Salesforce soars 8% as cost cutting shows its ‘brand new religion’ to increase profits

Chief Executive Officer Marc Benioff has pleased Wall Street this year by rapidly expanding profit margins, in part by eliminating positions. The company had a full-time workforce of 70,843 as of Oct. 31, an 11% decline from the period a year earlier. The job cuts were part of a restructuring earlier in 2023, though in September Salesforce said it would hire more than 3,000 new workers, seeking to capitalize on interest in artificial intelligence.

As part of its campaign to increase profit, Salesforce has focused on reducing expenses associated with sales and marketing. One way to cut those costs is by increasing self-service purchasing of its software. Last week, the company announced that its best-known products would be available to buy through the marketplace of Amazon.com Inc.’s cloud-computing unit, Amazon Web Services. That move “will help it reach new customers while reducing cost of sales,” wrote Rebecca Wettemann, principal analyst at Valoir.

In the current period ending in January, earnings, excluding some items, will be about $2.26 a share, the San Francisco-based software giant said Wednesday in a statement. Analysts, on average, projected $2.17. Revenue will be $9.18 billion to $9.23 billion, compared with analysts’ average estimate of $9.22 billion, according to data compiled by Bloomberg. Current remaining performance obligations, a measure of contracted sales, will increase about 10%, in line with estimates.

“They’ve found a brand new religion in terms of higher operating margins,” Anurag Rana, a Bloomberg Intelligence senior analyst, said in an interview on Bloomberg Television. The suppressed, but stable, sales growth isn’t bad as “we are still in a phase where money is being allocated at the expense of some of these software firms,” he said.

Shares reached a high of $251 in extended trading after closing at $230.35 in New York. The stock has jumped 74% this year through the close, although most of that rally happened in the first half of 2023 during pressure to boost profit from a cadre of activist investors.

Some investors have been concerned that the focus on cost-cutting has come at the expense of revenue growth, which has dipped to 11% the past three quarters. The company, which is the market leader in customer relations management software, is hoping that new AI features and a rare price hike will help reverse that trend.

In the fiscal third quarter, Salesforce reported revenue of $8.72 billion, in line with estimates. Profit, excluding some items, was $2.11 a share in the period ended Oct. 31. Analysts, on average, estimated $2.06. Adjusted operating margin was 31%.

“Over the last year we have transformed the company, enabling us to deliver another quarter of strong profitable growth,” Chief Financial Officer Amy Weaver said in the statement.

Salesforce is also working to better integrate its large acquisitions from recent years, such as workplace communication app Slack, data visualization tool Tableau and MuleSoft, which helps customers connect their software across the internet. Revenue growth in those units accelerated in the third quarter, snapping a streak of slowdowns.

Bundling these products with the rest of Salesforce “kind of fell off last year — now to see that come back, that is just really exciting,” Benioff said on a conference call after the results were released.

Sales from the data segment, which includes Tableau and MuleSoft, increased 22% in the quarter. That strength helped offset continued slowdowns in the company’s core sales and service applications, Tyler Radke, a Citigroup Inc. analyst, wrote in a note to clients.

Still, Slack hit a hiccup earlier this month when CEO Lidiane Jones resigned for the top job at dating app Bumble Inc. She is being replaced by Denise Dresser, who most recently served as president of accelerated industries. Dresser is the third leader for Slack in the past year.