The Pros, The Cons And The Bottom Line In Salesforce's Q1 Earnings Report

Salesforce.com, inc. CRM reported strong sales performance metrics, robust deals activity and had a solid quarter that beat and raised its 2018 fiscal year revenue target.

Oppenheimer analysts Brian Schwartz and Koji Ikeda have an Outperform rating on salesforce and raised the price target to $100.

Q1 Positives

According to the report, Q1 revenue, billings and EPS results all beat consensus. Specifically, its revenue of $2.39 billion (up 25 percent year over year) beat by ~$40 million. Additionally, its billings of $1.89 billion (up 16 percent year over year) was ~$14 million above consensus, and its EPS of $0.28 was $0.02 above expectations. Salesforce also reported a record amount of cash flow, which supports Oppenheimer’s valuation.

Beyond those numbers, the report offered strong Q2 and 2018 fiscal year revenue guidance. Salesforce raised total revenue guidance by approximately $3 million and modestly raised expected EPS. The revenue guidance is almost 1.5x above the fiscal first-quarter beat. The fiscal year 2018 revenue guidance was raised by ~$100 million and is now higher than its $10.18 billion consensus, according to Schwartz and Ikeda.

Negatives To Keep An Eye On

The Q1 operating margin did not extend to its fiscal year 2018 outlook; however, salesforce does not expect to continually increase its margins. The service cloud only grew by about 21 percent year over year (compared to 24 percent last quarter), and it has now seen seven straight quarters of weaker growth in this segment. Further, salesforce is only expecting to see similar billing growth in Q2.

Bottom Line

Overall, the Q1 clean earnings report and guidance provide strong data points indicating that the company is in a good place in the cloud computing industry. Oppenheimer has raised its target price from $95 to $100, and considers salesforce “one of the healthiest long-term growth stories in our SaaS/applications software universe.”

Schwartz and Ikeda summarized the report and their theses by stating: “CRM is a proven market share taker that possesses disruptive products and a powerful corporate culture, and is led by a visionary CEO. We think business fundamentals are robust and could get even better as adoption of SaaS and data analytics technologies expands. We are attracted to the dominant market positioning, rapid innovation, strong execution, fast organic growth, and the ability to enter new markets, which likely set the stage for steady, ongoing upward revisions beyond the current consensus.”

At last check, shares of salesforce were up 0.75 percent at $88.45.