Salesforce.com Inc (CRM) Common Stock USD0.001

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Salesforce reported third-quarter revenue of $10.3bn, slightly below expectations, up 8% ignoring currency moves. Within that, subscription and support revenue rose 9% to $9.7bn.

Underlying operating profit rose 17% to $3.6bn, with cost control helping push margins up.

Free cash flow rose 22% to $2.2bn. Net cash, including leases, was $0.2bn at the end of the period. The group returned $3.8bn through buybacks plus $0.4bn in dividends.

For the fourth quarter, revenue is expected to grow 10-11% to $11.1-11.2bn. Full-year guidance has been raised from 8% growth to around 9%. That includes a $0.3bn revenue contribution from the recently acquired Informatica.

The shares were up 1.7% in pre-market trading.

Our view

Salesforce delivered a decent quarter and some reasonable guidance, but its probably not enough to materially change the soft narrative. It’s been a challenging year, with the entire software sector under strain amid concerns about disruption from AI-driven competitors.

Salesforce is a cloud platform giant that helps businesses manage customer relationships, sales, and marketing in one place.

There are two major levers for growth from here. Firstly, through better bundling of its cloud products and improved use of its treasure trove of data. There’s a very clear correlation between annual recurring revenue per customer and the number of cloud products they adopt.

The trick is to ensnare customers so deep into the ecosystem that it becomes very hard to ever leave. Salesforce, with its huge breadth of interlinked products from sales and marketing to customer service, is well-placed to do just that.

Artificial Intelligence (AI) is the other major growth lever, and the Agentforce platform allows customers to build AI agents that can work alongside humans to analyse data, make decisions, and take actions autonomously.

Salesforce is saying all the right things when it comes to AI agents. Their data cloud offering helps join up messy data, at which point the AI tools can work their magic. This collection of products is the main area of growth right now, and progress is encouraging. But its from a small base, and softness in other business areas is keeping group level growth constrained to high single digit territory.

Markets have reigned in their optimism around AI agents having a near term impact, which we tend to agree with. Of all the AI tech, agents are the newest innovation. But we think it’s a matter of when, not if, they take off. Still, investors will need a bit of patience.

Cost controls mean cash flow is in a much better place than it was a few years ago. The balance sheet has plenty of wiggle room too, giving scope to support ongoing buybacks, a recently introduced dividend, and acquisitions. As ever, nothing is guaranteed.

Salesforce offers a strong product suite with plenty of growth levers, but it’s now a mature business. Markets expect low double-digit earnings growth over the next few years, which seems fair. We think AI will provide a much-needed boost over the medium term, and there’s good upside if investors re-rate this as a growth story again. Our concern is that slowing momentum outside AI could keep a lid on growth and the valuation subdued.

Environmental, social and governance (ESG) risk

The technology industry is low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Historically the sector has flown under the radar when it comes to regulatory oversight, but more recently we’ve seen regulators keen to get involved given the high-profile of some of the “big tech” names. Other key risk drivers include labour relations, data privacy, product governance and resource use.

According to Sustainalytics, Salesforce’s management of material ESG issues is strong.

Salesforce’s nominating and corporate governance committee periodically reviews the company’s ESG initiatives, while its cybersecurity team conducts regular assessments and operates 24/7 for incident response. The company also conducts annual employee surveys, runs an apprenticeship program. There’s also an audit committee overseeing compliance and ethics, supported by a third-party hotline for anonymous reporting.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

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