Shares of salesforce.com (CRM +1.05%) stumbled immediately following its first-quarter results. It wasn't that the start to 2020 got off on the wrong foot. On the contrary, the months leading up to and during the start of the COVID-19 crisis were exceptionally good. But second-quarter and full-year fiscal 2021 guidance (the 12 months ending Jan. 31, 2021) got an all-but-unheard-of downgrade from CEO Marc Benioff and company.
But even a downgraded outlook for Salesforce would be a banner period for most other mega-cap companies. This software giant is proving that -- even in lean times -- it is an essential ingredient of many organizations' operational needs.
Image source: Getty Images.
Acquisitions provide another quarterly boost
After growing revenue 29% in fiscal 2020, Salesforce got its new year started on the right foot with another 30% increase. Acquisitions, including the takeover of data analytics outfit Tableau over the summer of 2019 and MuleSoft in 2018 (both now part of the "Platform" segment), provided another boost. But even the company's large core proficiencies centered on its Sales and Service Cloud continued to grow at a fast pace in the months leading up to and during the start of the economic downturn.
|
Segment |
Three Months Ended April 30, 2020 |
YOY Increase |
|---|---|---|
|
Sales cloud |
$1.25 billion |
16% |
|
Service cloud |
$1.25 billion |
23% |
|
Platform and other |
$1.36 billion |
62% |
|
Marketing and commerce cloud |
$714 million |
27% |
YOY=Year over year. Data source: Salesforce.com.
The rate of growth is impressive considering the current global situation, and it underscores just how important the software firm has become to many organizations' efforts to adapt with the times. Among the highlights from the start of the year was the announcement that AT&T (T 0.36%) will be building a new unified view of all its customer data using Salesforce, upgrading its services across its telecom and media businesses to create a better customer experience. CEO Marc Benioff said this is one of the largest deals Salesforce has ever booked, and it will be starting work for AT&T this summer.
Besides AT&T, Benioff said it's becoming clear that lifestyles are going to be significantly altered post-COVID-19, and the pace of digital transformation is thus accelerating -- quickly becoming a "must-have" to stay relevant. As one of the pioneers enabling digital transformation, this puts Salesforce in an enviable position during this period of crisis.
Don't sweat the guidance
The accelerating pace of digital transformation may be disappointing to some shareholders, though. Salesforce is still lapping its Tableau takeover from late summer 2019, but even still, guidance for Q2 implied a deceleration in revenue growth to 22% to 23% from a year ago. And full-year fiscal 2021 revenue is expected to be about $20 billion, about 17% projected growth. If that full-year rate transpires, it would be the first time Salesforce's annual trajectory has dipped under 20%.
I'd hardly call this the end of an era, though. Benioff and company often under-promise and over-deliver. Let's also not forget we are in the midst of a steep drop in economic activity because of the coronavirus. Those companies that have been slow to move on upgrading for the digital age are also some of the businesses getting hit the hardest by the crisis. Even though they're cash-strapped, they are sending more money in Salesforce's direction, making this software giant look like a modern staple.
Plus, though Benioff said now's not the time to be concerned with the bottom line -- and even after spending billions on acquisitions and issuing new shares to get Tableau last year -- free cash flow (basic profits measured as revenue less cash operating and capital expenses) per share has remained relatively stable and is sporting a 50% increase over the last trailing three-year stretch. This tech giant has plenty of liquidity to remain aggressive in investing in future development and taking care of its employees and customers.
But let's say Salesforce's days of 20% or more revenue growth are in fact over. Investing in a mega-cap cloud computing leader (current market cap of $157 billion) able to grow sales nearly 20% and keep free cash flow stable amid a deep recession? I say, "yes, please." Salesforce remains a core component of my portfolio, and I'll keep adding to my position in the months ahead.
