Current Price: $210 Price Target: $320
Position size: 3% TTM Performance: +11%
Key Points:
- Beat expectations – Reported a top and bottom line beat and increased FY23 revenue guidance (+21% YoY) and saw record levels of revenue, margin and cash flow.
- Attrition improved – in Q3 they drove attrition rate to below 8% for the first time in company history…and ended Q4 w/ attrition between 1-7.5%
- Seeing solid margin expansion – op margins should be up >100bps this year. 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 Q4 at ~$44B, +21% 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 ~$22B, up 24% YoY.
- Quotes from the call
- “we don’t see any demand pull-forward”…this has been pointed to by bears as a concern saying that there has been a pull forward in demand w/ covid and that growth would slow in enterprise software…the rest of the quotes (along w/ their guidance and RPOs) also run counter to this argument…
- “The dynamics we’re seeing in customer engagement is absolutely fantastic. Just over the past few months I’ve done more than 75 meetings with C-suite executives and the accessibility, that sense of urgency and interest from the highest levels of companies is incredible and shows no signs of slowing down. What’s clear is there is a tremendous appetite for digital transformation and we fully expect that to continue.”
- “…despite inflation, the crisis, the supply chain, the conflict in Europe…the problems that we solve for our customers are as urgent as ever”…” it’s not just sales opportunity management anymore, it’s really every aspect of the customer experience. And it means that we’re starting conversations in every department of every single one of our customers and have the opportunity to expand really…”
- “Our progress in the enterprise continues with our largest deals getting even larger. The number of seven-figure deals signed in Q4 grew 34% year-over-year and in Q4 the number of eight-figure deals more than doubled.”
- “Our customers, it doesn’t really matter by geography or by industry, are very deeply committed to their digital transformation to their businesses. I think that if the pandemic put a light on anything for them it was that their businesses were not going to have a future, if they did not go through a digital transformation. And that these digital transformations as I said in my comments, we’re going to begin and end with the customer.”
- CRM is coming up on their 23rd anniversary…at 23 years old, their inaugural product, their Sales Cloud is ~$6B in annual revenue, close to ΒΌ of revenue and still growing at 17% which is amazing.
- 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 ~2% of revenue in FY ’23 resulting in FCF growth of ~25% to 26%, an acceleration from last year.
- Net leverage ratio <2x. In August 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 a big discount to peers at <7x calendar ’23 revenue. Inexpensive for a high-quality, high moat company w/ a large TAM and multiple secular tailwinds, driving double-digit top line growth at scale.
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