(Bloomberg) — Salesforce Inc. is no longer growing as quickly as it once was, while the software maker instead focuses on generating higher profits. Investors are worried.
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Shares fell 6% in premarket trading on Thursday morning after Salesforce gave a lackluster outlook for future sales and maintained, rather than increased, its full-year revenue forecast. The share decline came despite the company reporting fiscal first-quarter revenue, profit and operating profit margin that beat analysts’ estimates.
The shares closed at $223.38 in New York on Wednesday and are up 68% this year, making it one of the best performing stocks in the S&P 500.
After a tumultuous six months that included job cuts, executive departures, changes in board directors, and public pressure from several activist investors, Salesforce had regained the trust of many shareholders. In its March 1 earnings report, the San Francisco-based company, the leading maker of customer relationship management software, focused on earnings and announced market-pleasing metrics, including doubling share buybacks and the dissolution of its mergers and acquisitions committee.
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But amid the new direction, some are debating “the company’s ability to significantly increase its operating margin without affecting its ability to grow,” Deutsche Bank analyst Brad Zelnick wrote ahead of the results.
Salesforce said growth in current remaining performance bonds, or contract sales, will slow to 10% in the current quarter ending July, below analysts’ average estimate of more than 11%. The company also repeated its forecast for the prior year that revenue would grow 10% to around $34.6 billion – by far its slowest rate of expansion on record.
The forecast involves a cautious view of customers’ information technology budgets, Bloomberg Intelligence analyst Anurag Rana wrote after the results. Failure to raise the annual sales forecast “could drive the stock lower in the near term,” wrote Citibank’s Tyler Radke.
The contract sales outlook is lower than estimates as clients seek smaller consulting projects, said Mike Spencer, executive vice president of investor relations at Salesforce. The pressure on revenue growth is due to general economic factors rather than company cost reductions, he said, and the forecast does not assume that customer behavior will improve or worsen.
Executives are betting interest in artificial intelligence could boost sales. “There’s only one thing customers want to talk about and that’s artificial intelligence — and specifically generative AI,” CEO Marc Benioff said on a conference call after the release of the results. results.
The company is working to integrate its generative and data integration tools into all of its products, said chief operating officer Brian Millham. “We are perfectly positioned to help our customers harness the phenomenal power of AI,” he said. The current revenue outlook doesn’t take into account any of the potential benefits of AI, Spencer said.
Like many of its peers, Salesforce has incorporated AI capabilities into its sales, marketing, and workplace communications programs. He also launched a $250 million venture capital fund for generative AI startups.
Salesforce’s profitability continues to climb. The company increased its already aggressive operating profit margin by 1 percentage point to 28% for the fiscal year ending in January. Millham said the company is focusing on employee productivity metrics, including back-to-office rules. Chief Financial Officer Amy Weaver said Salesforce compensates for stock-based compensation dilution through share buybacks.
In the fiscal first quarter, which ended April 30, revenue rose 11% to $8.25 billion, beating analysts’ average of $8.18 billion. Adjusted earnings were $1.69 per share, versus an estimate of $1.61. The operating margin is 27.6%. For the current quarter ending in July, sales will increase 10% to about $8.52 billion, the company said. Analysts estimated an average of $8.49 billion, according to data compiled by Bloomberg.
The quarter “represented another significant step forward as we accelerate our strategy for transformation and profitable growth,” Weaver said in the release.
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