Salesforce (CRM)

Customer relationship management software maker Salesforce (NYSE:CRM) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 7.6% year on year to $9.83 billion. Guidance for next quarter’s revenue was better than expected at $10.14 billion at the midpoint, 1.2% above analysts’ estimates. Its non-GAAP profit of $2.58 per share was 1.3% above analysts’ consensus estimates.

Company Overview

Launched in 1999 from a rented one-bedroom apartment in San Francisco by Marc Benioff and his three co-founders, Salesforce (NYSE:CRM) is a software-as-a-service platform that helps companies access, manage, and share sales information such as leads.

Companies need to be able to interact with and sell to their customers as efficiently as possible. This reality coupled with the ongoing migration of enterprises to the cloud drives demand for cloud-based customer relationship management (CRM) software that integrates data analytics with sales and marketing functions.

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Salesforce grew its sales at a 11.4% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, Salesforce reported year-on-year revenue growth of 7.6%, and its $9.83 billion of revenue exceeded Wall Street’s estimates by 0.8%. Company management is currently guiding for a 8.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and indicates its products and services will face some demand challenges.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Salesforce’s billings punched in at $6.89 billion in Q1, and over the last four quarters, its growth slightly outpaced the sector as it averaged 10% year-on-year increases. This alternate topline metric grew faster than total sales, meaning the company collects cash upfront and then recognizes the revenue over the length of its contracts - a boost for its liquidity and future revenue prospects.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Salesforce is very efficient at acquiring new customers, and its CAC payback period checked in at 27.8 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation due to its scale. These dynamics give Salesforce more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

For software companies like Salesforce, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Salesforce’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 77.3% gross margin over the last year. That means Salesforce only paid its providers $22.66 for every $100 in revenue.

This quarter, Salesforce’s gross profit margin was 77%, in line with the same quarter last year. Zooming out, Salesforce’s full-year margin has been trending up over the past 12 months, increasing by 1.3 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Salesforce has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 19.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Salesforce’s operating margin rose by 1.6 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, Salesforce generated an operating profit margin of 19.8%, up 1 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Salesforce has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 32.8% over the last year.

Salesforce’s free cash flow clocked in at $6.30 billion in Q1, equivalent to a 64.1% margin. The company’s cash profitability regressed as it was 2.6 percentage points lower than in the same quarter last year, but it’s still above its one-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, leading to short-term swings. Long-term trends trump temporary fluctuations.

Over the next year, analysts predict Salesforce’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 32.8% for the last 12 months will increase to 34.3%, it options for capital deployment (investments, share buybacks, etc.).

Big corporations like Salesforce are attractive to many investors in times of instability thanks to their fortress balance sheets that buffer pockets of soft demand.

Salesforce is a profitable, well-capitalized company with $17.41 billion of cash and $11.37 billion of debt on its balance sheet. This $6.04 billion net cash position is 2.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

This was a beat and raise quarter, although the beats were fairly modest. Specifically, we enjoyed seeing Salesforce beat analysts’ billings expectations this quarter. We were also glad its full-year EPS guidance was raised and slightly exceeded Wall Street’s estimates. Overall, this print had some key positives. The stock traded up 5% to $290.16 immediately after reporting.

Updated: July 9, 2025 at 10:01 PM EDT

Are you wondering whether to buy Salesforce or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Salesforce doesn’t top our investment wishlist, but we understand that it’s not a bad business. Although its revenue growth was uninspiring over the last three years and analysts expect growth to slow over the next 12 months, its bountiful generation of free cash flow empowers it to invest in growth initiatives. Be wary, however, as Salesforce’s ARR has disappointed and shows the company is having difficulty retaining customers and their spending.

Salesforce’s price-to-sales ratio based on the next 12 months is 6.2x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $352.92 on the company (compared to the current share price of $270.90).