AI products are still underwhelming, Salesforce's revenue exceeded expectations last quarter but the guidance for this quarter is weak, leading to a plunge in after-hours trading | Earnings Report Insights

Customer relationship management (CRM) software giant Salesforce reported a double-digit growth in both revenue and profit for the last fiscal quarter, exceeding expectations. However, the revenue guidance for the current fiscal quarter is weak, reflecting a cautious tendency among software customers regarding cloud product spending in an environment filled with geopolitical risks and macroeconomic uncertainties.

Investors are increasingly concerned that established software manufacturers will be surpassed by new AI-based vendors, as AI is expected to impact companies like Salesforce that charge users for applications, taking over some of their work and reducing the workforce of enterprise clients.

Investors have been watching closely for a return on Salesforce's significant investments in automation and AI agents. The revenue guidance indicates that Salesforce's AI products have yet to deliver returns in the face of competition from emerging AI players.

After the earnings report was released, Salesforce, which had already risen over 1.4% on Wednesday, turned negative in after-hours trading, with declines exceeding 6%. As of Wednesday's close, Salesforce's stock price has fallen approximately 23.2% this year, underperforming among blue-chip tech stocks.

On September 3rd, Eastern Time, Salesforce announced its financial data for the second fiscal quarter of 2026 (referred to as Q2) ending July 31, 2025, and provided performance guidance for the third fiscal quarter (Q3) and the full fiscal year.

1) Key Financial Data:

Revenue: Q2 revenue was $10.24 billion, a year-on-year increase of approximately 9.8%. The company's guidance is between $10.11 billion and $10.16 billion, with LSEG analyst consensus expecting $10.14 billion, and a year-on-year growth of 7.6% in the previous quarter.

EPS: Under non-GAAP standards, diluted earnings per share (EPS) for Q2 was $2.91, a year-on-year increase of approximately 13.7%. The company's guidance is between $2.76 and $2.78, with analysts expecting $2.78, and a year-on-year growth of 5.7% in the previous quarter.

Operating Margin: The GAAP operating margin for Q2 was 22.8%, an increase of 3.7 percentage points year-on-year, and an increase of 1.1 percentage points from the previous quarter; the non-GAAP operating margin was 34.3%, an increase of 0.6 percentage points year-on-year, and an increase of 0.2 percentage points from the previous quarter.

2) Business Data and Financial Metrics:

Subscription and Support: Q2 revenue from subscription and support was $9.69 billion, a year-on-year increase of approximately 10.6%, compared to an 8.3% increase in the previous quarter.

CRPO: Current remaining performance obligations (CRPO) stood at $29.4 billion, a year-on-year increase of 11%, with analysts expecting $29.15 billion, and a year-on-year growth of 12% in the previous quarter

3) Performance Guidance:

Revenue: The revenue guidance for the third quarter is between $10.24 billion and $10.29 billion, a year-on-year increase of 8% to 9%, with analyst expectations at $10.29 billion. The full-year guidance is between $41.1 billion and $41.3 billion, previously guided at $41 billion to $41.3 billion, a year-on-year increase of 8.5% to 9%.

EPS: The diluted EPS under non-GAAP for the third quarter is expected to be between $2.84 and $2.86, with analyst expectations at $2.85. The full-year EPS is expected to be between $11.33 and $11.37, previously guided at $11.27 to $11.33.

Operating Margin: The full-year GAAP operating margin is expected to be 21.2%, down from 21.6%, while the non-GAAP operating margin is expected to be 34.1%, slightly up from 34.0%.

Revenue Growth Rate Approaches Double Digits for the First Time in Six Quarters, EPS Exceeds Expectations

The financial report shows that Salesforce's second-quarter revenue exceeded expectations with accelerated growth, nearing 10%. This is the first time in the last six quarters that revenue growth has approached double digits, after five consecutive quarters of single-digit year-on-year growth.

In the second quarter, Salesforce's EPS grew nearly 14% year-on-year, more than doubling the growth rate of the previous quarter, and exceeding the company's senior guidance range, nearly 4.7% higher than analyst expectations at the high end of the guidance range.

As a key financial metric representing the sum of deferred revenue and backlog orders, CRPO orders grew 11% year-on-year in the second quarter. Although the growth rate slightly slowed compared to the previous quarter, it still exceeded analyst expectations.

In the second quarter, the annual recurring revenue from data cloud and AI business exceeded $1.2 billion, a year-on-year increase of 120%, roughly in line with the growth rate of the previous quarter, with the annual recurring revenue from this business surpassing $1 billion in the first fiscal quarter.

