CRM • 10-Q • Q2 2022 • Neutral

Salesforce Growth Slows as Operating Leverage Shows Signs of Strain in Q2

August 25, 2022 • 1 min read

TL;DR

Salesforce posted decelerating growth with revenue up 22% YoY to $7.72B, while operating margins compressed significantly from 5.2% to 2.5% YoY. Subscription and support revenue grew 20.8% but showed signs of macro pressure. Operating expenses increased 22.9% YoY, outpacing revenue growth and highlighting challenges in achieving promised operating leverage. Strategic investments portfolio performance weakened substantially, with gains dropping from $526M to $45M YoY. These trends suggest increas

Financial Performance Overview: Revenue growth of 22% YoY reflects ongoing momentum but marks deceleration from prior quarters. Gross margins contracted 70bps to 72.4% as higher infrastructure costs and Slack integration expenses weighed on profitability. Operating income declined 41.9% YoY to $193M despite scale benefits, indicating significant cost pressure. Professional services growth of 35.4% YoY suggests healthy enterprise demand but at lower margins. Customer acquisition costs appear to be rising based on sales and marketing expense growth of 25.1% YoY.
Strategic Initiatives and Operational Changes: Increased R&D spend of 30.3% YoY to $1.33B reflects aggressive investment in product development and Slack integration. Strategic investments portfolio showed reduced gains, suggesting more selective M&A approach. Cost structure shifts evident in rising infrastructure spend and sales compensation. Management appears focused on balancing growth investments with profitability goals, though execution remains challenging. Integration costs from recent acquisitions continue to impact margins.
Market Position and Competitive Dynamics: Subscription revenue growth of 20.8% indicates stable core business despite competitive pressures. Professional services growth outpacing subscriptions suggests complex enterprise deals requiring more support. Strategic investments of $5.12B show continued focus on ecosystem expansion. Goodwill increase to $48.57B reflects acquisition premium pressures. Market share appears stable but at higher customer acquisition costs.
Operational Efficiency and Profitability: Operating margin compression of 270bps YoY to 2.5% reflects challenges in achieving scale benefits. Sales efficiency metrics declining with sales & marketing at 44.4% of revenue vs 43.2% year ago. R&D intensity increasing to 17.2% of revenue from 16.1% prior year. Stock-based compensation up 27.9% YoY indicates talent retention pressures. Cost structure showing limited leverage despite revenue scale.
Growth Catalysts and Material Risks: Unearned revenue decline of 17.9% to $12.83B suggests potential future growth moderation. Cash position strengthened with 26.8% increase in cash and equivalents to $6.93B. Strategic investments portfolio performance weakening could impact future M&A capability. Rising operational costs and declining margins present near-term headwinds. Integration execution and enterprise spending environment remain key risks.

Revenue

$7.72B ( YoY, QoQ)

↑ +22.0%

Gross Margin

(-70bps YoY)

↑ 72.4%

Free Cash Flow

Not directly provided in filing

Operating Margin

2.5% (-270bps YoY)

Growth Indicators

$12.83B ( vs. prior period)

↓ -17.9%

Subscription Revenue ↑$7.14B (+20.8% YoY)

Professional Services ↑$577M (+35.4% YoY)

Key Risks

Operating margin compression indicating scale challenges
Rising customer acquisition costs impacting profitability
Integration execution risks from recent acquisitions
Macro uncertainty affecting enterprise software spending

Key Opportunities

Professional services growth indicating strong enterprise demand
Platform integration driving potential competitive advantages
International expansion runway remains significant
Cash position enables strategic flexibility

Bottom Line

Salesforce's Q2 results highlight growing tensions between growth investment needs and profitability goals. While core business momentum continues, rising costs and margin pressure suggest increasing execution complexity. Key metrics to watch include operating leverage progression, customer acquisition costs, and unearned revenue trends. The company's strategic position remains strong but achieving balanced growth with profitability may prove challenging in the near term.