Salesforce: Do intelligent agents need to spend money first to make money later?

On February 27th, Beijing time, after the US stock market closed, SaaS leader Salesforce announced its Q4 2025 financial report. Overall, revenue growth continues to slow down, and earnings fell short of expectations due to a slowdown in gross margin improvement and the expansion of expenses. The performance is riddled with shortcomings, with detailed points as follows:

This quarter, Salesforce's core business subscription revenue was $9.45 billion, a year-on-year increase of 8%, which is a further decline of about 1.1 percentage points compared to the previous quarter, and also lower than the consensus expectation of 8.8% from sell-side analysts. The issue of declining growth that Salesforce has faced over the past three years has not improved. Moreover, according to the guidance for the next quarter, the growth rate will continue to decline (affected by exchange rates and the base effect of the leap year).

In terms of the performance of the five major clouds, the growth rate of Platform & Data Cloud increased significantly from 8.2% to 11.5% quarter-on-quarter, significantly higher than the market expectation of 8%, and is the only one showing an accelerating trend, likely due to contributions from AI & Agentforce.

In addition, the growth of the other four major clouds continues to decline across the board quarter-on-quarter, and is generally 1% to 2% lower than market expectations. Apart from the potential brought by Agentforce, the growth of the company's existing business remains quite weak.

2. The leading indicator of growth—PRO (unfulfilled balance) signals is relatively better. Although the year-on-year growth rate of short-term cRPO also declined from 10.5% last quarter to 9.4% this quarter, it is slightly better than expected. Moreover, after excluding the impact of exchange rates, the actual comparable growth rate of cRPO is 11%, accelerating by 1 percentage point quarter-on-quarter.

The growth of all unfulfilled balances, including those over 12 months, is even better. Even under the GAAP standard that includes exchange rate impacts, the growth rate accelerated from 9.9% last quarter to 11.4%. It can be seen that this quarter, the growth of long-term unfulfilled amounts is stronger compared to the short-term. The proportion of long-term RPO reached 52%, hitting a high since the 2021 fiscal year. This may suggest that while AI & Agentforce have not yet brought much incremental growth in the short term, they have indeed sparked customer interest, leading to some long-term contracts.

3. In terms of gross profit, this quarter Salesforce achieved a gross profit of $7.87 billion from subscription revenue, a year-on-year increase of 9.8%, which outpaced revenue growth, but the trend has significantly slowed down compared to last quarter's 12.3%. The gross margin was 77.8%, an increase of 0.9 percentage points year-on-year. However, compared to the more than 2 percentage points increase in gross margin in the first three quarters of this fiscal year, the improvement trend in gross margin this quarter has significantly slowed down. Dolphin Research boldly speculates that the upfront investment in AI & Agentforce may have dragged down gross profit, and the actual reasons need to be clarified by management's explanations.

Additionally, with a gross loss of $95 million from service revenue, this quarter Salesforce's total gross profit was $7.78 billion, lower than the expected $7.91 billion, with a gross margin of 77.8%, which is 1 percentage point lower than expected. The gross profit performance also fell short of expectations.4. From the expense perspective, Salesforce's total operating expenses this quarter were $5.96 billion, higher than the expected $5.71 billion. The expense-to-revenue ratio increased by 0.2 percentage points year-on-year to 59.6%, ending the trend of narrowing expenses over several years and expanding again.

Among these, the largest portion was marketing expenses at $3.47 billion, which was below the expected $3.55 billion, with only a 1% year-on-year growth. Currently, the company has not increased marketing investments due to the promotion of new businesses like Agentforce.

The main reason for the total expense expansion and exceeding expectations was that management expenses increased significantly by 21% year-on-year, and nearly $300 million in restructuring costs were confirmed.

6. Due to the slowing increase in gross margin and expenses exceeding expectations, the GAAP operating profit margin fell from 20% last quarter to 18.2% this quarter. As a result, the company's operating profit was $1.82 billion, only a 12% year-on-year increase, a sharp decline from over 20% in the previous two quarters.

Fortunately, the company's more focused free cash flow performance remained good, reaching $3.82 billion this quarter, higher than the expected $3.48 billion. The cash flow profit margin was 38.2%, still up 3.1 percentage points year-on-year. This was mainly due to lower-than-expected tax expenses and Capex.

