Lowering costs nets Salesforce a profitable quarter, but can it keep it up?

For a long time, just about every company was focused on growth over everything. Then, as the economy began to turn last year, that focus shifted pretty dramatically to profitability and being more financially sound. Salesforce was no different.

Salesforce had been spending big over the prior years, acquiring companies like Slack for $27.7 billion, Tableau for $15.7 billion and MuleSoft for $6.5 billion, effectively buying growth in the process. Meanwhile, during the pandemic, like other large tech companies believing the work-from-home phenomenon would drive cloud profits long-term, Salesforce hired big, increasing the number of employees by 30% between 2020 and 2022.

As the cost of doing business increased with higher interest rates combined with inflation and currency headwinds, it had an impact on just about every company’s revenue growth, including Salesforce’s.

Then last year, activist investors started taking a close look at Salesforce, forcing the company to rethink its growth strategy in the wake of a shifting economic landscape and activist demands for more financial discipline.

CEO Marc Benioff steered the company through that turbulence by shifting its approach from the earlier growth orientation to one more focused on profitability. That meant cutting costs, which unfortunately resulted in laying off 10% of the workforce. In addition, the company announced in March that it was disbanding its M&A committee, a strong signal that the days of buying growth were over (at least for now).

For better or worse, the approach appears to have worked, with three consecutive quarters of double-digit growth. The circling activists backed off in March after a quarter in which the company reported 14% growth year-over-year. This quarter wasn’t quite that good at 11% growth, but it beat Wall Street’s expectations and even Salesforce’s own projections by a fair amount, leaving Benioff very satisfied during the post-earnings call with analysts.

“So, listen, as we’ve shared with you over the last couple of earnings calls, Salesforce has really accelerated our transformation to profitable growth,” he said during the call. “I think that’s super clear from the numbers, and I couldn’t be more excited, especially on this huge top-line beat and what our margin is looking like today.”

A closer look at the numbers

Salesforce disclosed a top-and-bottom beat on Wednesday, besting expectations in terms of both revenue and profit. The company reported $8.60 billion in total top line, ahead of an anticipated $8.53 billion result. And it earned $2.12 per share, ahead of an expected $1.90 worth of adjusted per-share income.

That revenue result represented 11% year-over-year growth. More impressive, though, was how much Salesforce bolstered its profitability. Net income shot up from $68 million in the year-ago period to $1.27 billion in Salesforce’s most recent quarter.

That massive profitability gain was not predicated on one-time gains from nonoperating results. In simpler English, the company’s huge spike in profits was earned the old-fashioned way: keeping costs low while growing revenue.