Salesforce focused on improving margins
During Investor Day, Salesforce (CRM) management unveiled updated growth targets for 2021 and 2022.
The slightly revised expected revenue growth for the current year range from $ 26.2-26.3 billion to $ 26.25-26.35 billion. Currently, the FactSet consensus forecast assumes sales growth at the upper limit of this corridor: $ 26.33 billion. Salesforce executives forecast revenues of $ 31.65 billion to $ 31.80 billion for 2022, up to $ 0.3 billion from previous market expectations. We previously assumed that Salesforce sales in 2022 would grow to $ 31.2 billion.
One of the essential elements of the updated forecast is the improvement of estimates of non-GAAP operating margins. Management expects an operating GAAP margin of 3–3.5% in 2022 (below our forecast range of 4–5%), while a non-GAAP operating margin to be 20% (after taking into account the negative impact of the acquisition of Slack at the level of 1.25-1.5 pp) compared to our previous estimate of 19.2%. We also note that the relatively low operating margin is one of the issuer’s main weaknesses (amid high marketing and advertising costs).
So, Salesforce from 2018 to 2020 increased its non-GAAP operating margin by only 0.6%, to 17.7%, so growth to 20% by 2022 can be regarded as noticeable progress that the company’s management has achieved. The CEO focused on maintaining the momentum of digital transformation.
IDC estimates, up to 2024, $ 10 trillion will be spent on this area on a cumulative total and will be spent 57% of this amount in the next two years. We also note that the CAGR of target market revenue by management at 13% (previously forecast 11% growth), which is due to several factors, including the update of Gartner forecasts for target Salesforce markets (up to $ 40 billion), as well as a positive effect from the purchase Slack. Among the weaknesses of the Salesforce presentation, there are few details about the promising Industrial Clouds direction.
On the contrary, the CEO’s statement that the company at increasing margins positively impacted investor sentiment. However, management did not provide a medium-term benchmark for this indicator.
In general, we positively assess the event and the performance of the Salesforce management simply, revise our revenue and margin forecasts in the medium term and increase the target price for CRM securities to $ 287 per share.
