By: Eric Jhonsa
After the bell on Tuesday, Salesforce reported October quarter (fiscal third quarter) revenue of $3.39 billion (up 26% annually and boosted a little by the MuleSoft acquisition) and non-GAAP EPS of $0.61, topping consensus analyst estimates of $3.37 billion and $0.50. The company’s closely-watched billings proxy — defined as revenue plus the sequential change in Salesforce’s unearned revenue balance — came in at $2.89 billion, up 28% and above a $2.68 billion consensus.
For the January quarter, Salesforce guided for revenue of $3.551 billion to $3.561 billion (up 25%) and non-GAAP EPS of $0.54 to $0.55. The revenue guidance is above a $3.52 billion consensus, while the EPS guidance (pressured by aggressive spending) is below a $0.57 consensus.
Salesforce also established initial fiscal 2020 (ends in Jan. 2020) revenue guidance of $15.9 billion to $16 billion. That translates into 20% to 21% growth and is above a $15.83 billion consensus.
Worth noting: Salesforce has a history of initially offering conservative full-year revenue guidance and gradually raising it. Zev Fima, an analyst for Jim Cramer’s Action Alerts Plus portfolio, notes Salesforce still appears to be on track to hit its fiscal 2022 revenue guidance of $21 billion to $23 billion.
Salesforce’s stock, which sold off hard during the recent tech correction, rose 8.8% in after-hours trading to $138.60. Shares are now up 36% on the year, albeit still down 14% from an Oct. 1 high of $161.19.
Here are some notable takeaways from Salesforce’s earnings report and call.
1. The Backlog Continues Growing Strongly
Salesforce’s revenue performance obligation (RPO), defined as all of the future revenue (billed or unbilled) that it has under contract, totaled $21.2 billion at quarter’s end. That’s in line with analyst estimates and represents 34% annual growth (32% excluding MuleSoft’s impact). The current RPO, defined as contracted revenue that’s expected to be recognized during the next 12 months, rose 27% to $10 billion.
In addition, co-CEO Keith Block mentioned on the earnings call the number of deals Salesforce has that are generating over $1 million rose 46% annually. The number of $20 million-plus deals was said to still be growing “significantly,” but no number was given.
2. Billings Guidance Is Light, Partly Due to Currency Swings
Salesforce guided for its unearned revenue balance, which was up 25% annually to $5.38 billion, to be up about 17% at the end of its January quarter. When paired with Salesforce’s revenue guidance, this implies January quarter billings guidance of slightly less than $6.4 billion, compared with a $6.8 billion consensus.
On the call, CFO Mark Hawkins indicated that some billings were pulled into the October quarter, where billings beat consensus by about $200 million, relative to the January quarter. He also noted currency swings (i.e., the dollar’s recent strengthening) are expected to act as a $200 million headwind to unearned revenue this quarter, a much higher figure than the October quarter’s $34 million.
Salesforce, believing RPO represents “a more complete metric” for measuring deal activity, reiterates that its October quarter report is the last one in which it will issue unearned revenue guidance.
3. 3 of Salesforce’s 4 Product Segments Saw Very Strong Growth
Salesforce’s age-old Sales Cloud platform, widely used by enterprise salespeople to engage with potential and existing clients, saw its revenue rise just 11% to $1.02 billion. However, Salesforce’s Service Cloud, which provides customer support and engagement software, saw revenue rise 24% to $917 million.
The Marketing and Commerce Cloud segment (digital marketing and e-commerce software) saw revenue rise 37% to $489 million. And the Salesforce Platform and Other segment (tools and platforms for app developers) posted revenue of $742 million, officially up 51% and up 30% excluding MuleSoft. MuleSoft’s revenue rose about 35% to $105 million.
A healthy CRM software market remains a tailwind for Salesforce, as does the ongoing secular transition to cloud CRM apps relative to on-premise solutions. Research firm BTIG recently forecast global CRM software spending would rise 17.6% in constant currency this year to $46.4 billion, with cloud/SaaS apps accounting for 65.1% of the total (up from 61.6%. From 2017 to 2022, BTIG sees the CRM market growing at a 13.8% compound annual rate.
On the call, product chief Bret Taylor argued that the ability of Salesforce offerings within different product segments to play nice with each other is a competitive advantage for the company as rivals such as Adobe (ADBE – Get Report) and SAP (SAP – Get Report) use M&A to strengthen their CRM software lineups. He also talked up Salesforce’s recently-launched Customer 360 platform, which aims to let clients create integrated customer profiles that they can leverage across Salesforce’s apps.
4. International Growth Remains Healthy
Salesforce’s EMEA revenue totaled $641 million, up 29% in dollars and 31% in constant currency (CC). Its Asia-Pac revenue totaled $326 million, up 25% in dollars and 26% in CC.
When asked on the call about macro conditions — some enterprise tech firms have reported seeing pockets of weakness overseas — Block and founder/co-CEO Marc Benioff were mostly upbeat. Benioff did note that some European CEOs “are not as optimistic potentially” as their American and Asian counterparts, but added investment activity generally remains strong.
5. Salesforce Isn’t Slowing Down its Spending Pace
GAAP operating expenses (boosted some by MuleSoft) rose 32% to $2.41 billion, after having grown 27% in the July quarter. Sales/marketing spend rose 36% to $1.59 billion (equal to 47% of revenue); R&D spend rose 22% to $481 million; and G&A spend rose 26% to $342 million.
Salesforce’s EPS guidance suggests opex will also grow rapidly during the January quarter. The company is, however, maintaining its guidance operating cash flow to grow 15% to 16% in fiscal 2019; growth would be slightly above 20% if not for a $150 million headwind related to MuleSoft.