Earnings Review - Salesforce for Q4 & FY22 (01Mar2022)

Salesforce $CRM released their earnings last night and was well received by the market. 

Salesforce's press release details can be found in the link below:
https://investor.salesforce.com/press-releases/press-release-details/2022/Salesforce-Announces-Record-Fourth-Quarter-and-Full-Year-Fiscal-2022-Results/default.aspx

Highlights extracted from their new release (areas of concerns are highlighted in red):

• Raises FY23 Revenue Guidance to $32.1 Billion
• Fourth Quarter Revenue of $7.33 Billion, up 26% Year-Over-Year, 27% in Constant Currency
• FY22 Revenue of $26.49 Billion, up 25% Year-Over-Year, 24% in Constant Currency
• Current Remaining Performance Obligation of Approximately $22.0 Billion, up 22% Year-Over-Year, 24% in Constant Currency
• Operating Margin: Fourth quarter GAAP operating margin was (2.4)%. Fourth quarter non-GAAP operating margin was 15.0%
• FY22 GAAP Operating Margin of 2.1%, and Non-GAAP Operating Margin of 18.7%
• Earnings per Share: Fourth quarter GAAP diluted loss per share was $(0.03), and non-GAAP diluted earnings per share was $0.84. Mark-to-market accounting of the company’s strategic investments benefited GAAP diluted earnings per share by $0.03 based on a U.S. tax rate of 25% and non-GAAP diluted earnings per share by $0.03 based on a non-GAAP tax rate of 21.5%.
• Fiscal 2022 GAAP diluted earnings per share was $1.48, and non-GAAP diluted earnings per share was $4.78. Mark-to-market accounting of the company’s strategic investments benefited GAAP diluted earnings per share by $0.93 based on a U.S. tax rate of 25% and non-GAAP diluted earnings per share by $0.98 based on a non-GAAP tax rate of 21.5%
• Cash: Cash generated from operations for the fourth quarter was $1.98 billion, a decrease of (9)% year-over-year. Total cash, cash equivalents and marketable securities ended the fourth quarter at $10.54 billion.
• FY22 Operating Cash Flow of $6.0 Billion, up 25% Year-Over-Year
• Raises First Quarter FY23 Revenue Guidance to $7.37 Billion to $7.38 Billion, up Approximately 24% Year-Over-Year
• Raises FY23 GAAP Operating Margin Guidance to Approximately 3.6% and Reiterates Non-GAAP Operating Margin Guidance of Approximately 20%
• Remaining Performance Obligation: Remaining performance obligation ended the fourth quarter at approximately $43.7 billion, an increase of 21% year-over-year. The current remaining performance obligation ended the fourth quarter at approximately $22.0 billion, an increase of 22% year-over-year, 24% in constant currency.

GAAP & non-GAAP Guidance FY23

Per-share reconciliation of FY23 GAAP and non-GAAP diluted earnings (loss) per share

Some areas of concern include:

FY22 YoY revenue growth is 25% but the FY23 YoY revenue growth is forecasted to be 21% (that is 4% lesser).
More dilution of shares (and thus earnings) is expected with the company issuing more shares.

Cash generated in Q4 dropped by 9% YoY.

Consolidated statement of operations FY22

Let us do a deep dive into the above statement with a focus on the entire FY22 instead of just a quarter.

Analysis for on the consolidated statement of operations FY22

Observations from the Consolidated statements (FY 2021 vs 2022):

The Year on Year growth of Revenue is averaged 24.66% (23.43% growth for Subscription & support and 43.81% growth for Professional services & others).

For FY22, professional services continued to make a loss.  A bigger loss was incurred in FY22.  The loss was $8 million (FY21) and became $132 million (FY22).  The Gross Loss margin went from -0.63% to -7.19%.

If the average revenue growth is 24.66%, then, the growth of the cost incurred should be lesser to maintain our profit margin.  For operating expenses of R&D, Sales and marketing, General and Admin, the growth of the cost was 23.17%, giving us a slight margin.  

Other expenses grew by 254% in FY22.  This is something we should monitor.

There was a lesser "gain on strategic investments" where the company reaped $2,170 million (FY21) compared to $1,211 million (FY22), a decline of 44%.

With both revenue and costs on the rise, the net income dropped from $4,072 million (FY21) to $1,444 million (FY22) - a 64% drop YoY.  This is despite revenue increasing by 24.66% YoY.  Thus, we need to monitor the expenses incurred.

One of the areas of concern is the stock-based expense where we saw an increase of 26.89% in FY (that is more than the 24.66% revenue growth).  The stock-based expense grew from $2,190 million (FY21) to $2,779 million (FY22). This would continue to eat up the profits.  Thus, we ended FY22 with a 66% drop in basic net income per share (compared to FY21).  Fourth-quarter GAAP diluted loss per share was $(0.03), a loss and this cannot continue into the next quarter. 

Consolidated Balance Sheet as of 31 Jan 2022

Observations about Balance Sheet:
Total current assets grew to $22,850 million (FY22) from $21,889 million (FY21).  The current liabilities grew to $21,788 million (FY22) from $17,728 million (FY21).

The current ratio remained over 1 but the ratio has dropped by a good margin.

Total assets grew from $66,301 million (FY21) to $95,209 million (FY22).  However, a big proportion of the growth is in "goodwill" and "intangible assets (acquired through business combination)".

We noted a worrying growth in noncurrent debt from $2,673 million (FY21) to $10,592 million (FY22).  

Consolidated statement of cash flows FY22

Observations from the statement of cash flows:

Net cash provided from operating activities grew from $4,801 million (FY21) to $6,000 million (FY22).  Despite the drop in net income ($4,072 million in FY21 to $1,444 million in FY22), the increase was largely due to the reduction of gains on strategic investments, and an increase in unearned revenue.

Net cash provided from investing activities dropped from ($3,971) million in FY21 to ($14,536) million in FY22.  The majority came from the business combinations, net of cash acquired from ($1,281) million in FY21 to ($14,876) million in FY22.  

Net cash provided from financing activities increased from $1,194 million (FY21) to $7,838 million (FY22).  This was largely due to $7,906 million in FY22 from proceeds from the issuance of debt, net of issuance costs.  This is an area of concern. to load up extra debt.
Though there was a $1,197 million repayment of slack convertible notes, net of capped call proceeds, the company has taken on more loans in FY22.

Revenues by region

For FY22 (YoY), Americas grew from $14,736 million to $17,983 million, a 22% growth.

Europe grew from $4,501 million to $6,016 million, a 33.6% growth.

Asia Pacific grew from $2,015 million to $2,493 million, a 23.7% growth.

Conclusion

Growing revenue must be matched with growing margin and improving free cash flow.  However, the EPS has dropped 66% despite the growth of revenue.  It is healthy to see the growth in all 3 regions, with Europe leading the growth.  There are concerns about the growing expenses and stock-based expense remains one of them.  The balance sheet has increased in value but the "growth" is largely in goodwill and intangible assets.  Due to the high gross margin, the business is able to remain in the black. 

It does not provide a strong proposition to be considered for long term investments.  Please research before investing.