Salesforce.com Inc. is expected to have a much more subdued earnings report in the coming week as fear of a recession and inflation, as well as COVID shutdowns in China and the war in Ukraine, are prompting businesses and governments to cut back on capital spending.
is scheduled to report fiscal first-quarter results Tuesday after the close of markets.
Last quarter, the company topped $7 billion in annual revenue for the first time, and Salesforce Chairman and Co-Chief executive Marc Benioff and Co-Chief Executive Bret Taylor could not say enough about how Slack Technologies had “transformed” the company and continued “to exceed our expectations in every way.”
But, Salesforce has an April-ending quarter, which has proved a major headwind for companies like Cisco Systems Inc.
and Nvidia Corp.
that companies with March-ending quarters ducked in reporting earnings. Chinese authorities locking down Shanghai and other cities over COVID concerns on March 27 are exacerbating already challenging supply-chain issues, while the invasion of Ukraine amounts to lost revenue from Russia.
A possible canary in the coalmine was Workday Inc.
which reported this past week, and the human resources cloud-software company’s shares were punished, after a miss on earnings and an improved outlook, which did little to impress Wall Street, and that doesn’t appear to bode well for Salesforce, according to some analysts.
“The elephant in the room for many tech and software investors remains an eventual slowing macro and earnings growth backdrop will result in global enterprise tech spending slowing, including more [enterprise resource planning], [human capital management] and financials related software,” said Mizuho analyst Jordan Klein in a Friday note. “If that occurs, few, if any, bigger software companies would be immune.”
“Investors need to hear from Salesforce next week and eventually Oracle
to learn more on whether the Workday slowdown start of a trend or really company specific,” Klein said.
While unrelated to earnings, expect Benioff to address a Thursday report that more than 4,000 Salesforce workers have signed an open letter, demanding the company dump the National Rifle Association as a customer after last week’s elementary school shooting in Uvalde, Texas that killed more than 20, right before the gun-rights lobbying group kicked off its annual convention during Memorial Day weekend in Houston.
What to expect
Earnings: Of the 39 analysts surveyed by FactSet, Salesforce on average is expected to post adjusted earnings of 94 cents a share, down from the $1 a share expected at the beginning of the quarter, and up the 70 cents a share from a year ago. Salesforce forecast 93 cents to 94 cents a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 99 cents a share.
Revenue: Wall Street expects revenue of $7.38 billion from Salesforce, according to 35 analysts polled by FactSet. That’s up from the $7.27 billion forecast at the beginning of the quarter, and $5.96 billion from a year ago. Salesforce predicted revenue of $7.37 billion to $7.38 billion. Estimize expects revenue of $7.43 billion.
Stock movement: Over the company’s fiscal quarter, Salesforce shares dropped 24%, while the iShares Expanded Tech-Software Sector ETF
fell 16%, the S&P 500 index
declined 8.5%, the tech heavy Nasdaq Composite Index
fell 13%, and the Dow Jones Industrial Average
— of which Salesforce is a component — slid 6%.
Over the past five quarters, Salesforce has never failed to top the Wall Street consensus for both earnings and revenue. How the stock moves the next day is a coin toss as quarters it has gone up and gone down after earnings are reported is split at 10 apiece.
What analysts are saying
Jefferies analyst Brent Thill, who has a buy rating and a $260 price target, said his survey of Salesforce customers indicates they “have lowered growth expectations to 10-15% due to macro storm.”
“Given the tough setup heading into the Q, expectations are low,” Thill said.
Thill said 73% of the customers he polled “expect a stabilization in growth,” while 27% “expect to see an acceleration versus 46% last Q.”
“We believe this indicates that demand expectations for ’22 might have softened given the macro headwinds,” Thill said.
Citi Research analyst Tyler Radke, who has a neutral rating and a $182 price target, said he’s remaining on the sidelines on the stock as “a weakening economic backdrop, normalization of front-office spending and higher risk of M&A could keep shares range bound near term.”
“Our quarter-end inputs suggested growth rates generally consistent with last Q, but with weaker Marketing Cloud demand, and some continued sluggish Mulesoft trends,” Radke said. “With softer seasonality and incremental FX headwinds that aren’t always clearly quantified in the outlook, we anticipate Q1 results to reflect a smaller beat with little room for upside on the guidance, with most metrics set to decelerate given the lapping of the Slack acquisition,” Salesforce closed on its acquisition of Slack on July 21.
Wedbush analyst Daniel Ives, who has an outperform rating and $225 price target on the stock, said in his worst case scenario Street estimates for 2023 come down “by less than 10%.”
“If the enterprise world is starting to soften spend, cut front end sales jobs, and see less deal activity one of the first companies to see cracks in the armor will be Benioff & Co.,” Ives said. “To this point, while the Street will go conservative on Salesforce’s model through 2023, we believe so far deal flow and pipeline activity has held up well for the company which should be a good barometer of current enterprise spending despite macro worries.”
Cowen analyst Derrick Wood, who has an outperform rating and a $225 price target, said his checks were “somewhat mixed but generally constructive.”
“Our survey w/ 20+ partners suggests a solid 1Q performance in its commercial business,” Wood said.
“Our gov’t due diligence points to bookings down ~10% Y/Y (vs. +15% last qtr) but 1Q is the smallest gov’t qtr.,” Wood noted. “Our field checks point to a very large contract closing w/ a top customer, but we also think this year generally has a softer book of renewal business vs. last year.”
Of the 48 analysts who cover Salesforce, 43 have buy-grade ratings and five have hold ratings, with an average target price of $264.46, according to FactSet data.