Salesforce just hit a big profit target faster than expected

• Salesforce reported a profit margin of 31.6% on Wednesday for the second quarter of fiscal 2024, raising annual guidance to 30%.
• Activist investor Starboard Value last year called on Salesforce to increase its profit margins.
• A leaked plan said Salesforce aims to deliver a margin of more than 30% by fiscal 2025.

When Salesforce reported its second-quarter earnings after the bell on Wednesday, it came as a pleasant surprise to many activist stakeholders: It achieved the profit margins they wanted much faster than expected.

The cloud software giant reported a 31.6% non-GAAP operating margin for the second quarter of its fiscal year 2024 and raised guidance for the full year to 30%. The quarter ended July 31.

Achieving profit margins of more than 30% is an important milestone for Salesforce, which over the past year has come under pressure from at least five active investors demanding it focus on profits rather than revenue growth.

Over the past few months, Salesforce has been working on an accelerated plan to exceed profit margins by 30%, according to a draft planning document seen by Insider. That plan set a goal of reaching profit margins of more than 30% in fiscal 2025.

“Our transformation drove our results,” Marc Benioff, CEO and co-founder, said Wednesday on the company’s earnings call with investors. He noted that profit is now the company’s “top priority”.

To that end, in July, Salesforce announced that it would increase the list price on some of its most popular products, to the chagrin of some customers.

As for cost-cutting, since January the company has laid off at least 10% of its workforce, given up real estate, and scaled back employee benefits after a large number of active investors disclosed stakes in the company.

In October, Starboard Value was the first fund to disclose a significant stake in Salesforce, and called on the company to set more ambitious profit margin targets — and achieve them quickly. At the time, Salesforce had just announced a target of 25% profit margins by 2026, a number far below competitors like Oracle and Microsoft. These two companies already exceed profit margins of more than 40%. Starboard noted that Salesforce should have it profit margin of at least 30% — exactly what the company delivered on Wednesday.

“We couldn’t be happier to see these numbers. It’s incredible to see the margin accelerate in such a short period of time,” Benioff said. “We exceeded our expectations.”

Benioff still has a way to go to catch up with his alma mater and rival Oracle, which in June announced an annual report. Non-GAAP profit margin of 42%.

However, Benioff said on the call, referring to the company’s turbulent year, however, achieving profit margins of more than 30% in such a short time, with a “disciplined approach to cost management” was challenging, referring to the company’s turbulent year. And with layoffs and cost cuts has come an increased focus on employee performance and a demoralized workforce, several employees told Insider.

“It was a lot of work. It was hard. In many cases it was a struggle,” he said, adding that achieving this goal was “nothing short of a miracle.”

Some investors agree. In a pre-earnings note, Wedbush’s Daniel Ives called Benioff a comeback kid, and spoke poetically about the transformation.

Over the past year, Salesforce has had its back against the wall with campaigners on, growth/margins have been less than stellar, and skeptics on the Street have built a wall of skepticism. Fast-forward to today, Benioff & Co. pulled a back story on the history of the Street “Cost reduction and strategic focus have significantly increased profit margin and improved growth prospects,” Ives writes.

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