The Positives
+ Demand remains robust. 2Q24 total revenue grew 11% YoY to US$8.6bn, 1% above the top end of company guidance, driven by resilient demand for its cloud and business software offerings. Revenues from core products Sales Cloud and Service Cloud grew 12% YoY to US$1.9bn and US$2.1bn, respectively. Data Cloud remained the fastest growing segment, increasing by 16% YoY to US$1.2bn, with MuleSoft and Tableau offerings being the largest contributors.
+ cRPO growth beats guidance. Remaining performance obligation (RPO), which represents future revenue that is under contract but hasn’t been recognized, grew by 12% YoY to US$46.6bn. The current portion of RPO (cRPO), which the company expects to be recognized in the following 12 months, increased by 12% YoY to US$24.1bn. The cRPO growth came ahead of the company’s guidance of 10% YoY growth, and was largely driven by momentum in MuleSoft. The company also benefited from multi-cloud adoption strategy, with 6 of the top 10 deals in the quarter included five or more of its cloud products. Additionally, the number of customers whose annual contract value (ACV) exceeds US$10mn reached 450 (growth of 3x over 5 years).
+ Focused on improving profitability. In 2Q24, Salesforce’s operating expenses fell by 7% YoY to US$5bn resulting in an operating margin of 17% (vs. 3% in 2Q23). The improvement was mainly driven by higher operating leverage across all cost items, including job cuts (headcount dropped 11% YoY) and careful sales and marketing spend.
The Negative
– NIL
Outlook
For 3Q24e, Salesforce expects total revenue to be in the range of US$8.70bn to US$8.72bn, representing growth of about 11% YoY. The revenue guidance includes a US$100mn FX headwind. Management also guided GAAP EPS/adj. EPS to be in the range of US$1.02 to US$1.03 and US$2.05 to US$2.06, respectively.
Salesforce lifted its annual earnings/margin forecast despite the company witnessing an elongated sales cycle, additional deal approval layers, and deal size compression. For FY24e, the company now expects GAAP EPS of US$3.51 on total revenue of US$34.75bn (prev. GAAP EPS of US$2.68 on revenue of US$34.6bn) taking the midpoint (Figure 1). This implies total revenue growth of 11% YoY led by continued demand for its cloud products, particularly MuleSoft, Sales Cloud, and Service Cloud. Salesforce also raised its operating margin guidance to 13% from the prior guidance of 11% (up from 3% in FY23) driven by higher operating leverage.
In August, Salesforce hiked prices of its cloud products by an average of 9%. The company also plans to boost demand by introducing a generative AI-based tool named Einstein GPT for salespeople, customer service agents, and marketers. Management noted that the price increase will not have a material impact in FY24e as it is expected to hit the existing customer base over the next 1-3 years at renewals.
Salesforce generated about US$628mn (up 379% YoY) in Free Cash Flow in 2Q24, ending the quarter with US$6.8bn in cash and cash equivalents. The company returned US$1.9bn to shareholders in 2Q24 in the form of share repurchases.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note: