Salesforce 2.0 benefits will download soon enough
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Pranav Kiran
TORONTO, May 30 (Reuters Breakingviews) -Salesforce CRM.N shareholders are struggling to process the latest updates. The software developer lost a fifth, or nearly $50 billion, of its market value on Thursday, a day after it flagged that upcoming quarterly revenue and profit would fall below what analysts were anticipating. In time, however, the program will run smoother.
The company, whose products help clients manage the relationships with customers, is no longer the growth juggernaut it used to be. Its top line expanded by about 21% on a compounded basis between 2015 and 2024, but the rate is expected to halve over the next three years, according to LSEG data. Instead, the biggest operator in its industry by market share will keep seeking ways to improve profitability. Rabidly chasing more revenue probably would eat into margins.
Boss Marc Benioff seems to appreciate the benefits of such a strategic shift, after some prodding from pushy investors, including Elliott Investment Management. Although Salesforce doubled revenue through the pandemic to about $40 billion, customers are now spending less freely amid stubborn inflation and higher interest rates. Attention also has rapidly swung to all things artificial intelligence. Salesforce now expects its adjusted operating margin to reach nearly 33% in the year through January 2025, 10 percentage points higher than just last year.
This fresh focus has yet to catch on with investors, however. Salesforce shares trade at nearly 16 times anticipated EBITDA over the next 12 months, according to data from LSEG. The multiple is a premium to Oracle's ORCL.N approximately 14 times, but German peer SAP SAPG.DE – whose customers are probably a little stickier – trades at 22 times.
It’s easy to be skeptical about the new direction. Benioff splurged more than $50 billion on pricey acquisitions that delivered at best mixed results. At one point, the company even paid actor Matthew McConaughey more than $10 million a year to be a “creative adviser,” according to the Wall Street Journal. It has since slashed jobs, pulled back on M&A and returned capital to shareholders. And despite the disappointing quarterly figures, Salesforce hasn’t changed its annual revenue outlook. It may be taking a while to download, but this new version looks promising.
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CONTEXT NEWS
Salesforce shares tumbled 20% to around $217 apiece in morning trading on May 30, a day after the software developer delivered sales and earnings outlooks that fell short of what analysts had been expecting.
The company said on May 29 that its revenue would be about $9.2 billion to $9.3 billion in the second quarter compared with the approximately $9.4 billion anticipated by analysts, according to estimates compiled by LSEG. Salesforce added that adjusted earnings per share would be between $2.34 and $2.36 during the three-month stretch ending July 31, compared with estimates of $2.40.
Salesforce maintained its annual revenue forecast of between $37.7 billion and $38 billion, up 8% to 9% from the company’s previous fiscal year, which ends Jan. 31.
For the quarter ended April 30, it reported revenue of $9.1 billion, 11% more than a year earlier, but below the $9.2 billion that analysts had forecast.
Editing by Jeffrey Goldfarb and Sharon Lam
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