Dolphin Research's Perspective:

In summary, Salesforce's performance this quarter was disappointing. Firstly, apart from the platform and data cloud, which may have benefited somewhat from the initial positive effects of AI, all other business segments continued to show a trend of slowing growth.

In addition, the narrowing acceleration of gross margin and the expansion of expenses this quarter combined led to a reversal of the company's previously sustained profit expansion cycle over several years, as growth continued to decline. The narrative of compensating for the lack of growth through profit improvement no longer holds this quarter.

This also seems to suggest that while AI and Agentforce have not yet brought significant incremental revenue (market expectations are that noticeable contributions will only come by the end of fiscal 2026 or even in fiscal 2027), they have led to increased upfront investments. Similar to upstream cloud service providers, it appears that they must endure a period of upfront expenses and profit decline for an uncertain growth space. The only bright spot is that the RPO metric seems to indicate that AI functions like Agentforce may bring some long-term contracts, but due to the functions still being in the early development stage, their contribution to recent business remains quite limited.

Regarding the incremental contribution of AI and Agentforce, as of now, the incremental annualized revenue from AI-related data clouds is $900 million, a year-on-year increase of 120%, which accounts for about 2.4% of incremental contribution. Since October, the company has signed approximately 5,000 Agentforce contracts, which should align with market research and expectationsThe company's guidance for the next quarter is also not good, with an expected revenue median of $9.74 billion, lower than the anticipated $9.9 billion. The implied growth rate is 6.6%, continuing to decline from this quarter's 7.6% (due to exchange rates and the negative impact of last year's leap month).

On the earnings side, the company expects a decline in GAAP diluted EPS median to $1.5, also below the expected $1.66, indicating that the negative profit trend from this quarter will continue into the next quarter.

For the full fiscal year 2026 guidance, the company maintains its expectation of revenue growth at around 7% to 8% under constant exchange rates, which will continue to decline compared to this year's growth, but should not be lower than market expectations. The guidance for operating cash flow growth will be 10% to 11%, with profit growth further aligning with revenue, indicating that the improvement in profit margins for the entire next fiscal year will also be quite limited. This again suggests that investments in AI will drag down profit improvements.

The following is a detailed interpretation of this quarter's financial report:

1. Revenue growth slowdown has not reversed

On the growth front, this quarter Salesforce's core business subscription revenue was $9.45 billion, a year-on-year increase of 8%, which is a further decline of about 1.1 percentage points from the previous quarter, and below the consensus expectation of 8.8%. Salesforce has recently faced a persistent decline in growth, with no signs of improvement. Moreover, according to the guidance for the next quarter, the growth rate will continue to decline (of course, influenced by exchange rates and the leap year base).

Looking at the performance of the five major clouds under subscription revenue, the growth rate of Platform & Data Cloud increased significantly from 8.2% to 11.5% quarter-on-quarter, significantly higher than the market expectation of 8%, and is the only one showing accelerated growth. We believe this may be due to the contribution of incremental revenue from AI & Agentforce.

However, apart from that, the other four major cloud businesses still experienced a comprehensive decline in growth quarter-on-quarter, generally falling short of market expectations by 1% to 2%. This indicates that apart from the potential brought by Agentforce, the growth of the company's existing business faces considerable difficulties.

Due to the core subscription revenue growth falling short of expectations, along with approximately $540 million in service revenue this quarter (which has a negligible impact), Salesforce's total revenue this time was $9.99 billion, a year-on-year increase of 7.6%, lower than the expected growth rate of 8.1%.

II. Leading indicators show initial signs of improvement, will the future be better than now?

To some extent reflecting the leading indicators of subsequent growth, the year-on-year growth rate of cRPO short-term unfulfilled balance (the amount of signed contracts that have not yet been recognized as revenue) decreased from 10.5% in the previous quarter to 9.4% this quarter, but was slightly better than expected. Moreover, after excluding the impact of exchange rates, the comparable growth rate for this quarter is 11%, which is an acceleration compared to 10% in the previous quarter.

