CRM giant Salesforce's focus on margins sees sales growth slip
After activist investor pressure and job losses, professional services projects struggle
Salesforce has disappointed the markets as it failed to lift its revenue forecast and saw professional services projects stall.
The CRM giant reported revenue of $8.25 billion for the first quarter ended 30 April, up 11 percent year-on-year and a little higher than market expectations of $8.18 billion.
Meanwhile, the San Francisco-based biz offered Q2 revenue guidance of between $8.51 and $8.53 billion and FY24 revenue guidance of $34.5 billion to $34.7 billion, both up around 10 percent year on year.
While forecast second-quarter revenues beat analysts' expectations, investors unhappiness was registered when shares fell slightly in after-hours trading yesterday, having risen sharply since the beginning of the year.
It has been a troubled 12 months for the erstwhile SaaS pioneer. In January, it announced layoffs amounting to 10 percent of its circa 73,000 workforce, blaming over-hiring during the lockdown years of the COVID-19 pandemic. At the same time, Elliott Management revealed it had acquired a stake in Salesforce. It has since been joined by four more activist investors, including Third Point Capital, Mason Morfit's ValueAct, Jeff Ubben's Inclusive Capital, and Dan Loeb's Third Point. Their interest put a spotlight on Salesforce's bottom line.
As we've previously noted, Salesforce was understood to have come under pressure to improve margins closer to the industry-leading figures of 40 percent and above enjoyed by Microsoft and Oracle. Salesforce currently records margins of 20.4 percent and has set a target of 25 percent operating margin.
For the quarter ended 30 April, Salesforce hiked operating margins upwards to around 27.6 percent. This was was boosted by restructuring, it admitted in the results.
While operating profit margin improved and it got a reprieve from activist investors, the focus has shifted to revenue.
Future revenue under contract ended Q1 at $46.7 billion, up 11 percent year-over-year while current remaining performance obligation ended at $24.1 billion, up 12 percent year-over-year. Bloomberg Intelligence's Anurag Rana told Bloomberg Television the figures showed orders were going to be decelerating slowly.
Meanwhile, revenue from professional services is suffering.
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President and chief operating officer Brian Millham said: "Customers continue to scrutinize every deal, and we see elongated deal cycles and deal compression, particularly in our more transactional revenue streams like SMB, create and close, and self-serve.
"Also in Q1, our professional services business started to see less demand for multi-year transformations, and in some cases delayed projects as customers focused on quick wins and fast time to value."
CFO Amy Weaver said she expected the more measured buying behavior and weakness in professional services business to persist.
Analyst firm Megabuyte said the slowing of professional services was more of "a sign of the times than an immediate structural concern."
It reflects the appeal of smaller projects as CTOs and CIOs focus more on quicker projects with faster returns on investment. "As such, this has been partly offset by increased demand for Salesforce's efficiency-focused products," Megabuyte said. ®