Salesforce Posts Better-Than-Expected Q2 Results, Opening Room for Upside?

Second-quarter revenue reached $9.33 billion, surpassing the market forecast of $9.23 billion. The operating margin hit a record high, with an adjusted operating margin of 33.7%, up 210 basis points from the same period last year, compared to analysts' expectations of 32%.

Bloomberg Intelligence analyst Anurag Rana noted that the results show signs of stabilization and slight improvement, which is a positive indicator in a challenging software procurement environment. "Currently, traditional software businesses face greater pressure as customers allocate more funds towards purchasing GPUs," the chips that power artificial intelligence.

The company's stock reached a record high in early March 2024. However, amid a challenging economic environment, clients reduced IT spending to cut costs, resulting in first-quarter fiscal 2025 earnings that fell short of expectations for the first time since 2006. The stock plummeted nearly 20% the next day.

Management blamed temporary headwinds and upheld its full-year revenue forecast of $38 billion. Ahead of the second-quarter earnings report, the stock rebounded about 12% to approximately $260, reflecting increased market confidence in Salesforce's positive outlook.

Salesforce is undeniably the leader in the CRM market, with over 90% of its revenue derived from SaaS subscription fees. According to an IDC report, it held a 21.7% share of the CRM market in 2023, ranking first for 11 consecutive years, surpassing the combined market share of the second to fifth-ranked competitors.

Prior to fiscal 2023, Salesforce maintained rapid growth, with a CAGR of 32% from FY2005 to FY2022. From 2005 to early 2022, its stock price surged more than 60-fold.

Revenue growth for Salesforce decelerated to below 20% in Q3 FY2023 and further slowed to 8% in Q2 FY2025. The stock has seen significant volatility since early 2022, resulting in nearly flat returns.

Salesforce's management has forecasted a 9% growth for its current remaining performance obligation (cRPO) in Q3 FY2025, down from Q2. The cRPO, encompassing deferred revenue and order backlog, is a key forward-looking revenue indicator. In Q2 FY2025, Salesforce's cRPO stood at roughly $26.5 billion, marking a year-over-year increase of about 9.96% and a sequential rise of 42 basis points, surpassing analysts' expectations.

As sales growth slows, the market's focus has shifted to the company's profitability and various AI initiatives.

"Profitability has become fully the focus for Salesforce over the last six quarters," said Third Bridge analyst Charlie Miner. "You can't miss there right now, especially when sales growth is decelerating into the single digits, which is only the second time in their company history."

TD Cowen analysts said last week that after years of rapid development and dominating the data cloud market, Salesforce is entering a mature growth phase, emphasizing profit margins and cost control.

Salesforce Co-Founder and CEO Marc Benioff revealed in an earnings call that the company is set to launch Agentforce, an AI sales agent that surpasses chatbots in functionality and can address customer inquiries. More details are expected at the highly anticipated Dreamforce conference in September.

According to Yahoo Finance, Benioff expects 1 billion agents to be using the service by the end of fiscal year 2026. The service, which will be priced based on conversation volume, is projected to be highly profitable.

Wedbush analyst Dan Ives noted in a client report: "One of the biggest initiatives in the field is around monetizing the AI theme within Salesforce's massive installed base. We believe this is a major land grab opportunity that could significantly benefit Salesforce over the coming years and could increase overall revenue by $4 billion+ annually based on our estimates and field work by 2025."

"Salesforce is one of a few enterprise software suppliers that is well positioned for future top line AI monetization," wrote Oppenheimer's Brian Schwartz in a preview note last week.