A sigh of relief is in order. Salesforce shares jumped more than 4% in extended trading Wednesday after the enterprise software giant beat expectations for second-quarter sales and profit. The company may have maintained its full-year revenue guidance, but that was seen as enough after last quarter’s debacle. Additionally, an increase in its margin guidance showed Salesforce remains committed to profitable growth. Revenue rose 8% year over year to $9.33 billion in the quarter, beating the $9.23 billion analysts had expected, according to estimates compiled by LSEG. Adjusted earnings per share of $2.56 rose 21% year over year and beat the $2.36 analysts had expected, according to LSEG data. Adjusted operating margin rose to 33.7% in the three months ended July 31, beating the consensus estimate of 31.95%, according to FactSet. Based on generally accepted accounting principles (GAAP), quarterly operating margin was 19.1%, above the 18.38% expected. Salesforce Why we own it: Salesforce is a leading enterprise software tool for companies across industries, helping employees better communicate with their colleagues internally and with their customers. The company’s balance of margin expansion and the potential for faster revenue growth should lead to strong earnings growth. Competitors: SAP, Microsoft, HubSpot Most Recent Purchase: December 21, 2022 Initiated: June 15, 2018 Bottom Line Investor expectations were low heading into Salesforce’s earnings call on Wednesday after the company shockingly missed revenue and cut its GAAP margin guidance in the latest quarter — a double whammy for the profitable growth thesis that has been at the core of the story for over a year. That led to the stock having its worst day since 2004. The results were sharper this time around, with key numbers on revenue, remaining performance obligation (RPO), and current RPO (cRPO), as well as improved adjusted operating margin guidance. RPO represents contractual revenue that has not yet been officially recorded, while cRPO is the amount expected to be recorded over the next 12 months. Investors pay close attention to changes in these metrics to help them gauge the health and momentum of the business. It’s still tough to see Salesforce’s revenue growing just 8% year over year when that’s traditionally double-digit growth, but we’re willing to accept some revenue weakness if it’s temporary and margins are expanding. Fortunately, the margin story got back on track this quarter, and the company has a bullish story to tell about a pair of new AI tools for salespeople that will be generally available in October. Salesforce is grappling with an emerging notion that artificial intelligence could be the enemy — not the friend — of enterprise software companies if their customers can use AI to build internal software tools to manage their data. CEO Marc Benioff dismissed that notion early in the conference call with the following remarks: “I’ve been very disappointed by the enormous amount of money that so many of these customers have wasted on AI. They’re trying to build their own AI.” It’s not unlike the emergence of the cloud or even other technologies where they feel like they have to figure it out on their own, build it themselves, get into the details, try to figure it out, and they’re not going to do it any better than we do,” Benioff explained. “We’re a professional enterprise software company. That’s what we do. And we do it with the confidence and the scale that they need.” Salesforce’s new AI tools — which it calls autonomous AI sales agents — could be the company’s answer to that negative thesis. One AI agent focuses on handling inbound requests on behalf of salespeople. The other aims to improve a salesperson’s presentation and negotiation skills. Benioff was very bullish on the products, saying he expects thousands of customers to be using the platform by the start of the next fiscal year. The company may use its annual Dreamforce conference in September to make a big sales pitch. Another question on Wall Street is: If a company uses AI to become more efficient and can accomplish more with fewer workers, how will that impact Salesforce’s business model, which is primarily based on seats? A seat, in software licensing terms, is a registered user of the product. A company may need fewer seats if the business is run more efficiently. Asked about this on the conference call, executives reminded the analyst that Salesforce also has many consumption-based products, such as its data analytics and commerce applications. Those shouldn’t be affected. Overall, Salesforce had a much better quarter and a more upbeat conference call than its previous report in May, largely due to excitement over new product innovations. Salesforce’s next task is to prove that these new AI products will become a significant driver of revenue growth. Again, that’s where Dreamforce comes in. We reiterate our 2 rating and $300 price target on Salesforce as we take a wait-and-see approach to its AI products. We also won’t be surprised to see a hangover in tech stocks on Thursday after better-than-expected results from fellow Club holding Nvidia fell short of Wall Street’s lofty expectations. CRM YTD has been driving Salesforce’s stock performance year-to-date. Quarterly Results From a macro perspective, there hasn’t been much talk about the buying environment or whether the Federal Reserve’s widely expected interest rate cuts will spur more deals. When it was pointed out that Salesforce’s Americas region, its largest, grew just 8% in the quarter, COO Brian Millham attributed the weakness to a “measured buying environment” rather than market saturation. Millham added that he believes the region can return to double-digit growth thanks to its new technologies, innovations and multi-cloud deals. Across all regions, multi-cloud deals accounted for about 80% of total new business, and the company signed 1,500 AI deals in the quarter. Think of a cloud as a service designed for a specific business function, such as sales, customer service and marketing. Deals involving multiple clouds are important because they mean more business and deeper relationships with the specific customer. On the operational side, we were pleased to see better-than-expected margins and an increased full-year outlook despite increased investment in growth opportunities, such as the two new AI sales agents. Separately, CFO Amy Weaver, who led Salesforce’s transformation to profitable growth, announced Wednesday evening that she is stepping down from her role. She will remain CFO until a successor is named and will then serve as an advisor to the company. Management wisely ramped up its share buyback activity during the quarter, likely benefiting from the $200-a-share price throughout June. The company repurchased $4.3 billion worth of stock during the quarter, nearly double the $2.2 billion it repurchased in the prior quarter. That helped reduce diluted shares by 1% year over year. For fiscal 2025, Salesforce reaffirmed its full-year revenue guidance of $37.7 billion to $38 billion, an increase of 8% to 9% from a year earlier. The midpoint is roughly in line with the consensus estimate. While Salesforce isn’t generating a ton of revenue growth, the company remains cost-disciplined, as evidenced by management raising its full-year operating margin guidance. The company now expects adjusted margins of 32.8%, up from 32.5% previously. That translates into an increase in adjusted EPS guidance. Salesforce now expects earnings in the range of $10.03 to $10.11 per share, up from $9.68 to $9.76. The new midpoint of $10.07 is well above the consensus estimate of $9.89. For the third quarter, Salesforce expects revenue of $9.31 billion to $9.36 billion, below the $9.4 billion estimate. But despite the revenue decline, Salesforce’s adjusted EPS guidance range of $2.42 to $2.44 was slightly better than the $2.42 estimate. (Jim Cramer’s Charitable Trust is long CRM and NVDA. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable fund’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. 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Salesforce headquarters in San Francisco, California, United States on Wednesday, November 29, 2023.
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A sigh of relief is in order.
Salesforce Shares jumped more than 4% Wednesday after the enterprise software giant beat expectations for second-quarter sales and profit. The company may have maintained its full-year revenue guidance, but that was seen as enough after last quarter’s debacle. Plus, an increase in its margin guidance showed Salesforce remains committed to profitable growth.
