Earnings Beat Shows Why Salesforce.com's Rising

After the bell on Thursday, Salesforce.com (CRM) reported a strong top- and bottom-line beat with its fiscal second-quarter 2020 earnings.

Revenue of $4 billion (+23% year-over-year on a constant currency, or CC, basis) beat the consensus of $3.955 billion, and adjusted earnings per share of 66 cents exceeded the consensus expectation of 47 cents. (Those earnings include an 11 cent benefit related to the company's required mark-to-market accounting on its strategic investment and a 16 cent negative impact related to the loss on the settlement of the Salesforce.org reseller agreement.) 

Great Guidance

Before we dig further into the quarter, a word on guidance. For its fiscal third quarter, management is initiating its outlook and is expecting revenue in the range of $4.44 billion to $4.45 billion (+31% YoY growth), well ahead of expectations of $4.181 billion, with adjusted earnings per share of 65 cents to 66 cents, in line with 66 cent consensus.

Current Remaining performance Obligation Growth is expected to increase 24% to 25% YoY, and this includes 2 points of growth from Salesforce.org and 2 points to 3 points of growth from the Tableau Data acquisition, which closed earlier than expected. This guidance also includes approximately $300 million of revenue from Tableau and $75 million from Salesforce.org.

Just as impressive, for the full year, management is raising its full fiscal year revenue outlook to $16.75 billion to $16.90 billion (+26% to 27% YoY growth), smashing current consensus of $16.435 billion. Included in this guidance is the anticipation of $550 million to $600 million in contribution form the Tableau Data acquisition. Additionally, adjusted earnings per share is expected to be $2.82 to $2.84, an outlook that is greater than the current consensus of $2.77.

Operating cash flow growth of 21% to 22% YoY was maintained, a fantastic outcome when you think about the expenses Salesforce.com must incur, because of its recent buying spree and the cash impact of foreign exchange headwinds created by the strong dollar.

In the after-hours market, shares of CRM were climbing more than 6% to approximately $158 per share in reaction to a strong report and raised guidance.

Any Way You Slice It, a Good Quarter

Back to the quarter, adjusted operating margins were 14.3% (-349 basis points year-over-year, but higher than 13.9% consensus). Meanwhile, operating cash flow of $436 million (-5% YoY) spectacularly trounced expectations $271 million.

Digging into the revenue breakdown, subscription and support revenue was $3.745 billion (+22% YoY), topping estimates by $45 million. Professional services and other revenue of $252 million (+14% YoY) missed estimates by $3 million.

By cloud services, sales cloud revenue growth accelerated sequentially to 12.5% with its $1.13 billion number, service cloud increased 22% year-over-year to about $1.1 billion, Salesforce platform and "other" increased 28% year-over-year to $0.9 billion and that includes $159 million of "Mulseoft," and lastly, marketing cloud & commerce cloud increased 36% year-over-year to $0.6 billion.

Management also provided a tremendous amount of color about the results to help investors think about revenue growth organically. It's a bit granular, but it will help investors separate what's driven by M&A and what is from the core business.

For total revenue, foreign exchange represented an approximate 1% drag on YoY growth, and this affected each cloud on a similar proportional basis. Next, the acquisition of Salesfoce.org represented approximately 1 percentage point to 2 percentage points of growth YoY across each cloud. Third, this was the first quarter of normalized "MuleSoft" results, and this moderated the growth rate of platform and other on a sequential basis. After adjusting and factoring in all these considerations, management cited "robust" organic growth on a CC basis across each cloud.

By region, revenue on a CC basis increased 20% in the Americas, 30% in Europe, the Middle East and Africa, and 27% in the Asia Pacific.

Down the Pipe

Next, let's take a close look at a few key metrics Salesforce.com reports on that track how much business is in the pipeline. The all-important billings measure, which represents the portion of revenue generated from new business within the quarter -- the remainder of recognized revenues coming from revenue that was previously unrecognized, but has now been recognized due to a fulfillment of service obligations -- registered at $3.554 billion (+19.9% YoY), representing a beat against expectations of $3.518 billion.

Another key metric we look for when evaluating CRM is its remaining performance obligations (RPO), which represents the difference between bookings and billings -- bookings being the amount customers have committed to spending in the future (think contracts signed). RPO ended the quarter at $25.3 billion, representing an increase of 20% year-over-year and includes $350 million related to the business combination with Salesforce.org.

As for the current remaining performance obligation, which represents all future revenue under contract that has not been recognized as revenue yet, Salesforce.com's $12.1 billion figure beat expectations of $11.822 billion and represents a 25% YoY increase in constant currency. These are all positive signs of healthy spending trends.

Customer Wins, Deep Relationship

As for some customer wins and deepened relationships management discussed on the call, management highlighted how the "Salesforce Cloud Einstein" will be used in FedEx's call centers; how railroad giant Union Pacific (UNP) named Salesforce as its unified CRM platform to make services like automated shipping and tracking updates more efficient; how unicorn AirBnb selected Salesforce.com "to power" its global messaging program and expanded its use of the marketing cloud to communicate with guests and hosts; and how the relationship with Marriott (MAR) was expanded to better personalize customer care. Salesforce also now has a new relationship with the Italian bank UniCredit to help transform their customer service, too. This is a much-needed investment for traditional banks, because they desperately need help in their competition with the fintech community.

"With our Customer 360 vision, Einstein AI and the millions of Trailblazers innovating on our platform, Salesforce has never been better positioned for the future," said co-CEO Marc Benioff in the release.

His partner, co-CEO Keith Block, added that an "enormous wave of digital transformation is sweeping across every industry."

Block also noted that these major brands, like FedEx (FDX) and Unicredit (UNCRY) have "turned to Salesforce in the quarter to propel their growth."

We also heard more from Block on Thursday's episode of "Mad Money."

"The trust our customers have in us to drive their digital transformations is reflected in our strong quarterly results across our clouds and regions," said Block in the release.

There are plenty more relationships highlighted on the call that we could name.

Rising Above

Overall, we felt that the results were staggering and nothing short of impressive. What amazed us most was the robust free cash flow, a measure that this recently beaten down stock was already cheap, based on a relative to peer basis.

As we look ahead, we don't see much evidence, if any, that suggests management won't make good on their guidance of organically doubling revenue in the next four years -- as cavalier as that sounds. While the bears believe an economic slowdown could disrupt this, we always remind ourselves of how the last thing enterprises will cut back on during uncertain times is their customer relationship management spending. It's too critical to the future of every business, with estimates of more than 60% of global Gross Domestic Project getting digitized by 2022. If you needed any conformation on this thinking, read the first response on the Q&A section of the call about how the Fourth Industrial Revolution is impacting retailers.

Economic slowdown or not, Salesforce.com's customers and potential customers have to invest in these capabilities or else risk falling by the wayside. Putting it all together, we have and will continue to view this Cloud King's outlook as durable and not as susceptible to an economic slowdown as many think.