Salesforce reported fourth-quarter revenue of $10.0bn, up 9% ignoring currency moves. Within that, Subscription & Support revenue grew 9% to $9.5bn. Strong cost discipline drove adjusted operating profit up 14% to $3.3bn.
Free cash flow rose 17% to $3.8bn. Net cash, including leases, stood at $2.6bn at the end of the period. The company returned $7.8bn to shareholders through buybacks and paid out $1.5bn in dividends over the full year.
For the first quarter of the new year, Salesforce expects revenue growth of 6-7% to $9.71-$9.76bn. Full-year guidance for the coming year points to revenue growth of 7-8% to $40.5-$40.9bn.
The shares were down 4.8% in pre-market trading.
Our view
Despite hitting underlying operating income targets, revenue growth chugged along at a modest rate and guidance for the next quarter and full year came in lighter than hoped.
Having spent the past year or two rightsizing the business, costs are in a much better position and the benefits are being felt on both the profit and cash flow lines. This was a necessary process, but focus now rightly turns to top-line growth.
The tricky macroeconomic environment is one of the reasons for the slowdown in sales growth, which is now trending around the high single digit mark compared to the mid-twenties seen a few years ago. Businesses are still being selective with their software spend.
There are two major levers for growth from here. Firstly, through better bundling of its cloud products and improved use of its treasure trove of data. There’s a very clear correlation between annual recurring revenue per customer and the number of cloud products they adopt. The trick is to ensnare customers so deep into the ecosystem that it becomes very hard to ever leave. Salesforce, with its huge breadth of interlinked products from sales and marketing to customer service, is well-placed to do just that.
Artificial Intelligence (AI) is the other major growth lever, and the newly launched Agentforce platform allows customers to build AI agents that can work alongside humans to analyse data, make decisions, and take actions autonomously.
Salesforce is saying all the right things when it comes to AI agents, and 3000 new paid AI deals is a promising start. But with around 150,000 customers and guidance pointing to another year of slowing growth (albeit only marginally), these deals aren’t dial movers just yet. We think it’s a matter of time, and investors will need a bit of patience.
Cost controls mean cash flow is not only healthy, but rising at a decent clip. The balance sheet has plenty of wiggle room too, giving scope to support ongoing buybacks, a recently introduced dividend, and acquisitions. As ever, nothing is guaranteed.
Salesforce has a great product range, with a wide array of data and growth levers to pull. The valuation doesn’t look too demanding to us on a long-term view. But after a period of getting fit, it needs to deliver on its promise of an AI agent driven acceleration of top-line growth, which may not come this year.
Environmental, social and governance (ESG) risk
The technology industry is low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Historically the sector has flown under the radar when it comes to regulatory oversight, but more recently we’ve seen regulators keen to get involved given the high-profile of some of the “big tech” names. Other key risk drivers include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Salesforce’s management of material ESG issues is strong.
Salesforce’s nominating and corporate governance committee periodically reviews the company’s ESG initiatives, while its cybersecurity team conducts regular assessments and operates 24/7 for incident response. The company also conducts annual employee surveys, runs an apprenticeship program. There’s also an audit committee overseeing compliance and ethics, supported by a third-party hotline for anonymous reporting.
Salesforce key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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