"Strongest component of the Dow Jones" surges after market close, Salesforce's profit guidance exceeds expectations, AI demand is booming! | Earnings Report

Benefiting from the strong demand for cloud services driven by the AI boom, Salesforce, known as the "strongest component of the Dow Jones Industrial Average," has reported third-quarter results and full-year guidance that exceeded market expectations.

After the U.S. stock market closed overnight, Salesforce surged more than 8%, with a cumulative increase of 70.9% so far this year, reaching a market value of $224.1 billion.

The software giant, headquartered in San Francisco, stated in its earnings report on Wednesday that adjusted earnings per share for the fiscal year ending in January are expected to be around $2.26, higher than analysts' forecast of $2.17. Fourth-quarter revenue is expected to be between $9.18 billion and $9.23 billion, basically in line with the average analyst expectation of $9.22 billion. The remaining contracted revenue is expected to increase by about 10%, consistent with expectations.

The earnings report also showed that Salesforce's third-quarter revenue increased by 11% YoY to $8.72 billion, in line with expectations, with adjusted earnings per share of $2.11, slightly higher than analysts' expectation of $2.06. The adjusted operating profit margin was 31%.

AI Drives Cloud Demand Surge

Salesforce CEO Marc Benioff attributed the steady revenue growth to its newly launched AI products, including tools supported by OpenAI's large models, which help customers automatically draft sales emails or create customer service chatbots.

Salesforce launched these AI features in June this year, with a personal subscription fee of $50 per month and an enterprise all-inclusive subscription fee of $360,000 per year.

However, a recent report by research firm KeyBanc suggests that AI may take longer to generate revenue growth.

Meanwhile, according to previous reports, Salesforce has been testing methods to reduce the operating costs of AI, such as replacing OpenAI's large models with cheaper open-source models whenever possible.

In a prepared statement, Benioff said:

In terms of revenue, we are now the third-largest enterprise software company, the largest AI CRM (Customer Relationship Management) company, and the largest enterprise application company. Most importantly, we are leading our customers into a new era of productivity and incredible growth by integrating CRM, data, and AI on one integrated platform.

In addition, Salesforce's free cash flow in the third quarter was $1.37 billion, more than double the $115 million in the same period last year and more than twice the $637 million in free cash flow in the previous quarter.Cost reduction and efficiency improvement strategies are effective!

The third-quarter earnings report has completely dispelled investors' concerns. Previously, investors were worried that Salesforce's cost-cutting measures might erode revenue.

Earlier this year, in order to expand profit margins, Salesforce has been committed to reducing expenses related to sales and marketing. Specific measures include expanding the scope of self-service software purchases. Last week, the company announced that its flagship product can be purchased through Amazon Web Services' marketplace.

Salesforce stated that as of the end of this quarter, the number of full-time employees was 70,843, a decrease of 11% compared to the same period last year. As part of the restructuring in early 2023, Salesforce announced a large-scale layoff, but in September, it announced that it would hire more than 3,000 new employees, partly to introduce artificial intelligence. Salesforce's stock price had previously plummeted by more than half between November 2021 and the end of 2022.

Analyst Anurag Rana said in an interview with the media:

They have found a new belief in higher operating profits.

He said that restrained but stable sales growth is not bad because "the market is still in a phase where funds are allocated at the expense of sacrificing some software companies."

Chief Financial Officer Amy Weave stated in a statement:

Last year, we transformed the company, enabling us to achieve strong profit growth for another quarter.