Company Background
Salesforce (CRM) is one of the key cloud-based enterprise software solutions provider, with a focus on customer relationship management (CRM). The company currently has over 150,000 paid customers globally that depend on its software solutions to manage sales, customer service, marketing, and analytics (Figure 1).
Investment Merits
We initiate coverage with a BUY rating. Our target price is US$258 based on a DCF valuation with a WACC of 6.1% and terminal growth of 4.0%.
REVENUE
Salesforce has two revenue segments: Subscription and Support (93% of FY22 revenue) and Professional services and others (7%). Subscription and Support revenues include subscription fees paid by clients that use its enterprise cloud computing services (Sales Cloud, Service Cloud, and Marketing and Commerce), software license-related businesses Tableau and MuleSoft, and technical support. Professional services and others include revenue associated with services such as consulting, deployment, training, and implementation.
Total revenue expanded at 26% CAGR in the past five years (Figure 3). Over FY18-22, Salesforce’s Subscription and Support revenues rose at a CAGR of 26% to US$24.7bn in FY22. The growth was due to a volume-driven surge from new business, including new customers, additional subscriptions from existing customers, upgrades, as well as reduced attrition rate for its services.
The Americas (68% of FY22 revenue) is Salesforce’s biggest market (Figure 4), followed by Europe (23%), and Asia Pacific (9%).
MARGINS
Gross margins averaged 74% in the past five years. This was mainly because Salesforce’s revenue is primarily made up of subscriptions, resulting in a continuous purchasing cycle for customers. Operating margin declined from 4% in FY18 to 2% in FY22 due to the sales & marketing push, rising headcount, and investments in technology. We expect operating margins to be 4% in FY23e and 6% in FY24e.
Net margins in FY22 were 6%, down from 19% the previous year. The change is primarily because the company recognized a tax benefit of US$1.5bn on a pretax income of US$2.6bn in FY21. The tax benefit was associated with intra-entity transfer of intangible property.
BALANCE SHEET
Assets: In FY22, cash and cash equivalents decreased by 12% YoY to US$5.5bn. Marketable securities also decreased by US$700mn. Fixed assets for FY21 were US$5.7bn, up from US$1.9bn in FY18, largely due to ongoing CAPEX spending. The company’s current ratio for FY22 is 1.0x.
Liabilities: Current liabilities for FY21 were US$21.8bn, almost US$4.1bn more than FY21. This increase was mainly due to a rise in accrued expenses and unearned revenue. Non-current liabilities saw a jump of US$8.2bn in FY22. Salesforce had a net debt position of US$5.1bn in FY22 (Figure 5). Salesforce’s debt-to-equity ratio remains low at only 0.2x.
CASH-FLOW
Cash-flow from operations has steadily risen at 23% CAGR to US$6bn (Figure 6) from FY18 to FY22. CAPEX stood at US$0.7bn in FY22, rising at 9% CAGR over FY18-22. In FY22, Salesforce generated US$5.3bn in free cash flow. This translates to a 20% free cash flow margin. Salesforce’s ability to generate significant amounts of cash allows it to acquire firms.
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