Salesforce Q1 revenue missed estimates for the first time in years. Full-year guidance was cut, though margins improved. The AI and Data Cloud push has not yet moved the needle on deal velocity.
Salesforce missed Wall Street's revenue target for the first time in years, and the outlook for the current quarter fell short of expectations. The company reported fiscal first-quarter revenue of $9.82 billion, up 8% from a year earlier but below the $9.91 billion consensus compiled by Bloomberg. Adjusted earnings per share of $2.44 beat the $2.37 estimate, helped by cost controls and a slower pace of hiring.
Shares fell 4% in after-hours trading Wednesday.
The miss was concentrated in the professional services and other revenue line, which came in at $629 million versus the $720 million analysts had modeled. Subscription revenue, the core of the business, grew 9% to $9.19 billion – roughly in line with expectations.
"We delivered solid subscription revenue growth, but the services miss was a surprise," Chief Financial Officer Amy Weaver said on the earnings call. She attributed the shortfall to "timing of certain consulting engagements that slipped out of the quarter."
For the current quarter, Salesforce forecast revenue of $10.0 billion to $10.05 billion. Analysts were looking for $10.12 billion. The company also trimmed its full-year revenue forecast to a range of $40.5 billion to $40.7 billion, down from the prior $40.7 billion to $41.0 billion. The full-year adjusted operating margin forecast was unchanged at 20%, which implies continued cost discipline.
Salesforce's current remaining performance obligations – a measure of contracted but unbilled work – rose 10% to $26.4 billion, a deceleration from 14% growth in the prior quarter. The metric, watched closely as a signal of future revenue, missed the $27.1 billion consensus.
The Guidance Reset
The lowered full-year forecast reflects slower deal velocity in the enterprise segment, particularly in large multinational accounts, Weaver said. The company is seeing longer sales cycles and smaller initial deal sizes as customers scrutinize spending. The trend is most pronounced in Europe and the Asia-Pacific region, where currency headwinds also weighed on reported revenue.
Salesforce is not alone in this. Rival Workday reported a similar pattern in its February quarter, and SAP flagged cautious enterprise spending in its April update. The common thread: companies are consolidating vendors and pushing for more measurable returns on software investments before committing to multiyear deals.
Weaver said the company is responding by emphasizing its Data Cloud and AI products – which carry higher average contract values – and by pushing consumption-based pricing for its Einstein AI platform. Those initiatives are too early to show in the numbers, she said.
Margin Story Holds, For Now
Operating margin in the quarter was 18.7% on an adjusted basis, up from 17.1% a year ago. The improvement came from slower hiring and a freeze on discretionary spending. Headcount fell 3% year over year, the fifth consecutive quarter of decline.
The margin beat was the one bright spot. The company is on track to hit its 20% target for the full year, Weaver said. But investors may start to question how much more cost can be wrung out without affecting growth. The headcount cuts have been concentrated in sales and marketing – the very functions that would normally be driving the deal volume the company is now missing.
Product and AI Bets
Salesforce has been repositioning its product set around its Data Cloud and Einstein AI, which it calls the "trusted AI" layer. The company said it has closed over 2,000 Data Cloud deals since the platform launched in 2022, but did not break out revenue from the product line. The AI features are largely embedded into existing subscriptions, making it hard for investors to measure adoption or incremental revenue.
Chief Executive Officer Marc Benioff said on the call that the company is "winning in AI" and that Einstein is being used by over 100,000 customers. He did not specify how many are paying for AI-specific add-ons versus using included features.
The Stock Setup
Salesforce shares trade at about 24 times forward earnings, a discount to the five-year average of 32 times. The stock is down 15% from its 52-week high.
The lowered guidance resets expectations lower, but the margin story offers a floor. The question for the rest of the year is whether the subscription revenue deceleration is a temporary pause or the start of a slower growth regime. The next quarter's results, due in August, will offer the first real test of whether the AI and Data Cloud push is converting into faster deal flow.
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