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Morningstar | Salesforce Reports Solid 4Q Results; Guidance Mixed; Shares Undervalued

Salesforce reported upside versus our fourth-quarter expectations and offered light guidance for the first quarter of fiscal 2020, although overall guidance was in line with our forecast for the coming year. Through various puts and takes, our $180 fair value estimate is unchanged and we maintain our wide moat rating. Results reinforce our thesis that the company remains a strategic partner for customers, who are looking for holistic solutions for real business problems as they undertake their own digital transformations.  The company’s breadth of solutions remains critical, as customers continue to sign larger deals involving multiple clouds.

First-quarter revenue and EPS guidance was slightly lower than the market had expected. We believe many investors did not contemplate the seasonality involved with MuleSoft’s license driven revenue. However, guidance looks better for the full year, and is largely in line with our expectations. We are not concerned with modestly light guidance for the first quarter in the context of in line guidance for the year.

We believe the biggest news was that management also provided a long-term revenue target of $26 billion to $28 billion in fiscal 2023, which translates into a 19% CAGR over that time frame. Perhaps just as impressively, management emphasized repeatedly that salesforce.com would hit this bogy organically.

For the fourth quarter, subscriptions & support drove revenue upside relative to our model, with continued internal surprises driven by MuleSoft. EPS upside was driven largely by tax benefits and accounting changes, but the company still drove $0.07 of upside from better revenue and margins.

For the quarter, GAAP revenue grew 26% year over year to $3.6 billion (up 27% in constant currency). Total remaining performance obligation, or RPO, grew 25% to $25.7 billion, while current RPO grew 24% to $11.9 billion, indicating that new business signings remain robust. Segment results remain strong, as sales cloud grew 11% year over year, service cloud grew 22%, platform & other grew 54% (MuleSoft), and marketing & commerce cloud grew 34%.

The $0.46 in GAAP EPS was well ahead of $0.10 expectations. The $0.29 was due to purchase accounting and mark-to-market accounting changes. The remaining $0.07 was from revenue and margin upside. Non-GAAP operating margin declined 160 basis points year over year to 16.5%, but was ahead of our 15.1% estimate. We had modeled higher sales and marketing expenses. We expect operating margins to grind higher in the coming years due to increasing operating leverage.