Salesforce (CRM) Q4 Earnings Top, Stock Down On Co-CEO Exit

salesforce.com Inc. (NYSE:CRM) delivered better-than-expected results for fourth-quarter fiscal 2020. The company’s fiscal fourth-quarter non-GAAP earnings of 66 cents per share beat the Zacks Consensus Estimate by 20%. Nonetheless, quarterly earnings declined 6% from the year-ago quarter’s level of 70 cents, as benefits of higher revenues were more than offset by elevated operating expenses.

Salesforce’s fiscal fourth-quarter revenues of $4.85 billion jumped 35% year over year, surpassing the Zacks Consensus Estimate of $4.75 billion. Moreover, the top-line figure improved 34% in constant currency (cc). The company also noted that the acquisition Tableau in August 2019 contributed $344 million to its quarterly revenues. Excluding the sales of acquired businesses, total revenues were up 22% year over year.

The enterprise cloud computing solutions provider has been benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions led to the better-than-expected performance during the fiscal fourth quarter.

Quarter in Detail

Coming to the company’s business segments, revenues at Subscription and Support increased about 35% from the year-earlier period to $4.56 billion. Professional Services and Other revenues climbed 26% to $288 million.

Sales Cloud revenues grew 17% year over year to $1.23 billion. Revenues from Service Cloud, one of the company’s largest and the fastest-growing businesses, also improved 26% to $1.22 billion. Moreover, Marketing & Commerce Cloud revenues jumped 28% to $690 million. Salesforce Platform and Other revenues surged 74% to $1.43 billion.

Geographically, the company registered revenue growth of 32% in the Americas (70% of total revenues), 28% in the Asia Pacific (9%), and 49% in Europe and Middle East Asia or EMEA (21%) on a year-over-year basis.

Salesforce’s non-GAAP gross profit came in at $3.85 billion, up 40% from the prior-year quarter. Additionally, gross margin expanded 280 basis points (bps) to 79.4%.

salesforce posted non-GAAP operating income of $745 million, up 25% year over year. However, operating margin shrunk 100 basis points (bps) to 15.5% due to elevated operating expenses as a percentage of revenues. Operating expenses flared up 46% year over year to $3.67 billion. As a percentage of revenues, operating expenses expanded 570 bps to 75.6% from the year-ago period’s 69.9%.

Salesforce exited fiscal 2020 with cash, cash equivalents and marketable securities of $7.9 billion compared with the $4.3 billion recorded at the end of fiscal 2019. The company generated operating cash flow of $1.63 billion in the fiscal fourth quarter and $4.33 billion for fiscal 2020.

As of Jan 31, 2020, total unearned revenues were $10.66 billion, up 24% on a year-over-year basis.

Guidance

Buoyed by better-than-anticipated fiscal fourth-quarter top-line performance, Salesforce raised its revenue guidance ranges for the first quarter and fiscal 2021. For fiscal 2021, revenues are now predicted between $21 billion and $21.1 billion compared with the earlier expectation of $20.8-$20.9 billion, marking 22-23% year-on-year growth.

The company expects its full-fiscal GAAP and non-GAAP earnings per share to come in at 12-14 cents and $3.16–$3.18, respectively. It assumes non-GAAP operating margin to expand 125 bps on a year-over-year basis to 18.1%.

Operating cash flow is expected to increase approximately 20% year over year or come in more than $5.1 billion. The company assumes capital expenditure to be approximately 4% of fiscal 2021 revenues.

Coming to the fiscal first quarter, revenues are guided between $4.875 billion and $4.885 billion, higher than the previous guidance $4.8-$4.835 billion. The updated revenue outlook indicates a 30-31% growth from the prior-year reported number.

Furthermore, Salesforce anticipates non-GAAP earnings per share in the band of 70-71 cents for the fiscal first quarter.

CRM Stock Falls on Co-CEO Exit

Despite better-than-expected quarterly results and an upbeat fiscal 2021 outlook, shares of Salesforce fell 2.5% yesterday during the extended trading session. The stock plunged after the company announced the surprise exit of co-CEO Keith Block. Block joined Salesforce in 2013 and was elevated to the co-CEO post in August 2018.

He, along with Marc Benioff, led the company’s operations, strategy, and growth plans. During his tenure at the company, Salesforce revenues quadrupled to more than $17 billion in fiscal 2020 from the $4 billion generated in fiscal 2013.

Salesforce Acquires Vlocity

Concurrent with its fiscal fourth-quarter results, Salesforce announced entering into an agreement to acquire Vlocity, Inc. for $1.33 billion. The tech start-up builds industry-specific cloud and mobile software on the Salesforce platform. Vlocity has a wide range of customers across the communications, media, healthcare, energy, insurance and financial services, and entertainment industries.

Acquisitions have always been one of Salesforce’s key growth strategies. Last year’s buyout of Tableau has been a key catalyst. The acquisition contributed $652 million to revenues in fiscal 2020.

We believe, Salesforce’s continued focus on expanding its business through strategic acquisitions and investments will drive growth over the long run. In our opinion, the Vlocity buyout will enhance the firm’s capabilities and expand its customer base, thereby bringing in incremental revenues.

Zacks Rank & Stocks to Consider

Salesforce currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector include Dropbox, Inc. (NASDAQ:DBX) , Stamps.com Inc. (NASDAQ:STMP) and ManTech International Corporation (NASDAQ:MANT) , each flaunting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Dropbox, Stamps.com and ManTech is currently projected at 22.2%, 15% and 8%, respectively.

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