Salesforce Slides After Beating Estimates and Cutting Guidance

The CRM software leader is seeing some profit-taking after cutting its full-year revenue outlook.
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Salesforce.com’s  (CRM) - Get Report light guidance and slowing backlog growth are overshadowing its quarterly beat and positive earnings call remarks.

On Thursday afternoon, the cloud CRM software giant reported April quarter (fiscal first quarter) revenue of $4.87 billion and non-GAAP EPS of $0.70, slightly topping consensus analyst estimates of $4.85 billion and $0.65.

Revenue officially rose 30% annually, and was up 23% if one excludes $273 million of subscription and support revenue provided by business intelligence software vendor Tableau Software, which Salesforce acquired for $15.7 billion last August.

For the July quarter, Salesforce is guiding for revenue of $4.89 billion to $4.9 billion and non-GAAP EPS of $0.66 to $0.67, below consensus estimates of $5.04 billion and $0.74.

And the company is now forecasting fiscal 2021 (ends in Jan. 2021) revenue of about $20 billion, EPS of $2.93 to $2.95 and operating cash flow growth of 10% to 11%, down from prior guidance for revenue of $21 billion to $21.1 billion, EPS of $3.16 to $3.18 and roughly 20% op. cash flow growth.

Salesforce’s stock fell in after-hours trading on Thursday and were down 4.6% to $172.41 on Friday morning. Shares were up 11% on the year going into earnings, after having risen more than 50% from their March low.

An RPO Growth Slowdown

Along with its revenue guidance, decelerating remaining performance obligation (RPO) growth highlights how COVID-19 has been impacting Salesforce’s deal activity.

RPO, which covers all revenue that has been contracted but not yet recognized, ended the April quarter at $29.3 billion. That’s officially up 18% annually, and up 13% after excluding contributions from Tableau and the Salesforce.org unit, which handles sales to non-profits and was folded into Salesforce in June 2019. RPO growth slowed from the 20% official growth and 16% organic growth seen during the January quarter.

Also, for the July quarter, Salesforce is guiding for 16% to 17% growth for current RPO, which covers revenue expected to be recognized during the next 12 months. Current RPO was up 23% in the April quarter.

CFO Mark Hawkins noted on the earnings call that the average duration of contracts Salesforce signed in the April quarter was about 3 months less than in the year-ago quarter.

Some Recent Improvement

Though RPO growth has been slowing, CEO Marc Benioff and recently-appointed president/chief revenue officer Gavin Patterson indicated deal activity and visibility has been improving in recent weeks.

Benioff said Salesforce has seen “continuous improvement” in its bookings and deal pipeline in May, and that its pipelines for the July quarter and fiscal 2021 are very strong. “I've been on more sales calls with more CEOs in the last two months than at any time in my career,” he claimed.

Patterson later added that Salesforce is starting to get “much better visibility for bookings” not just for its July quarter, but also for its October and January 2021 quarters.

April Quarter Numbers

With Salesforce (like other cloud/SaaS software firms) getting much of its revenue in a given quarter from contracts that were inked in prior quarters, COVID-19 didn’t have a massive impact on the April quarter’s top-line growth.

Salesforce’s Sales Cloud (sales software) segment saw revenue grow 16% annually to $1.25 billion, with 12% organic growth. Service Cloud (customer support/engagement software) revenue grew 23% to $1.25 billion, with 21% organic growth. Marketing & Commerce Cloud (online marketing and e-commerce software) revenue grew 27% to $714 million, with 23% organic growth.

And “Salesforce Platform & Other revenue -- it covers the Heroku and Lightning cloud app-building platforms, the MuleSoft API management software unit and Tableau -- saw revenue grow 62% to $1.36 billion, with 27% organic growth.

Tableau, which gets much of its revenue from software implementations taking place in on-premise (rather than cloud) environments, was a weak spot. Its April quarter subscription/support revenue of $273 million was below reported calendar Q1 2019 revenue of $282.5 million.

Salesforce continued spending aggressively in the April quarter: GAAP operating expenses rose 43% annually to $3.75 billion, easily outpacing revenue growth of 30%. As is the case for many other enterprise software firms, sales/marketing spend (up 41% to $2.39 billion, thanks to both organic growth and M&A) was by far the biggest opex line item.

Operating cash flow fell 5% annually to $1.86 billion, and free cash flow (hurt by a $150 million real estate purchase) fell 15% to $1.54 billion. Hawkins mentioned that operating cash flow was impacted by (in addition to aggressive spending) “delayed payments from customers while sheltering in place and some temporary financial flexibility that we granted to certain customers that were most affected by the COVID pandemic.” He added that Salesforce expects to “collect the majority of the balance this year” and doesn’t expect it to impact its full-year free cash flow.

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