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Salesforce Q2 Earnings: Profitability Soars Despite Heavy AI Investments

Published 08/31/2023, 07:15 AM
Updated 07/09/2023, 06:31 AM
  • Salesforce shares surged following better-than-expected Q2 results
  • The company's top line is stabilizing and benefiting from earlier restructuring efforts
  • Salesforce achieved its profitability target ahead of schedule, positioning itself well for the AI-shaped future

Salesforce (NYSE:CRM) shares rose in early Thursday trade after the software maker offered a much better-than-expected outlook for this quarter and its fiscal year.

The Q2 results and guidance are likely to alleviate some investor concerns about the company’s ability to balance top-line growth and margin expansion.

Many concerns going into the quarter were associated with how margins and profit figures will look as Salesforce continues to invest in GenAI technology.

How Did CRM Perform in Q2?

Salesforce reported Q2 EPS of $2.12, easily topping the analyst estimate of $1.90. Revenue for the quarter came in at $8.6 billion, rising 11% year-over-year and beating the consensus estimate of $8.53 billion.

Subscription and support revenue jumped 12% YoY to $8.01 billion, while analysts were looking for $7.91 billion. Smaller business segment – Professional services and others – saw its sales come in at $597 million, an increase of 3% YoY and below the expected $618.9 million.

Remaining performance obligations rose 12% YoY to $46.6 billion, while current remaining performance obligation (cRPO), an important financial metric for software companies, also jumped 12% YoY to $24.1 billion.

cRPO is defined as the sum of deferred revenue and backlog that the company is obligated to deliver over the next twelve months.

Salesforce generated $810 million of cash from operations for Q2, marking a substantial increase of 142% YoY. Free cash flow was $0.63 billion, an increase of as much as 379% YoY.

Marc Benioff, Chair and CEO of Salesforce, said:

“Our transformation drove our strong second quarter results, delivering revenue of $8.6 billion and record GAAP and non-GAAP operating margins,”

“Based on our performance and what we see in the back half of the year, we’re raising our fiscal year ‘24 revenue, operating margin, and operating cash flow growth guidance."

Along these lines, CRM sees Q3 EPS in the range of $2.05-2.06 on revenue of $8.70-8.72 billion, topping the consensus for earnings of $1.83 per share on sales of $8.66 billion.

For FY24, the company sees EPS of $8.05 on revenue of $34.75 billion at the midpoint of the guidance, again topping the average analyst estimate for an FY profit per share of $7.45 on revenue of $34.65 billion.

Strong Profitability Despite Heavy GenAI Investments

With the investor focus on margins, Salesforce said its second-quarter operating margin stood at 17.2% while the adjusted operating margin was 31.6%, much higher than the expected 28.2%.

The company clarified that restructuring negatively impacted the Q2 operating margin by 50 basis points.

Still, Salesforce managed to meet its milestone for an adjusted operating margin of at least 30% three quarters earlier than expected, which is likely the key driver of the post-earnings stock run.

Profitability is now likely to sustain 30% levels for the remainder of this fiscal year given significant cost savings from the workforce restructuring implemented earlier this year.

In January, Salesforce said it will cut about 10% of its employees, which will lead to about $1.4 billion to $2.1 billion in charges.

Amy Weaver, President and CFO of Salesforce, said:

“We are accelerating our transformation and continue to drive strong shareholder value,"

Despite job cuts measured in thousands of positions, Salesforce said earlier this year that it will continue to implement its targeted hiring approach.

The company is forced to ramp up investments in AI as the tech sector transitions from general to accelerated computing.

CEO Benioff also said in the press release:

“As the #1 AI CRM, with industry-leading clouds, Einstein, Data Cloud, MuleSoft, Slack and Tableau, all integrated on one trusted, unified platform, we’re leading our customers into the new AI era,”

More precisely, Benioff spoke on the earnings call about AI now being the fifth priority for Salesforce. He even said that Salesforce “has pioneered AI, not just in predictive.”

The focus for the management is on translating Salesforce’s No.1 CRM position to being at the top of the AI CRM list. The AI push is now helping Salesforce become the third-largest enterprise software company by revenue in the world.

Earlier this year, Salesforce presented Einstein GPT, which was described as the world’s first generative AI for CRM. By leveraging GenAI technology, the product creates content for sales, services, marketing, IT, and other teams.

Einstein GPT is also integrated with other key Salesforce products, like Tableau, MuleSoft, and Slack. Salesforce is one of the biggest companies that partnered with ChatGPT developer OpenAI.

Benioff added:

“Salesforce is really well positioned with the future. And with this incredible technology, Einstein, that we've invested so much in and grown and integrated into our core technology base, we're democratizing generative AI, making it very easy for our customers to implement every job, every business, and every industry,”

In June, Salesforce announced it is doubling its $250 million Generative AI fund for startups to $500 million. The fund has already made several investments, including Hearth, You.com, Anthropic, Hugging Face, and Cohere.

Doubling down on Generative AI Fund enables Salesforce to invest in more AI-focused startups and ultimately accelerate the development of transformative AI solutions for enterprise clients.

***

Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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