Salesforce Inc. executives predicted record adjusted earnings in the second quarter and increased their guidance for record profit for the full year Wednesday, but shares still declined about 6% in after-hours trading.
Salesforce
CRM,
has easily been the biggest gainer among Dow Jones Industrial Average
DJIA,
components this year, increasing more than 65% amid a wave of activist-investor activity and Chief Executive Marc Benioff’s pivot from focusing on revenue growth to expanding profit margins with layoffs and other cost cuts. The change in strategy has arrived after a pandemic revenue surge dissipated, as corporate customers look to moderate their spending on cloud software.
Benioff countered concerns about long-term revenue growth three months ago by promising record annual earnings more than 35% higher than Salesforce’s previous all-time mark. On Wednesday, he boosted that view, and predicted record quarterly earnings in the current period.
Executives guided for second-quarter adjusted earnings of $1.89 to $1.90 a share on revenue of $8.51 billion to $8.53 billion, and increased their full-year adjusted-earnings forecast to range of $7.41 to $7.43, after guiding for $7.12 to $7.14 three months ago. Analysts on average were expecting second-quarter adjusted earnings of $1.70 a share on revenue of $8.5 billion, according to FactSet. Salesforce has never reported adjusted earnings higher than $1.74 a share, according to FactSet records.
Benioff is promising record profit even as the outlook for corporate spending has suffered, according to analysts.
“Customers are taking a more measured approach to spending plans over the next two years compared to the last two, with nearly 90% of survey participants planning to maintain or slow the growth rate of their Salesforce relationship,” Stifel analysts wrote late last week regarding a survey of Salesforce customers, while maintaining a $240 price target and buy rating. “While margin expansion and cash flows remain the key focus of investors in the near term and we anticipate upside to expectations in F1Q, we believe the long-term growth potential of the business will once again enter the spotlight as we progress through the year.”
Salesforce reported a fiscal first-quarter profit of $199 million, or 20 cents a share, on sales of $8.25 billion, up from $7.41 billion a year ago. After adjusting for stock compensation, restructuring and other costs, the cloud-software company reported earnings of $1.69 a share, up from 98 cents a share a year ago.
Analysts on average were expecting adjusted earnings of $1.61 a share on sales of $8.18 billion, according to FactSet. Shares declined more than 4% in after-hours trading immediately following the report, after a 2.1% increase to $223.48 in the regular session.
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A major question ahead is whether Salesforce will continue to cut costs, including more layoffs. After smaller rounds of layoffs last year, Benioff took the blame for over-hiring during the COVID-19 pandemic while axing roughly 8,000 workers in January, but analysts have still pondered whether more cuts would be on the way to get to the Salesforce co-founder’s ambitious profit goals.
“In terms of cost-cutting, we are seeing a slowdown in overall activity as we believe the vast majority of the culling is now in the rear-view mirror as the margin story takes hold, and Salesforce is now in a balanced position of growth and profitability, we believe,” Wedbush analyst Dan Ives wrote in a preview of the earnings last week, while maintaining a buy rating and increasing his price target to $230 from $220.
This story originally appeared on Marketwatch
