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Salesforce Earnings: Slowing Growth and Risk of More Disappointment Ahead

Lowering fair value estimate on Salesforce stock; shares attractive.

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Morningstar’s Key Stats for Salesforce

What We Thought of Salesforce Earnings

We are lowering our fair value estimate for wide-moat Salesforce to $285 per share from $300 after the company reported lower-than-expected fiscal 2025 first-quarter revenue and guided for second-quarter revenue lower than we anticipated.

After robust fourth-quarter results, management pointed to macro trends reverting to where they have been for the last couple of years, with elongated sales cycles and more approvals factoring into guidance. While the second-quarter outlook was light, management maintained its full-year outlook, raising the possibility of further disappointment throughout the rest of the year. The firm had success during the quarter with multicloud deals, while management remains excited about the artificial intelligence opportunity, which we believe Salesforce is well positioned to capitalize on. We see the shares as attractive.

Sluggishness in the quarter was driven by weakness in Europe and several verticals, such as technology, retail, and consumer goods. Weakness in Europe and technology is a common thread in our software coverage. Revenue grew 11% year over year (11% in constant currency) to $9.133 billion, versus the midpoint of guidance of $9.145 billion. Subscriptions and professional services fell short of our model, with the former growing 12% and the latter contracting 9% year over year as customers continue to take on smaller projects. Data cloud and multicloud deals were strong, Canada and Japan were resilient, and the public sector and financials sector performed well in the quarter. Current remaining performance obligations grew 10% year over year but decelerated more than 250 basis points year over year and sequentially, which heightens the risk that achieving revenue growth objectives as the year progresses could be challenging.

Even With AI Investments, a Path for Continued Margin Expansion

While profitability remains a bright spot, we see a path for continued margin expansion even as the firm invests in AI innovation. Non-GAAP operating margin was 32.1% versus 27.6% a year ago.

Major restructuring actions from January 2023 continue to boost margins, but the internal cultural shift remains apparent, and we expect operational efficiencies and pricing to serve as tailwinds to margins over the next couple of years. That said, the second quarter will be the first comparison against a full quarter of restructuring benefits from a year ago, so we expect margin expansion to fall off the torrid pace we have seen recently.

Diving further into Salesforce’s revenue trends, we are encouraged by some pockets of strength, even as macroeconomic conditions delivered a gut punch this quarter. Management repeatedly noted strong client interest around AI and Data Cloud. On a year-over-year and constant-currency basis, Sales Cloud grew 11%, Service Cloud grew 11%, Platform grew 10% (including Slack), Marketing and Commerce Cloud grew 10%, and Data Cloud surged 25%. Relative to our model, Sales, Service, and Platform were all better than we expected, with Marketing and Commerce slightly light and Data notably weaker. Management does not provide detailed revenue guidance at the segment level. Revenue growth in the Americas was 11%, Europe was 9%, and Asia-Pacific was 21%, all on a constant-currency and year-over-year basis. Churn was stable at around 8%.

Salesforce Stock vs. Morningstar Fair Value Estimate

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Dan Romanoff, CPA

Senior Equity Analyst
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Dan Romanoff, CPA, is a senior equity research analyst on the technology, media, and telecommunications team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers software.

Before Joining Morningstar in 2019, Romanoff spent 12 years in buy-side equity research covering the technology and telecommunications sectors, most recently at Holland Capital Management. Prior to that, he spent five years in sell-side equity research as an associate analyst at UBS and a senior analyst at Credit Suisse covering various areas within technology, including hardware, software, and semiconductors. Romanoff also has worked as an auditor and in valuation services for major public accounting firms.

Romanoff holds a bachelor’s degree in accountancy and a Master of Business Administration in finance, both from the University of Illinois at Urbana-Champaign. He also holds the Certified Public Accountant and Accredited in Business Valuation designations.

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