Salesforce Q1 FY2021 - beats revenue estimates but trims full year guidance

In typical fashion, Marc Benioff CEO Salesforce was upbeat about the long term outlook for his company despite guiding revenue lower for the full year by just over five percent. What happened and how is Salesforce seeing the remainder of the year? First up the numbers:

• Q1 FY 2021 revenue came in at $4.87 billion, up 30% year over year and a tad over estimates
• Current Remaining Performance Obligation (CRPO) of approximately $14.5 billion, up 23%
• Operating cashflow was down 5% to $1.86 billon
• Updates full-year revenue guidance to $20 billion (previously $21.1 billion but still up 17% year over year)
• A Q1 operating loss of $140 million compared to $210 million profit in the prior year
• Tableau contributed $273 million in revenue but this was down from Q1 2019 at $282.5 million

On the earnings call, the company noted that it took a hit of $65 million related to canceled events around the world, one-time lease impairments of $25 million, a one time $140 million accelerated commission payment, and $20 million in donated PPE. Take all those together and the operating loss turns onto a profit of $110 million. On the call Mark Hawkins CFO Salesforce suggested that a reworking of events to virtual might lead to some reversal of the $65 million charge later in the year. 

As we heard from Workday earlier, customers are seeking relief and that contributed directly to a fall in cashflow although Hawkins is cautiously optimistic that cashflow will even out over the remainder of the year and does not expect to see a material impact for the full year. 

As is often the case, attention focused on the full-year guidance. Hawkins said:

There are two important assumptions reflected within the guidance that stem from our assumptions that the IT spending growth normalizes next year, which we believe to be appropriately conservative and consistent with our learnings as we successfully navigated through the great financial crisis.

First, our guidance assumes our revenue attrition rises from less than 9% now to less than 10% temporarily for the rest of the fiscal year. Second, the guidance reflects the adjustment to incremental new business expectations that we made due to the COVID pandemic. Another important consideration when thinking about our FY 2021 guide is the magnitude of the above when applied for a term license products.

Adding color to support the guidance, Hawkins said that while March was unsurprisingly choppy, the company saw stabilization in April and 'positive trends' in May. In his remarks, Benioff took the opportunity to talk extensively about how Salesforce core values allow the company to make a compelling case when going to market.

We saw once again how our values create value. We've seen how our agility and our beginner's mind has enabled us to quickly pivot and take action. And we made investments during Q1 to confront this once in a generation calamity, focusing on our employees, delivering relevant innovation for customers and supporting our communities with PPE, grants and technology. We could do all this because the proven strength and sustainability of our extraordinary business model and our extraordinary technology and our extraordinary Ohana.

He also talked about Work.com, the previously announced software suite which, when combined with Workday, is designed to provide an end to end solution that helps firms purposefully plan a return to the workplace saying that he expects Work.com to become a significant part of customer conversations going forward. 

Despite the softness in the guidance, Benioff insists that Salesforce is a critical part of an accelerated digital transformation journey:

Salesforce became incredibly relevant to our customers, first in this core digital transformation, and then next was really, how we could provide tremendous value in reopening safely.

My take

I generally find financial analyst calls disappointing and this was no exception.

There was no real explanation for the fall in revenue guidance beyond an expected 10-11% drop in Q2 that's modeled to continue through Q3 but maybe moderate in Q4. It's always good to hear a CFO reigning in gushing enthusiasm and here Hawkins did a good job cautioning analysts. 

I expect the guidance reflects the general uncertainty to which Workday referred the other day but more color would certainly have helped. There wasn't, for example, any discussion about momentum in the regions (although EMEA had a standout quarter per the earnings release) or color around factors impacting the different parts of the portfolio neither vertical nor by customer size.

A breakdown of the different clouds showed that 'platform,' which includes Heroku, Lightning, and Tableau had a stellar quarter. I would have liked to understand more about the momentum behind that portfolio. None was asked and none offered. 

 An important win at AT&T drew attention which, in my mind, served to deflect away from what could have been more incisive probing around the forecast and whether projects are being delayed or cancelled. 

Even so, Benioff, while mentioning the 2008-9 financial crisis was quick to point out that the current COVID-19 crisis is nothing like anything any of us has seen before. At the same time though, Benioff is looking to the future and an expectation that by this time next year it will be something like business as before. Like everyone else I have no clue as to whether he is correct. As Benioff knows, different countries are taking very different approaches to manage the pandemic. So while Benioff was able to talk about re-opening some offices in the Far East, the fact remains that the vast majority of Salesforce offices are closed.

And it is this tension between having to operate virtually and Benioff's anxiety to get back into in-person operations that I believe will show how well the Salesforce strategy and tactics turn out. The Leading Through Change program has attracted some 75 million viewers said Benioff but how much of that will turn into deal flow?

Finally, while you would not necessarily expect to hear much about the competitive environment, the fact remains that Zendesk and ServiceNow are formidable competitors, with Service Now in particular cranking up the recognition stakes as a credible customer service alternative.