Salesforce's CEO Marc Benioff commented on the performance, stating that the first half of fiscal year 2026 showed strong performance in revenue, margin, cash flow, and CRPO, with the company expected to set a record of nearly $15 billion in operating cash flow in fiscal year 2026.

Benioff believes that these results reflect the success of the company's clients—such as Pfizer, Marriott, and the U.S. Army—who are transforming into agent-based enterprises where humans and AI agents work side by side, reshaping workflows, enhancing productivity, and helping clients achieve success.

Third Quarter Revenue Guidance Indicates Maximum Growth of 9%, Median of Range Below Expectations

Although Salesforce's revenue growth in the second quarter was surprising, the performance guidance indicates that this growth momentum may not be sustainable.

Salesforce expects a maximum revenue growth of 9% in the third quarter, with the median of the guidance range falling short of $10.27 billion, below the analyst expectation level of $10.29 billion at the high end of the guidance range. This suggests that the growth rate in the third quarter will slow compared to the second quarter Salesforce expects the revenue growth rate for the current fiscal year to be at most 9%. When announcing the first quarter financial report, Salesforce raised the annual revenue guidance range by nearly 1% to over 1.2%. However, during this earnings announcement, it did not continue to raise the entire range but slightly increased the lower end of the range by $100 million, an increase of 0.2%.

The median of Salesforce's third-quarter ESP guidance range meets analyst expectations, and the full-year EPS guidance range has been slightly raised.

Salesforce also expects that the CRPO growth under GAAP for the third quarter will slightly exceed 10%, in line with analyst expectations.

Salesforce is facing the most severe growth challenges since its inception. From 2006 to 2022, the company's annual revenue growth rate maintained at least 24%, but this trend reversed starting in 2023. Revenue growth for the fiscal year 2025 is only expected to be 8.7%, with market expectations indicating that revenue growth may not return to double digits until the fiscal year 2029.

This growth trajectory reflects a typical transition for software companies from a high-growth phase to a mature phase. For example, Oracle, after experiencing long-term high growth, had an annualized sales growth rate of 7.6% from 2006 to 2023, while reducing diluted shares by 48% through stock buybacks, driving a 91% increase in per-share metrics. Salesforce began its cash return program in the fiscal year 2023 and has since reduced diluted shares by 2.3%.

Dual Challenges in AI Transformation

Salesforce is attempting to revitalize growth through AI agent technology but faces dual threats from AI. First, the ability of AI to write code may replace some of its functions and application development business; second, as the pioneer of Software as a Service (SaaS), AI may prompt companies to reduce their workforce, thereby decreasing enterprise customers' demand for the traditional SaaS business model of "charging by seat."

The Agentforce AI platform launched by Salesforce aims to integrate AI agents into customer relationship management software, with these agent systems capable of completing complex task series using AI language models through simple prompts. However, market adoption has been slow, and the potential risks of new tools make enterprises more cautious in deployment.

A greater concern is that AI-native competitors may disrupt existing cloud software companies in the same way that cloud computing once disrupted the traditional software industry. Future "AI-native" competitors may be securing their first round of financing or may not yet have emerged, but they could challenge existing companies unexpectedly, much like Salesforce did twenty years ago.

Before the earnings report, earlier this Wednesday, Salesforce's CEO Benioff revealed in a podcast that last week, Salesforce cut about 4,000 customer support positions. The company has become another Silicon Valley giant to lay off employees due to the impact of AI.

Analyst Expectations and Market Sentiment

Recent analyst adjustments reflect cautious market sentiment. Last week, Citigroup lowered Salesforce's target price from $295 to $275, maintaining a neutral rating, stating that partner feedback indicated a "disappointing demand outlook" for the second quarter. Analysts indicated they would wait for more data points on the broader rollout and commercialization of Agentforce Bank of America has lowered its target price for Salesforce from $350 to $325, maintaining a buy rating. Recent discussions with partners indicate that second-quarter deal activity is "in line" with expectations, with projected second-quarter revenue and remaining performance obligations (cRPO) expected to reach $10.1 billion and $19.2 billion, respectively, which is basically in line with valuation expectations.

Oppenheimer has lowered its target price for Salesforce from $370 to $315, maintaining an outperform rating. The agency's research shows that Salesforce's business trends are weak, with limited short-term catalysts aside from a seasonal improvement in enterprise IT spending in the second half of the year. Analysts believe that the second-quarter earnings report may not generate new perspectives on Salesforce.

After Salesforce released its earnings report, Barclays analyst Raimo Lenschow commented that investors must focus on the qualitative data of Salesforce's AI agent platform Agentforce and wait for the company's annual technology conference Dreamforce next month to boost their enthusiasm