Salesforce Earnings: Cloud Slump Weighs on Growth Outlook

Salesforce reported quarterly results that missed revenue estimates, sending shares lower in extended trading. The company cited slower cloud spending and longer deal cycles across its enterprise customer base.

Revenue for the fiscal second quarter came in at $9.25 billion, below the $9.35 billion analysts had expected. Adjusted earnings per share of $2.45 beat the $2.40 consensus, but the top-line miss overshadowed the profit beat.

The company's subscription revenue, which makes up most of its sales, grew 9% from a year earlier. That is the slowest growth rate in five quarters. CFO Amy Weaver told analysts that customers were taking longer to close large deals and that some were trimming the scope of new implementations.

"We are seeing customers pause on larger commitments and extend their evaluation cycles," Weaver said on the earnings call. "The cloud environment is more measured than it was a year ago."

Salesforce's guidance for the current quarter also disappointed. The company projected revenue of $9.1 billion to $9.2 billion for the fiscal third quarter, below the $9.4 billion analysts were looking for. Full-year revenue guidance was cut to $37.7 billion to $38.0 billion, down from a prior range of $38.0 billion to $38.3 billion.

The slowdown was most pronounced in the company's Salesforce Platform and Mulesoft businesses, two areas that had been growth drivers in previous quarters. Data Cloud, the company's newer data analytics product, continued to see strong adoption but was not enough to offset weakness elsewhere.

Operating margins came in at 19.8%, slightly ahead of the 19.5% analysts expected. The company has been pushing for margin expansion through cost cuts and hiring freezes, but the revenue slowdown limited the improvement.

Analysts reacted to the results with downgrades. "The revenue trajectory is softening faster than the Street expected," wrote Keith Weiss of Morgan Stanley in a note to clients. "The margin story is intact, but the growth story is under pressure."

Salesforce's stock fell 6% in after-hours trading. The decline erased gains from earlier in the session when the broader market rallied. The stock had already fallen 12% this year before the earnings report.

The company's CRM stock page now carries an Alpha Score of 61 out of 100, a Moderate label that reflects the twin pressures of slowing revenue and shrinking margins.

Weaver said the company expects the cautious spending environment to persist through at least the end of the calendar year. "We are not seeing a broad recovery in the second half," she said. "We are managing the business accordingly."

Salesforce has been under investor pressure to improve profitability. Activist investors have pushed for larger cost cuts and stock buybacks. The company has responded with job cuts and a renewed focus on margin expansion, but the revenue slowdown has made those efforts harder to sustain.

Some analysts see the current weakness as a buying opportunity. "The stock is pricing in a recession that may not materialize," said Mark Murphy from J.P. Morgan. "Salesforce's recurring revenue model and strong cash flow give it a floor."

Others are more cautious, pointing to the company's heavy reliance on large deals that can be delayed or canceled in uncertain economic conditions. "This is not a product problem. It's a macro problem," said Brent Thill of Jefferies. "But macro problems take time to resolve."

The company's stock market analysis page tracks these competing views against the broader software sector's performance.

Salesforce said it still expects to generate $12 billion in operating cash flow this fiscal year. The company also announced a new $10 billion share buyback authorization, up from an earlier $5 billion program.

The next catalyst for the stock will be the fiscal third-quarter results, due in late November. Until then, the debate between bulls and bears hinges on whether the cloud spending slowdown is temporary or structural.