-year guidance was actually raised as management remains very confident in the business fundamentals. I believe CRM is in an excellent position to continue on their growth trajectory and reach new all-time highs heading into 2019.

The acquisition of MuleSoft also gives CRM additional room to run as they enter the front-end of applications. As the PaaS market inevitably continues on the high-growth path, CRM will begin to develop a strong foothold and grow their market share. Trading at just over 7x forward revenue, and below the recent valuation over the past few months, this name is a solid SaaS tech name to hold onto for the long term.

ChartData by YCharts

In my opinion, there are other growth SaaS names that may have a higher return potential in 2019, however, there are very few names (and even less in the tech sector) that provide the consistent execution as CRM. Over the long term, CRM is an absolute winner that should be held onto.

Risks to CRM include integration with MuleSoft not working out as planned. The $6.5 billion purchase was viewed as pretty high and if CRM is not able to successfully integrate the acquisition and realize the benefits, investors may begin to look elsewhere to deploy their capital. Also, if the market goes through another correction, much like the one we just went through the past few weeks, CRM is not immune to their valuation contracting.

This article was written by

Individual investor with hands-on experience in the equity markets. Largely focusing on Tech companies or major mispricings in the market.

Disclosure: I am/we are long CRM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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