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Salesforce (CRM) has switched its focus to profitability in response to a slowdown in growth.
 

Key takeaways

• Salesforce is set to report the seventh consecutive quarter of slower revenue growth
• A sharper focus on profitability should see it deliver record quarterly adjusted EPS
• Salesforce needs to convince markets about its outlook as consensus suggests Wall Street has some doubts
• Salesforce shares are trading at less than half the all-time highs we saw in late 2021
• The index to watch is the Dow Jones, which is still finding support from a rising trendline after being tested last week
   

When are the Salesforce Q2 earnings?

Salesforce will release second-quarter earnings after US markets close on Wednesday, August 30. A live webcast will be held with management on the same day at 1400 PT (1700 ET).
 

Salesforce earnings consensus

Revenue is forecast to rise 10.5% from last year to $8.526 billion in the second quarter, while adjusted EPS is expected to rise 59% to $1.90.
 

Salesforce earnings preview

Salesforce has made improving profitability a priority and is starting to reap rewards, an aptly timed move considering it is suffering from a slowdown in demand.

Revenue is set to keep growing at a double-digit rate, but this is expected to be the seventh consecutive quarter of slower growth as businesses become more stringent with their spending.

Salesforce has said current remaining performance obligations – representing the amount of work it has been paid for but yet to complete and used as an indicator of future revenue growth – will rise about 10% year-on-year in the second quarter but Wall Street has pencilled in a much slower rise of just 3.2%, suggesting analysts are more pessimistic and that Salesforce needs to convince them about its outlook. 

Salesforce could start to see a boost from higher prices as we move into the second half, although this could impact the number of customers willing to renew more expensive contracts going forward. Businesses are carefully evaluating what they need and where they source it from as they become more disciplined with their budgets while simultaneously looking for new AI-infused services that can help them save costs and launch new products. With this in mind, Salesforce needs to show it can meet these new demands and remain cost-competitive or risk seeing more money flow out of budgets for professional services and into new areas like AI and machine learning.

Salesforce is trying to automate processes for its lowest-value products to make them more profitable and finding ways to make its salespeople more productive, while also leveraging AI to boost its own business and provide new services to customers. For example, Salesforce launched Einstein GPT in the first quarter to help clients improve efficiency.

Salesforce should start to reap rewards in the second quarter. Adjusted EPS is forecast to jump to a new quarterly record of $1.90, according to consensus figures from Bloomberg. Its adjusted operating margin – a key metric – should improve to around 28.2% in the quarter compared to just 19.9% the year before as Salesforce focuses on driving profitable growth.

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Notably, Salesforce disappointed the markets in the first quarter because it spent more in capital expenditure than hoped, so watch out for how much it spent in the second. Wall Street has pencilled in quarterly capex of $207 million.

Keep an eye on how the third-quarter outlook compares to expectations. Wall Street is looking for sales of $8.66 billion and adjusted EPS of $1.84. Salesforce is currently aiming to deliver annual sales growth of about 10% and a 42% rise in full-year adjusted EPS after upgrading its guidance in the previous quarter.
 

Where next for CRM stock?

Salesforce has undergone its sharpest correction of 2023 since falling from the 18-month highs hit in July, although it has traded rangebound for the past three weeks.

Buyers have reliably returned to the market after the stock slipped into a range of $205 to $200, providing some firm support over the past three months. Any sustained slip below this range could trigger a sharper fall below $189.

However, we have also seen $212 provide a tough ceiling for the stock to crack this month. It needs to close above here to set a new higher high. Doing this would allow it to recapture the 50-day moving average and bring the 50% retracement (from the highs we saw in late 2021) back into view.

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Dow Jones analysis: Where next?

Salesforce, as a provider of everyday software that keeps companies going, is seen as something of a bellwether for the wider economy as it provides clues on how much businesses are spending. It is also one of the largest components of the Dow Jones Industrial Average, carrying a weight of over 4% and making it the index to watch when Salesforce releases results.

We saw the Dow Jones test the rising trendline that can be traced back to last October last week before buyers re-entered the market to provide some support. Notably, the trendline is aligned with the 100-day moving average, reinforcing its strength. Any sustained slip below here could be significant and expose the 200-day moving average, which lies beneath to provide a potential safety net.

The index has since tested the 50-day moving average, but we can see it has tried and failed to move above here twice in the last week alone, with long upper wicks suggesting there is a strong rejection for buyers at this level and where sellers are willing to come back in. That makes 34,666 the immediate upside goal. That would also allow it to recapture the high we saw last December.

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