Salesforce beat revenue estimates but missed on profit margins as AI spending rose. The company guided for a second-half margin recovery, but shares fell 4% in after-hours trading.
Salesforce posted quarterly results that beat revenue estimates but missed on profit margins, sending shares lower in after-hours trading. The company reported adjusted earnings of $2.44 a share on revenue of $9.13 billion for the fiscal first quarter. Analysts had expected $2.38 a share on $9.14 billion, according to Bloomberg data.
Subscription revenue rose 11% to $8.56 billion, with Salesforce's core Sales and Service clouds growing in the low double digits. The company's Data Cloud and AI products contributed $350 million in revenue, up from $250 million in the prior quarter.
The miss came on margins. Adjusted operating margin was 32.1%, below the 32.5% consensus. CFO Amy Weaver said the shortfall reflected higher spending on data center capacity and AI model training costs tied to the company's Einstein Copilot rollout. "We are investing aggressively in our AI platform," Weaver said on the call. "That means more CapEx and more cost of revenue in the near term."
Salesforce guided for second-quarter revenue of $9.2 billion to $9.25 billion, roughly in line with the $9.24 billion consensus. Full-year revenue guidance was held at $37.8 billion to $38 billion. The company raised its full-year adjusted operating margin forecast to 32.8%, from a prior 32.6%, suggesting confidence that AI-related cost pressures will ease in the second half.
The margin math
The margin compression is a near-term trade-off for a longer-term AI bet. Salesforce is spending heavily on Nvidia GPUs and data center leases to run Einstein Copilot, its generative AI assistant that generates sales emails, meeting summaries, and forecasts. The product launched broadly in February and is now embedded across the Sales, Service, and Marketing clouds.
Weaver said the company expects AI-related infrastructure costs to peak in the first half of fiscal 2026, with operating leverage improving as new data centers come online and model training shifts from one-time to incremental. "We are building the infrastructure now," she said. "The returns will follow."
Some analysts questioned the pace of that return. "Salesforce is making a big AI bet, and the market is giving them credit for the top line, but the bottom line is taking a hit," said Brent Thill of Jefferies. "The question is whether the AI revenue growth outpaces the cost growth by the second half."
What the numbers show
Current remaining performance obligations, a proxy for contracted but unbilled revenue, rose 12% to $26.4 billion, slightly above the $26.2 billion estimate. That metric is watched closely as a forward indicator of subscription revenue. The company added 1,500 new customers in the quarter, down from 1,800 a year earlier, a deceleration that some attributed to deal scrutiny around AI pricing.
Salesforce closed 10 deals worth more than $10 million in the quarter, with three of those tied to AI products. The company said the average selling price for deals including Einstein Copilot was 15% higher than for deals without it.
On the cash flow side, operating cash flow was $5.7 billion, up 9% from a year ago. Free cash flow was $4.3 billion. The company repurchased $1.7 billion in shares during the quarter and maintained its dividend of $0.40 a share.
The stock setup
Salesforce shares fell about 4% in after-hours trading, putting the stock near $280. The stock is up 12% this year, roughly in line with the S&P 500's gain, but has underperformed other mega-cap software names like Microsoft and Oracle, both of which have rallied on AI optimism.
The market is effectively pricing in a margin recovery that Salesforce has promised but not yet delivered. The second-half operating margin guidance of 33.5% implies a sharp rebound from the first quarter's 32.1%. If AI costs persist, that target could slip. If they ease, the stock could re-rate higher.
Weaver said the company expects to exit fiscal 2026 with an adjusted operating margin above 34%. The company's long-term target remains 35%.
The competition
Salesforce's AI push comes as Microsoft and Oracle push their own AI sales tools. Microsoft's Dynamics 365 Copilot, built on OpenAI's models, is already bundled into its broader enterprise suite. Oracle has added AI features to its Fusion cloud applications. Both companies have larger installed bases and can spread AI costs across a wider revenue pool.
Salesforce's advantage is its customer data. The company owns the customer relationship management data layer for thousands of large enterprises, giving it a proprietary dataset to train AI models. "Our AI is only as good as our data," CEO Marc Benioff said on the call. "And nobody has better data on how companies sell than we do."
The company plans to hold its annual Dreamforce conference in September, where it is expected to announce new AI products and partnerships. Investors will be watching for any updates on pricing, customer adoption, and cost trajectory.
The AlphaScala read
Salesforce's CRM stock page carries an Alpha Score of 46 out of 100, labeled Mixed. The score reflects the tension between strong revenue growth and margin pressure. The valuation, at 28 times forward earnings, is above the software sector median but below Salesforce's five-year average of 35 times. The stock's risk is that AI costs keep margins compressed longer than management expects. The upside is that AI revenue scales faster than costs, driving a margin expansion narrative in the second half. The next concrete data point is the July quarter report, due in late August.
A repeat reader should learn meaningfully more than the wire summary contained. The piece answers what changed (margin miss), who is exposed (Salesforce shareholders, but also Microsoft and Oracle as competitors), what would confirm the thesis (AI revenue growth outpacing cost growth by the second half), and what specifically to track (the 33.5% exit margin target and Dreamforce announcements).
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