Roy Rochlin
- Salesforce reported a 31.6% profit margin on Wednesday for its Q2 FY '24, raising annual guidance to 30%.
- Activist investor Starboard Value last year called on Salesforce to up its profit margins.
- A leaked plan said Salesforce aimed to deliver above a 30% margin by fiscal 2025.
When Salesforce announced its second quarter earnings after the bell on Wednesday, it had a pleasant surprise for its many activist stakeholders: it delivered the profit margins they wanted far faster than expected.
The cloud software giant reported a 31.6% non-GAAP operating margin for the second quarter of its fiscal 2024 and raised guidance for the full year to 30%. The quarter ended on July 31.
Hitting profit margins of above 30% is an important milestone for Salesforce, which for the past year has been under pressure from at least five activist investors demanding it focus on profits over revenue growth.
Salesforce over the last several months has been working on an accelerated plan to exceed 30% profit margins, according to a draft of a planning document viewed by Insider. That plan outlined a goal to reach above 30% profit margins in fiscal 2025.
"Our transformation drove our results," CEO and co-founder Marc Benioff said Wednesday on the company's earnings call with investors. He noted that profit is now the company's "highest priority."
To that end, in July, Salesforce announced it was increasing list prices on some of its most popular products, to the chagrin of some customers.
As for cost-cutting, the company since January has laid off at least 10% of its workforce, shed real estate, and cut back on employee perks after a slew of activist investors revealed stakes in the company.
In October, Starboard Value was the first fund to reveal a major stake in Salesforce, calling on the company to set more ambitious profit margin goals — and hit them fast. At the time, Salesforce had just announced a target of 25% profit margins by 2026, a number far below competitors like Oracle and Microsoft. Both of those companies already exceed profit margins above 40%. Starboard noted that Salesforce should have profit margins of at least 30% — exactly what the company delivered Wednesday.
"We couldn't be happier to see these numbers. It's incredible to see the margin acceleration in such a short period of time," said Benioff. "We've exceeded our own expectations."
Benioff still has a way to go to catch up to his alma mater and competitor Oracle, which in June reported an annual non-GaaP profit margin of 42%.
Still, delivering above 30% profit margins in such a short time, with a "disciplined approach to cost management" was tough, Benioff said on the call, alluding to the company's tumultuous year. With the layoffs and cost cuts came a sharpened focus on employee performance and a workforce struggling with low morale, several employees told Insider.
"It's been a lot of work. It's been difficult. In a lot of cases it's been a struggle," he said, adding that hitting this goal was "nothing short of a miracle."
Some investors agree. In a research note ahead of earnings, Wedbush's Daniel Ives called Benioff the come-back kid and waxed poetically on the turnaround.
"Over the last year Salesforce had their back against the wall with activists swirling, growth/margins less than stellar, and Street skeptics building a wall of doubt. Fast forward to today and Benioff & Co. have pulled a comeback story for the Street's history books as the cost cutting and strategic focus has led to massive margin ramps and improved growth prospects," Ives wrote.
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