Salesforce Q1 2023 Results: Huge Opportunities Ahead (CRM)

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My thesis is that Salesforce (New York Stock Exchange: CRM) offers tremendous opportunities as the era of digital transformation continues. They have extended beyond the sales and service clouds so that they support customers with productivity gains in many different areas.

To advance

Investor Day 2021 presentation shows that the expected CAGR for digital transformation spending from 2019 to 2024 is 15%. It also shows that the percentage of total technology dedicated to digital transformation is expected to increase from 42% in 2020 to 57% in 2024. Considering all the clouds they offer, Salesforce is well positioned to capture a significant share of these expenses in the years to come. years:

Massive opportunity

Massive opportunity (Investor Day 2021 presentation)

Salesforce is holding firm at a time when many other companies are struggling. On the 1Q23 call, co-CEO Marc Benioff said Salesforce is monitoring economic data and isn’t seeing a significant impact. Co-CEO Benioff notes that Salesforce is scholarly; they have an incredible business model that has allowed them to be very resilient over the past 23 years:

We have an incredible technology model that we have, where we’ve been through all kinds of crashes and dot-com recessions and financial crises and global pandemics and you’ve all seen us weather all possible storms, but we continue to weather them storms thanks to the power and strength of our model. In 2001, I think it really affected us. We almost lost our business because we were – on month-to-month contracts, we didn’t have the right cash flow structure, investors just wouldn’t give us money, and so we made a lot of changes at that time, and it really strengthened our business and made us more sustainable over time.

Salesforce increased the number of cloud offerings from FY18 to FY22 and customers are signing up in droves. Landing customers with 1 cloud, Salesforce is able to better serve them in subsequent years by having them use additional clouds:

Multi-cloud adoption

Multi-cloud adoption (Investor Day 2021 presentation)

In the Investor Day 2021 presentation, SVP Evan Goldstein notes that no one has a product portfolio like Salesforce:

No one owns the breadth and depth of our product portfolio. If — when management teams come to us looking for a business solution, we can leverage a best-in-class group of assets to provide them with the right solution that will solve their business challenges.

President Gavin Patterson talks about Salesforce helping customers achieve productivity gains on the 1Q23 call:

In this new or digital world of working from anywhere, our customers need to create amazing customer experiences with every interaction to stay competitive. And at the same time, they need to realize gains in productivity, efficiency, and resilience through their technology investments. That’s why they turn to Salesforce as their trusted digital advisors and Customer 360 as their digital platform.


Based on the 1Q23 presentation, FY23 revenue is expected to be $31.7-31.8 billion, 20% above the FY22 level, and cash flow growth of exploitation is expected to increase by 21 to 22%. Gross profit is about 3/4 of turnover and it is exciting to see how it has grown over the years. Gross profit soared from $4.1 billion in FY15 to $19.5 billion in FY22 at a CAGR of 25% over the 7-year period:

Gross profit growth

Gross profit growth (Author’s spreadsheet)

*Data has been split between Platform and Other starting in FY21.

I like to look at cost of revenue and operating expenses as a percentage of revenue for the last fiscal year. The sales and marketing spend line stands out as it represents 45% of revenue for Salesforce, 27% for Adobe (ADBE) and SAP (SAP), and 20% for Shopify (SHOP):

Sales and marketing as a percentage of revenue

Sales and marketing as a percentage of revenue (Author’s spreadsheet)

Note that Salesforce and SAP are of similar size with annual revenues of $26.5 billion and €27.8 billion, respectively. Adobe is about half that size with annual revenue of $15.8 billion, while Shopify is even smaller with annual revenue of $4.6 billion.

Management explained that Salesforce is a subscription company in growth mode, so the cost of booking (“BTC”) or sales and marketing may be high for the current year as the benefits increase. extend to the years to come:

Cost to book

Cost to book (Investor Day 2021 presentation)

As Salesforce matures, I expect sales and marketing to decline as a percentage of revenue. At 45% of FY22 revenue, sales and marketing reached $11.9 billion. If Salesforce is more like Adobe and SAP, so that sales and marketing is only 27% of revenue, the FY22 amount would have been just $7.2 billion for a difference of 4, $7 billion.

Since sales and marketing are fully deducted before arriving at the net income line on the cash flow statement, free cash flow (“FCF”) is maintained due to growth and revenue considerations. subscription mentioned above. Last twelve months FCF TTM is $5,723 million or 1Q23 + FY22 – 1Q22 or [$3,676 million – $179 million] + [$6,000 million – $717 million] – [$3,228 million – $171 million] or $3,497 million + $5,283 million – $3,057 million. Stock-based compensation was $2.8 billion for FY2022 and normally I would treat that as a cash expense and lower adjusted FCF. However, I think growth investments in sales and marketing have more than compensated for this.

On the 1Q23 call, I liked what CFO Amy Weaver said about FCF growing faster than revenue:

For cash flow, our philosophy is that our OCF and FCF should grow faster than revenue because we are growing our operating margin, which we are doing. In terms of confidence levels, both on cash and operating margin, this largely comes down to the focus on disciplined growth. This is not a passing fad. I am convinced that constraints make the company stronger and more innovative. And that’s the goal of every part of the business.

I think the FCF for FY23 will be about 22% higher than the FY22 level, so it’s about $6,445 million. If Salesforce is worth 30 times that amount, the valuation range is $190-195 billion.

By 1Q23 10-Q through April 2022, there were 995 million shares outstanding through the end of May. Multiplying that by the June 1 stock price of $176.07 gives us a market capitalization of $175 billion. Enterprise value is fairly close to market capitalization as $6,859 million in cash and cash equivalents and $6,644 million in marketable securities are more than offset by long-term debt of $9,595 million .

My valuation estimate is higher than the market capitalization, so I think the stock is undervalued.

Final Thoughts

On the 1Q23 call, co-CEO Benioff summarized the opportunities ahead of Salesforce:

So let me say this is a time when every business, every industry, every government is investing in digital transformation, no company is better positioned than us to help businesses transform for the digital future.

At the June 2021 annual meeting, Chief Financial Officer Weaver said he was allocating capital to growth rather than dividends. Investors should be on the lookout for upcoming annual meeting on June 9 to learn more about Salesforce’s role in driving digital transformation forward.

Disclaimer: Anything in this article should not be taken as a formal investment recommendation. Never buy a stock without doing your own thorough research.

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