Salesforce Inc - Cost-cutting efforts boost earnings

7 Mar 2023
  • FY23 revenue was in line with expectations at 101% of our forecasts, but Adj. PATMI was higher than expected at 106% of our FY23 forecasts due to higher operating leverage. 4Q23 revenue grew 17% YoY in constant currency to US$8.4bn driven by reignited MuleSoft and Tableau licenses sales.
  • operating margin was a record high 29.2% in part due to recent job cuts. Future contracted revenue or remaining performance obligations (RPO) grew by 11% YoY to US$48.6bn.
  • We maintain a BUY recommendation with a higher DCF target price of US$219 (WACC 7%, g 4%), up from US$205. Our FY24e revenue is nudged lower by 2% as many corporations continue to scrutinize their IT spending; while we have increased our Adj. PATMI by 24% due to lower expenses. Salesforce enjoys tailwinds from digital transformation trends as companies seek to have a single view of their customer data.

 

 

The Positives

+ Strength in MuleSoft and Tableau products drive growth. Salesforce recorded revenue of US$8.4bn for 4Q23, ahead of the company’s guidance of US$8.0bn, and representing a 14% YoY growth (17% YoY in constant currency). Data, which includes MuleSoft and Tableau license sales, rose 18% YoY to US$1.3bn – the highest YoY revenue increase in 4Q23. Salesforce’s other core businesses also performed well, with Sales and Service cloud revenues growing 13% YoY to US$1.8bn and US$1.9bn in 4Q23, respectively. Remaining performance obligations (RPO), which represent future revenue under contract, grew by 11% YoY to US$48.6bn. The current portion of RPO (cRPO), which the company expects to be recognized in the next 12 months, increased by 12% YoY to US$24.6bn. This was driven by the strength of its Customer 360 platform, multi-cloud adoption, and record low customer attrition rate of below 7.5%.

 

+ Cost cuts are paying off. In 4Q23, Salesforce reported a record high adj. operating margin of 29.2% compared with 15% in 4Q22 driven by higher operating leverage across all cost segments (particularly Research and Development). In 4Q23, Salesforce benefited about 6 percentage points from one-time items, including 1.5 points from restructuring. In Jan 23, the company announced that it would lay off 10% of its workforce (~7,000 employees).

 

The Negative

– Pressure from foreign exchange rates. Salesforce’s revenue was negatively impacted due to the strengthening of the dollar against several key foreign currencies, including the Euro, British pound, and Japanese yen. In 4Q23, the unfavorable foreign exchange rate movement negatively impacted revenue by about US$250mn (or 3% of total revenue). The foreign exchange impact was guided to decrease revenue growth in 1Q24e by US$150mn.

About the author

Ambrish Shah
US Technology Analyst (Software/Services)
PSR

Contact us to Open an Account

Need Assistance? Share your Details and we’ll get back to you

IMPORTANT INFORMATION

This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

This advertisement has not been reviewed by the Monetary Authority of Singapore.  

 

Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com