• 1Q24 revenue/Adj. PATMI was within expectations at 24%/23% of our FY24e forecasts, excluding a restructuring charge of US$0.7bn. Revenue grew 11% YoY to US$8.2bn due to higher subscription sales. PATMI spiked 611% YoY (71% normalized) driven by higher operating leverage.
• Future contracted revenue or remaining performance obligations (RPO) grew by 11% YoY to US$46.7bn. For FY24e, Salesforce maintained its total revenue guidance of US$34.6bn (up 10% YoY), while raised its GAAP EPS outlook to US$2.68 from US$2.60 taking the midpoint. Adj. operating margin expected to be 28% up from 22.5% in FY23.
• We downgrade to ACCUMULATE from BUY recommendation after the recent jump in its stock price. We increase our DCF target price to US$226.00 (prev. US$219.00) with a WACC of 7% and terminal growth of 4%. Our FY24e revenue estimates remain unchanged, while we have increased our PATMI by 2% due to lower expenses. Salesforce enjoys longer term tailwinds from cloud-based digital transformation trends as companies look to form a more holistic views of their customers.

The Positives

+ Strength in MuleSoft and core products drive growth. 1Q24 revenue grew 11.3% YoY (13% in constant currency) to US$8.2bn, 1% above the top end of company guidance, driven by higher subscription sales. Salesforce witnessed continued strength in its core products with Sales Cloud and Service Cloud revenues growing 13% YoY in constant currency to US$1.8bn and US$2.0bn, respectively. Within Data Cloud, MuleSoft revenues grew by 26% YoY, while Tableau grew by 12% YoY. Total remaining performance obligations (RPO), which represent future revenue under contract, grew by 11% YoY to US$46.7bn. The current portion of RPO (cRPO), which the company expects to be recognized in the next 12 months, increased by 12% YoY to US$24.1bn. This was driven by the strength of its Customer 360 platform, multi-cloud adoption trends, and low customer attrition rate of 8%.

+ Improvement in margins. In 1Q24, Salesforce reported adj. operating margin of 27.6% compared with 17.6% in 1Q23. This was mainly driven by continued focus on operational discipline, driving cost controls through job cuts, real estate consolidation, and lower travel and entertainment expenses.

The Negative

– CAPEX spending jumps. In 1Q24, Salesforce’s CAPEX increased by 36% YoY to US$243mn. The extra spending is towards the introduction and rollout of generative AI-driven product enhancements. During the quarter, Salesforce launched Einstein GPT, which is designed to help salespersons and customer-service agents to perform their duties more efficiently, including generation of personalized emails to send to customers. For FY24e, CAPEX is expected to be about US$865mn (2.5% of total revenue).