Current Price: $268 Price Target: $320
Position size: 2.5% Return since inception (8/11): +11%
Key Points:
- Beat expectations – Reported a top and bottom line beat. Revenues were $6.3B, up 23% YoY. Op margins expanded 20bps. Guiding to +24% FY21 revenue growth.
- Attrition improved – was between 8% and 8.5%, an improvement from last quarter’s 9% to 9.5%.
- More details on Slack strategy coming at Dreamforce/analyst day – “with Slack, we’re bringing a whole new dimension to salesforce.”
- Setting the stage for margin expansion – mgmt. continually reiterated their focus on cost discipline and efficient growth.
- Extremely positive demand commentary – saw strong demand across all of their products, regions and customer sizes. Sales cloud growth accelerated to 15% YoY, service cloud growth has accelerated to 23% and industry cloud growth was 58% (~$2B ARR, but an increasing part of the mix).
- Contracted revenues underscore demand strength and provide visibility – Remaining performance obligation (RPOs), representing all future revenue under contract, ended Q2 at ~$36B, +18% YoY. And Current RPOs or cRPO (all future revenue under contract that is expected to be recognized as revenue in the next 12 months) was ~$18.7B, up 23% YoY.
- Quotes from the call
- “Our products are more relevant than ever. I have never seen this kind of momentum in the business. Honestly, that’s because CRM is more strategic now than it’s ever been. Every digital transformation begins and ends with a customer and that’s why around the world more and more companies are putting their trust in salesforce to help them get back to growth; that’s the agenda on every CEOs mind.”
- “IDC just released their April 2021 SaaS vendor ratings that survey more than 2,000 companies worldwide and salesforce is rated #1 in trust, #1 in product, #1 in industry specialization, and #1 in value for the price.”
- ESG comments…
- They’ve progressed from being a “net zero company” to being “fully renewable.”
- “A lot of the companies that I met with [recently] were mostly Fortune 100 CEOs, they crave to have that same net zero and renewable profile, which is very exciting to see the world having this kind of sustainability focus.”
- Companies are using salesforce’s sustainability cloud to track their carbon footprint and other climate related initiatives.
- Reasonable valuation & strong balance sheet
- Expect CapEx to be ~3% of revenue in FY ’22 resulting in FCF growth of ~15% to 16% – excluding the anticipated impact of M&A, this would have be +22% to 23%.
- Net leverage ratio <2x. During the quarter they issued $8 billion of senior notes (to fund Slack deal) with a weighted average interest rate of 2.25 % and weighted-average maturity of 20 years. Concurrent with that, S&P upgraded their credit rating to A+.
- Trading at ~8x calendar ’22 revenue. Inexpensive given multiple secular tailwinds driving double-digit growth at scale for a high-quality, high moat company trading at a big discount to peers.
Investment Thesis:
- Strong moat – dominant front office software that is mission critical and productivity enhancing to customers with high switching costs and an ecosystem advantage
- Solid long-term secular growth drivers – digital transformation, multi-cloud, industry verticals and international expansion
- Improving unit economics – growth strategy should yield higher quality (lower attrition) and higher recurring revenue cohorts which should improve margins over time and support their multiple
- Reasonably valued – high quality franchise, growing double-digits and trading at a discount to peers
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109