Salesforce Outlook Disappoints as AI Fails to Spark Growth

(Bloomberg) -- Salesforce Inc. provided an outlook for annual sales that fell short of estimates, suggesting new artificial intelligence features for its software have yet to spur growth. The shares declined about 4% in extended trading.

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Revenue will increase about 9% to as much as $38 billion in the year ending January 2025, the San Francisco-based company said Wednesday in a statement. Analysts, on average, estimated $38.6 billion, according to data compiled by Bloomberg.

Now that Salesforce has cut costs and improved profitability over the past year, investors have turned their attention to the company’s revenue growth, which has slowed as many corporations tightened their spending on software. Salesforce, like many technology companies, is investing in new artificial intelligence-based features to help spark sales of its customer relations management software. On Tuesday, it launched a copilot feature that uses generative AI to answer questions and create new content.

“It’s no secret that the key investor debate is whether Salesforce’s sustainable growth rate is double-digits+ or single-digits,” wrote Rishi Jaluria, an analyst at RBC Capital Markets, in a note before the results were released.

The shares fell to a low of $278.61 in extended trading after closing at $299.77 in New York. The stock is up 83% over the past 12 months as the software giant pleased Wall Street by rapidly expanding margins.

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Salesforce introduced an outlook for subscription and support revenue — expected to rise more than 10% in fiscal 2025 — in order to communicate that the bulk of its business is still growing at double digits, said Mike Spencer, executive vice president of investor relations. “That’s even before AI,” Spencer said, noting that the uptick from the new features would take longer to appear in results.

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Adjusted operating margin will be 32.5% in the fiscal year, the company said. That’s better than the 31.4% margin anticipated by Wall Street. Expansion of the metric is possible even as the company spends on AI due to “continued cost discipline,” wrote Tyler Radke, an analyst at Citigroup Inc., ahead of the results. Last month, Salesforce cut about 700 workers as part of its ongoing focus on trimming costs.

The company also announced its first quarterly dividend of 40 cents a share payable on April 11 to shareholders as of March 14. Salesforce also increased its share repurchase program by $10 billion to a total of $30 billion.

The company also is tweaking sales methods and prices. It replaced some online product bundles this week with higher-priced options, according to archived copies of its website hosted by the Wayback Machine. Price increases — like the one announced in July 2023 — can help buffet growth in 2024, wrote BMO Capital Markets analyst Keith Bachman.

In the fiscal fourth quarter ending Jan. 31, revenue increased 11% to $9.29 billion. Profit, excluding some items, was $2.29 per share. Analysts, on average, estimated profit of $2.27 a share on revenue of $9.22 billion. Salesforce reported an adjusted operating margin of 31.4%, in line with estimates.

(Updates with comments from executive in the sixth paragraph.)

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