Salesforce earnings: Is another cut to the outlook in store?

By Emily Bary

Analysts are split on whether Salesforce will make a further cut to its subscription revenue outlook when it reports earnings Wednesday

Salesforce Inc. reduced its subscription revenue outlook when it last reported earnings. Is another cut in store this week?

Analysts are split on what Salesforce (CRM) will do when it posts fiscal second-quarter earnings on Wednesday afternoon. The company's most recent outlook for subscription and support revenue called for fiscal 2025 growth that was slightly below 10%, or growth coming in at 10% on a currency-neutral basis.

Evercore ISI's Kirk Materne anticipates strong results from Salesforce for the latest quarter, but he thinks a cut to the second-half forecast might be reasonable.

Buy-side investors, he notes, are already anticipating roughly 8% to 9% growth for the fiscal year, so "seeing a modest cut to [second-half] guidance would make some sense, especially when offset by a small raise to the [fiscal-year operating-margin] guidance."

That combination "would likely drive more buy-side interest in shares coming away from the print," Materne added.

See also: Workday follows Salesforce's lead with increased margin focus

Guggenheim analyst John DiFucci also thought a further guidance reduction would be sensible, but he wasn't so sure it will happen.

Salesforce "lowered guidance last quarter, so they likely won't this quarter, though they probably should," he wrote. "Consensus [fiscal 2025] subscription revenue growth estimate of 9.8% implies a significant increase in business momentum, which seems unlikely given the uninspiring partner survey and channel checks in the quarter."

His industry conversations "suggested pressure on renewals, continued weakness in Europe and early traction in Einstein, while Data Cloud is lackluster."

On the plus side, "Salesforce can still probably continue to increase profit metrics over time, as there's likely still room to wring inefficiencies out of this model," DiFucci wrote.

UBS's Karl Keirstead was also doubtful that Salesforce would lower its outlook again, even in light of a "still-tough spending backdrop that may have become modestly tougher over the last several months."

He spoke to Salesforce partners as well and found mixed results from these checks, with two partners slightly missing their Salesforce targets and one exceeding them.

"The rationale for concluding that these checks sounded a shade worse was the language about recent demand trends, as one partner said that [July/August] was a touch worse, another cited a worsening spend environment and another called out a June-quarter slowdown," Keirstead wrote. "This sounds like incremental weakness, not stabilization."

But Keirstead didn't come away with "a consistent view that Salesforce will trim its [fiscal 2025 revenue] guide," so he and his team "default to a view that a reaffirm is expected."

Jefferies analyst Brent Thill said investors "fear whether [the] top line could be reset due to a challenging environment," and he got a "sluggish" read from his partner checks, too.

More positively from a short-term perspective, Salesforce faces its easiest comparisons of the year when it comes to fiscal second-quarter numbers, Thill said.

"We expect updates on the demand environment, AI/Data Cloud adoption within customer base and commitment to giving more margin upside," he added.

Analysts expect $2.35 in adjusted earnings per share for Salesforce's fiscal second quarter, up from $2.12 in the year-earlier period. The FactSet consensus calls for $9.22 billion in overall revenue, up from $8.60 billion a year before. Subscription and support revenue is anticipated to come in at $8.68 billion, versus $8.01 billion a year prior.

Salesforce has beaten expectations on adjusted EPS in every quarter going back at least five years, according to data from FactSet. The only revenue miss in that span is the 0.2% shortfall seen with the April-quarter report.

Shares of Salesforce are essentially flat on the year. The company's last earnings report ushered in the sharpest one-day drop for Salesforce's stock in two decades.

-Emily Bary

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08-27-24 0702ET

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