Salesforce Projects Wider Profit Margins Despite Revenue Growth Slowdown

Mar 02, 2023
Business and growth concept.

Salesforce expects its profit margins to increase even as it battles a slowdown in revenue growth. The software provider for sales professionals has been battling a slowdown in sales growth for years averaging about 25%. The slowdown has been a bone of contention resulting in activist investors calling for massive changes in the management.

Salesforce Cost Cutting

In response to the revenue growth slowdown, the company has resorted to cost-saving measures to boost its profit margins. It has since resorted to trimming its wage bill by laying off some staff and paring some real estate costs. It has also increased scrutiny on spending.

In January, the company announced its largest-ever layoffs, cutting 10% of its staff, representing about 8,000 workers. It has also stopped nonessential travel targeting employees that don’t work directly with customers.

While the company has relied on mergers and acquisitions over the years to grow, it is abandoning the strategy. Consequently, it has disbanded its M&A committee as it moves to focus on efficiency. The transformation has been part of a two-year plan that is bearing fruit.

Salesforce President Brian Millham has already confirmed they are trying to make the company as efficient as possible. Part of the efficiency entails maintaining a smaller sales team in an effort that also involves pushing customers to self-serve options.

Improving Operating Margins

Amid the aggressive restructuring, Salesforce expects its operating margins for the fiscal year that started February 1 to increase to about 27% from 22.5% in the previous fiscal year. In addition, last year, the company announced plans to boost operating margins to 25% by 2026, up from 20% recorded in the previous years before 2022.

The better-than-expected operating margins outlook is the catalyst that continues to fuel investors’ sentiments on the stock. The stock rose by more than 16%, much of the losses accrued over the past 12 months.

Investors pushed the stock up the markets after it reported $8.38 billion in revenue for the three months that ended January, representing a 14% year-over-year increase. For the current fiscal year, Salesforce is projecting sales of between $34.5 billion and $34.7 billion, above consensus estimates of $33.89 billion and representing 10% year-over-year growth.

Nevertheless, the company posted a wider-than-expected net loss of $98 million from $28 million delivered in the same quarter last year. Billings, which reflects the business that Salesforce transacts every quarter, grew by 13% to $14.68 billion, above the consensus estimate of $13.74 billion.

Activist Investor Pressure

Despite the better-than-expected results, Salesforce remains under pressure from activist investors concerned about the slow revenue growth rate. The activists’ investors have been pushing for management changes after ramping up stakes in the company.

The activist investors have already pushed for adding three new directors to the board, including Mason Morfit, the CEO of ValueAct Capital. Mr. Morfit is accredited for making more aggressive measures that have led to significant margin targets.

Elliot Management, with a significant stake, is reportedly planning to nominate its own directors for the company. However, it is reportedly not preparing for a proxy battle but rather to pressure the management into making the necessary changes that will help improve the company’s results.