US software giant Salesforce's stock price plummeted before and during regular trading hours Wednesday after the company delivered a lower-than-expected revenue projection for its next fiscal quarter, prompting a recalibration from some Wall Street analysts.
But other leading analysts expressed support for Salesforce (CRM) as its share price fell more than 10% during regular trading hours. The stock price fell more than 65 points during pre-market trading after the company delivered its latest quarterly earnings report.
“The stock's reaction suggests the guidance definitely disappointed,” Needham & Company analyst Scott Berg told Capital.com.
Revenue growth expected to decline
Berg said the projection implied a stronger-than-expected revenue slowdown.
He noted that Salesforce (CRM) pointed to problems tied to its Mulesoft business segment and higher foreign-exchange rates. Mulesoft provides integration software that connects applications, data, and devices.
The stock-price decline came as some analysts adjusted their price targets while maintaining their ratings for Salesforce.
For accounting purposes, the latest reporting period served as the third quarter of Salesforce’s 2022 fiscal year. Salesforce estimated earnings per share (EPS) of 72 cents to 73 cents for its fiscal fourth quarter, but analysts polled by Dow Jones had projected EPS of 77 cents for the period.
CRPO displeases analysts
Salesforce's current remaining performance obligations (CRPO) – future revenue under contract expected to be recognised in the next 12 months – had a large influence on the stock price, according to analysts. The company said its CRPO rose 23% year-over-year to $18.8bn on a non-GAAP basis.
Salesforce reported a 19.8% overall non-GAAP operating margin. The company’s outlook calls for an 18.6% operating margin, and revenue of $7.3bn, in the next reporting period.
The projections appeared to signal a change in demand or slipping sales signal, Berg said.
“The (third-quarter) results were generally more positive than I expected, especially growth in the company's sales cloud,” Berg said. “However, we were mildly disappointed with operating margins that dipped below 20%. Guidance was modestly disappointing as well, both with revenue and CRPO.”
Guidance coincides with wider trend
But Berg said CRM’s outlook coincided with a wider trend that he has seen from other software companies lately.
“I have had several companies in my coverage universe with October quarter ends report over the last two weeks that gave (third-quarter) results or guidance that (were) a bit weak,” he said.
That weakness stemmed mainly from deals where their closure dates were postponed until the next quarter.
“CRM may be experiencing the same issue,” he said, “These results have been starkly different to my September-quarter reporting companies that were generally positive with positive guidance.”
Wedbush and Cowen show empathy
Meanwhile, two other leading analysts – Daniel Ives of Wedbush and Derrick Wood of Cowen & Company – also empathised with the company’s situation.
“Salesforce’s customer diversification, product portfolio breadth, and ratable (software-as-a-service) model (are) continuing to gain significant momentum in the field as the digital transformation spending cycle kicks into its next gear of growth,” wrote Ives in a research note that he provided to Capital.com. “Larger and more strategic digital transformation projects are getting the green light within many enterprises and (are) a major tailwind for Salesforce given its stalwart positioning and expanded product footprint.”
He advised investors not to worry about the company’s guidance.
“CRM delivered solid October results that were generally in line with Street estimates with some areas of upside,” he wrote. “However, the Street will nitpick at the (fiscal-year fourth quarter) operating margin outlook, which was slightly below bull case expectations, along with CRPO guidance, which was strong but could have been better in the eyes of the Street. We believe this is a conservative outlook as CRM continues to juggle a number of organic growth initiatives, digesting Slack into the mix, while trying to push operating margins higher.”
First quarter since Slack purchase
Salesforce’s latest reporting period was the first full quarter in which it owned Slack, after completing the $27.7bn purchase of the instant messaging company in July.
Ives expects Salesforce’s operating margins, “which will ultimately be key for the Street” will expand further in the 2023 fiscal year, along with “early positive contributions from the Slack deal,” which remains the right “offensive and defensive” position versus rival Microsoft.
Cowen’s Wood called CRM’s non-GAAP 19.8% operating margin in the latest quarter “a standout,” noting that it was about 160 basis points above the Wall Street consensus of 18.2%. The profit-margin growth was aided by work-from-home efficiencies and more CRM spending discipline, the analyst noted.
But Wood said Salesforce’s fourth-quarter CRPO guidance fell below Cowen’s 21% estimate.
He expects the weaker-than-normal fiscal third-quarter CRPO upside and the lower than anticipated CRPO fourth-quarter outlook to “pressure shares.”
He noted that the company’s $7.23bn revenue projection was slightly above Wall Street’s $7.22bn prediction.
“We are nevertheless encouraged by (CRM’s) pipeline commentary (and with) a reset bar heading into (the fiscal fourth quarter) we expect shares to find good footing,” wrote Wood.
New Co-CEO not causing alarm
He was enthused by CRM’s decision to promote Bret Taylor to act as Co-CEO alongside Marc Benioff, who also chairs the company’s board. Taylor previously served as the company’s president, COO, and chief product officer (CPO).
“We think the promotion of Bret Taylor should be viewed positively given his strong performance as CPO (and) COO (and) exposure to investors,” wrote Wood.
Needham’s Berg said he was “not surprised at all” by the move.
“The company previously had a co-CEO structure when Keith Block was with the company,” Berg noted. “A nuanced difference though is in the division of responsibilities. (Block’s) background was leading the sales and go-to-market motions where (Taylor) leads products.”
Ives said Taylor’s promotion was “not a total surprise to the Street” given his growing role within the company.
Also, the move came at “a critical juncture” as Salesforce looks to achieve “its next chapter of growth” amid increasing Wall Street scrutiny following the Slack acquisition.
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