Why Is Salesforce.com (CRM) Down 17.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Salesforce.com (NYSE:CRM). Shares have lost about 17.8% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Salesforce.com due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Salesforce Q4 Earnings Beat Estimates

Salesforce delivered better-than-expected results for fourth-quarter fiscal 2020. The company’s fiscal fourth-quarter non-GAAP earnings of 66 cents per share beat the Zacks Consensus Estimate by 20%. Nonetheless, quarterly earnings declined 6% from the year-ago quarter’s level of 70 cents, as benefits of higher revenues were more than offset by elevated operating expenses.

Salesforce’s fiscal fourth-quarter revenues of $4.85 billion jumped 35% year over year, surpassing the Zacks Consensus Estimate of $4.75 billion. Moreover, the top-line figure improved 34% in constant currency (cc). The company also noted that the acquisition Tableau in August 2019 contributed $344 million to its quarterly revenues. Excluding the sales of acquired businesses, total revenues were up 22% year over year.

The enterprise cloud computing solutions provider has been benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions led to the better-than-expected performance during the fiscal fourth quarter.

Quarter in Detail

Coming to the company’s business segments, revenues at Subscription and Support increased about 35% from the year-earlier period to $4.56 billion. Professional Services and Other revenues climbed 26% to $288 million.

Sales Cloud revenues grew 17% year over year to $1.23 billion. Revenues from Service Cloud, one of the company’s largest and the fastest-growing businesses, also improved 26% to $1.22 billion. Moreover, Marketing & Commerce Cloud revenues jumped 28% to $690 million. Salesforce Platform and Other revenues surged 74% to $1.43 billion.

Geographically, the company registered revenue growth of 32% in the Americas (70% of total revenues), 28% in the Asia Pacific (9%), and 49% in Europe and Middle East Asia or EMEA (21%) on a year-over-year basis.

Salesforce’s non-GAAP gross profit came in at $3.85 billion, up 40% from the prior-year quarter. Additionally, gross margin expanded 280 basis points (bps) to 79.4%.

Salesforce posted non-GAAP operating income of $745 million, up 25% year over year. However, operating margin shrunk 100 basis points (bps) to 15.5% due to elevated operating expenses as a percentage of revenues. Operating expenses flared up 46% year over year to $3.67 billion. As a percentage of revenues, operating expenses expanded 570 bps to 75.6% from the year-ago period’s 69.9%.

Salesforce exited fiscal 2020 with cash, cash equivalents and marketable securities of $7.9 billion compared with the $4.3 billion recorded at the end of fiscal 2019. The company generated operating cash flow of $1.63 billion in the fiscal fourth quarter and $4.33 billion for fiscal 2020.

As of Jan 31, 2020, total unearned revenues were $10.66 billion, up 24% on a year-over-year basis.

Guidance

Buoyed by better-than-anticipated fiscal fourth-quarter top-line performance, Salesforce raised its revenue guidance ranges for the first quarter and fiscal 2021. For fiscal 2021, revenues are now predicted between $21 billion and $21.1 billion compared with the earlier expectation of $20.8-$20.9 billion, marking 22-23% year-on-year growth.

The company expects its full-fiscal GAAP and non-GAAP earnings per share to come in at 12-14 cents and $3.16–$3.18, respectively. It assumes non-GAAP operating margin to expand 125 bps on a year-over-year basis to 18.1%.

Operating cash flow is expected to increase approximately 20% year over year or come in more than $5.1 billion. The company assumes capital expenditure to be approximately 4% of fiscal 2021 revenues.

Coming to the fiscal first quarter, revenues are guided between $4.875 billion and $4.885 billion, higher than the previous guidance $4.8-$4.835 billion. The updated revenue outlook indicates a 30-31% growth from the prior-year reported number.

Furthermore, Salesforce anticipates non-GAAP earnings per share in the band of 70-71 cents for the fiscal first quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 19.06% due to these changes.

VGM Scores

Currently, Salesforce.com has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Salesforce.com has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.