Salesforce gives forecast for slowing sales growth in push for profit
SALESFORCE isn’t growing as fast as it used to while the software company shifts its focus to generating higher profits instead. Investors are concerned.
The shares slipped as much as 7.1 per cent in extended trading on Wednesday (May 31) after Salesforce gave a lacklustre outlook for future sales and maintained, rather than raised, its annual revenue forecast. The stock drop came despite the company reporting revenue, earnings and operating profit margin in the fiscal first quarter that topped analysts’ estimates.
After a tumultuous six months that included job cuts, executive departures, board director changes and public pressure from multiple activists investors, Salesforce had been winning back the faith of many shareholders. During its Mar 1 earnings report, the San Francisco-based company, the top maker of customer relations management software, signalled an emphasis on profit and announced market-pleasing steps, including doubling stock buybacks and disbanding its committee on mergers and acquisitions.
But amid the new focus, some are debating “the company’s ability to dramatically expand operating margin without impacting its ability to grow”, Brad Zelnick, an analyst at Deutsche Bank, wrote ahead of earnings.
Salesforce said growth in current remaining performance obligations, or contracted sales, will slow to 10 per cent in the current quarter ending in July, falling short of analysts’ average estimate of more than 11 per cent. The company also repeated its earlier fiscal-year forecast that revenue would increase 10 per cent to about US$34.6 billion – by far its slowest rate of expansion on record.
The forecast implies reflects a cautious outlook about customer information technology budgets, Anurag Rana, an analyst at Bloomberg Intelligence, wrote after the results. The failure to increase the annual sales guidance “may drive the stock lower in the near-term”, wrote Citibank’s Tyler Radke.
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The shares closed on Wednesday at US$223.38 in New York and have rallied 68 per cent this year, making it one of the best-performing stocks in the S&P 500.
The contracted sales outlook fell short of estimates because customers are looking for smaller consulting projects, said Mike Spencer, Salesforce executive vice-president of investor relations. Pressure on revenue growth is due to broad economic factors rather than company cost cuts, he said, and the forecast doesn’t assume improvement or worsening of customer behaviour.
Executives are betting that interest around artificial intelligence could boost sales. “There’s only one thing that customers want to talk about and that’s artificial intelligence – and specifically generative AI,” chief executive officer Marc Benioff said on a conference call after the results were released.
The company is working on bringing its generative and data integration tools into all of its products, said chief operating officer Brian Millham. “We’re perfectly positioned to help our customers harness the phenomenal power of AI,” he said. The current revenue outlook doesn’t factor in any of the potential benefits from AI, Spencer said.
Like many of its peers, Salesforce has integrated AI features into its sales, marketing and workplace communication programmes. It also launched a US$250 million venture fund for generative AI startups.
Salesforce’s profitability continues to climb. The company raised its already-aggressive operating profit margin 1 percentage point to 28 per cent for the fiscal year ending in January. Millham said the company is focusing on employee productivity measures, including return-to-office rules. Chief financial officer Amy Weaver said Salesforce is offsetting dilution from stock-based compensation with share buybacks.
In the fiscal first quarter, which ended Apr 30, revenue increased 11 per cent to US$8.25 billion, topping the US$8.18 billion average projected by analysts. Adjusted profit was US$1.69 a share, compared with an estimate of US$1.61. Operating margin was 27.6 per cent. For the current quarter ending in July, sales will grow 10 per cent to about US$8.52 billion, the company said. Analysts, on average, estimated US$8.49 billion, according to data compiled by Bloomberg.
The quarter “represented another strong step forward as we accelerate our transformation and profitable growth strategy”, Weaver said in the statement. BLOOMBERG
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