Similarly, the growth of the total unfulfilled balance including the portion over 12 months is even better, with the growth rate accelerating from 9.9% in the previous quarter to 11.4%, even under the GAAP measure that includes exchange rate effects. It can be seen that this quarter the growth of long-term unfulfilled amounts is stronger than that of short-term. The proportion of long-term portions this quarter reached 52%, the first time since the fiscal year 2021. This change may suggest that while AI & Agentforce have not yet brought significant incremental business in the short term, they have indeed attracted customer interest, leading to certain long-term contracts or usage commitments.

Overall, although revenue growth continued to slow this quarter, the growth of both short-term and long-term RPO improved after excluding exchange rate effects, with long-term growth outpacing short-term growth, which may indicate a tendency for revenue growth to accelerate in the subsequent quarters.

III. Is the trend of gross profit improvement paused?

In terms of gross profit, this quarter Salesforce achieved a gross profit of $7.87 billion from subscription revenue, a year-on-year increase of 9.8%, although it still outperformed revenue growth, the trend has significantly slowed compared to 12.3% in the previous quarter.

The gross profit margin is 77.8%, an increase of 0.9 percentage points year-on-year, while the gross profit margin increase in the first three quarters of this fiscal year was over 2 percentage points. That is, the trend of gross profit margin improvement that has lasted for several years has significantly slowed this quarter, and the performance on the gross profit side is also poor. We speculate that the upfront investment in AI & Agentforce vs. the very little revenue contribution in the short term may have dragged down the gross profit, and the actual reasons can be monitored in the management's explanations during the conference call.

Additionally, the service revenue brought a gross loss of $95 million (which is also higher than usual levels), this quarter Salesforce's total gross profit amounted to $7.78 billion, lower than the expected $7.91 billion, with a gross profit margin of 77.8%, which is 1 percentage point lower than expected.It is evident that the gross profit performance is indeed below expectations.**

IV. Significant Increase in Management Expenses, Dragging Down Profits

From the expense perspective, this quarter Salesforce's total operating expenses amounted to $5.96 billion, higher than the expected $5.71 billion. The expense-to-revenue ratio increased by 0.2 percentage points year-on-year to 59.6%, reversing the trend of contraction that lasted for several years.

However, specifically looking at it, the largest portion, marketing expenses of $3.47 billion, was below the expected $3.55 billion, with only a 1% year-on-year growth. Therefore, the total expense exceeding expectations was not due to increased marketing investments for promoting new businesses like Agentforce.

The main reason is that management expenses increased significantly by 21% year-on-year this quarter, and an additional nearly $300 million in restructuring costs was recognized this quarter. These two factors are the primary reasons for the expansion of total expenses exceeding expectations. Attention should be paid to the company's explanation for the sharp rise in management expenses.

R&D expenses maintained a year-on-year growth of 11.4%, with a stable growth rate and no significant changes.

As an important component of expenses for SaaS companies, the stock-based compensation (SBC) expense this quarter was approximately $800 million, accounting for 8% of revenue. As per previous seasonal trends, the proportion has fluctuated quarter-on-quarter. However, the SBC expense ratio for the entire fiscal year 2025 is still significantly higher than that of fiscal year 2024. The SBC expense ratio also shows a trend of further expansion.

V. Operating Profit Margin Declines but Cash Flow is Still Good

As mentioned above, Salesforce's gross profit margin improvement has slowed this quarter, falling below expectations. On the expense side, management and restructuring expenses were higher than expected, leading to a decline in the company's operating profit margin under GAAP from 20% last quarter to 18.2% this quarter.

As a result, the company's operating profit this quarter was $1.82 billion, a year-on-year growth of only 12%, a sharp decline from over 20% in the previous two quarters. Although Salesforce has been experiencing sluggish growth recently, it previously achieved significant results in profit release through cost reduction and efficiency improvement, but this quarter's performance on the profit side is also unsatisfactory

However, the company's focus on free cash flow profit performance remains good, reaching 3.82 billion this quarter, higher than the expected 3.48 billion. The cash flow profit margin is 38.2%, an increase of 3.1 percentage points year-on-year. The reason for this is that tax expenses this quarter were nearly 200 million lower than expected, which contributed significantly. Additionally, capital expenditures this quarter were only 150 million, down from 200 million in the previous quarter, and did not increase due to AI & Agentforce, which may also be one of the reasons for the free cash flow exceeding expectations.