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Will Salesforce’s improved margins lift SaaS share prices?

Profits had been sagging and growth slowing, and a lot of the talk in the build-up to Salesforce’s Q4 2023 earnings was around how the California company would cope with mounting pressure from activist investors. Workday and Zoom also reported their Q4 2023 results.

– All three SaaS companies beat Wall Street expectations.

– Salesforce has come under pressure from activist investors but is now heading in the right direction.

– The Global X Cloud Computing ETF holds all three stocks and is up 7% year-to-date.

It’s been a big week for SaaS stocks, with Zoom [ZM], Workday [WDAY] and Salesforce [CRM] all reporting their latest earnings.

Zoom’s revenue of $1.12bn for its fourth quarter (Q4) 2023 marked a modest 4% year-over-year increase but surpassed the $1.1bn expected by analysts polled by Refinitiv. EPS of $1.22 comfortably beat expectations of $0.81 per share.

Workday reported adjusted EPS of $0.99 on revenue of $1.7bn for Q4 2023, up 19.5% from the $1.4bn reported the year-ago quarter. This beat both top and bottom-line expectations of $1.6bn and $0.91 per share.

Salesforce’s adjusted EPS of $1.68 on revenue of $8.4bn smashed past expectations of $1.36 per share on $8bn.

The Zoom share price is up 2.8% year-to-date, while the Workday share price has gained 10% in the same period.

Shares in Salesforce were up around 16% after-hours Wednesday, having gained 26.2% year-to-date until earnings. Positive momentum has been driven mainly by the news that activist investors Paul Singer and Dan Loeb have recently bought stakes.

 

Salesforce’s operating margin surprises

The key metric investors were looking for in the Salesforce earnings was the operating margin. It was reported a few days before the report that another activist, Starboard Value, was pushing for margins above 30%. The margin for Q4 2023 was 29.2%, significantly above its 2026 target of 25%, which the company committed to back in September.

Another big talking point heading into the SaaS earnings was the impact inflation was having on enterprise IT budgets and whether companies would be paring down their costs.

Workday reported subscription revenue growth of 22.5% for the full fiscal year to the end of January. However, it warned that it’s expecting growth for fiscal 2024 to be between 17% and 18% due to a weaker spending environment for human resources software.

Carl Eschenbach, co-CEO, told analysts on a conference call that the company was targeting a “return to 20%-plus subscription growth when the environment improves”.

Zoom had roughly 213,000 enterprise customers at the end of Q4 2023, up 12% year-over-year but lower than the 216,500 Wall Street had been forecasting, according to Yahoo Finance.

The number of customers contributing more than $100,000 in trailing 12-month revenue was up 27% to 3,471, although this was down from growth rates of 31% and 37% in Q3 and Q2 2023, respectively.

Weak spending environment remains

There could very well be more softness ahead, evident in Workday’s weak outlook. It’s expecting Q1 2024 revenue will be between $1.665bn and $1.668bn, up at best 19% from $1.4bn and a 22% growth rate in the year-ago quarter.

Oppenheimer analyst George Iwanyc reiterated a ‘perform’ rating for Zoom following the earnings report. In a note to clients seen by Benzinga, he said he was “positive on the operational adjustments” Zoom had made, namely cutting its workforce by 15%. However, with the number of customers contributing more than $100,000 slowing, he’s “looking for better visibility into demand stabilisation [and] improvement”.

Zoom could struggle to upsell to existing enterprise customers in fiscal 2024, Evercore analyst Peter Levine told Yahoo Finance. Upselling has been a key driver of growth as the company diversifies its product offering beyond its legacy Zoom Meetings platform.

As for Salesforce, it would appear the presence of activist investors is already paying off.

“[CEO Marc] Benioff read the room with activists swirling and delivers with his back against the wall. Huge step in the right direction for the cloud stalwart,” tweeted Wedbush analyst Dan Ives.

Funds in focus: Global X Cloud Computing ETF

Workday is the top holding in the Global X Cloud Computing ETF [CLOU] with a weighting of 4.97% as of 1 March. Salesforce and Zoom are weighted 4.33% and 3.36%, respectively. The fund is up 7.1% year-to-date.

Zoom is the second-biggest holding in the Ark Innovation ETF [ARKK], making up 7.93% of the portfolio as of 2 March. The fund is up 23.9% year-to-date.

Of the three stocks, Salesforce has the biggest weighting in the WisdomTree Cloud Computing Fund [WCLD] as the seventh-biggest holding with 1.52% of assets under management as of 1 March. Workday and Zoom have allocations of 1.50% and 1.41%, respectively. The ETF is up 11.8% year-to-date.

 

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