What investors are watching when Salesforce reports 3Q results on Wednesday

Published Tue, Nov 29 20223:41 PM ESTUpdated Wed, Nov 30 20227:58 AM EST

Club holding Salesforce (CRM) is set to report fiscal third-quarter 2023 results after the closing bell Wednesday, and we'll be looking to see how the enterprise software maker has weathered gathering macroeconomic headwinds. Salesforce, which develops cloud-based, customer relationship management software for businesses, has consistently delivered revenue growth in recent years through its subscription-license model. But like other tech giants, Salesforce has been weighed down by a stronger U.S. dollar — making its products too pricey for many international customers — and by customers tightening their IT budgets amid slower global growth. Analysts expect third-quarter earnings-per-share to come in at $1.21 a share, down 4.7% from the same period last year, while total revenue should climb 14% year-over-year, to $7.82 billion, according to estimates compiled by Refinitiv. Here are the top 3 factors the Club is looking out for when the print comes in Wednesday. Near-term operating margins Investors will be closely watching operating margins to ensure the company can scale up and expand into new markets, all while maintaining profitability. Last quarter, Salesforce reiterated it expects its operating margin for 2023 to climb by 170-basis points year-over-year, to 20.4%, a bullish forecast in the face of currency headwinds and broader economic uncertainty. For its current quarter, we'll be looking to see if Salesforce can maintain that guidance, at a minimum, and hopefully raise it. Either scenario would be welcome news for shareholders like us, who want to see Salesforce turn a profit even as the Federal Reserve raises interest rates to rein in inflation. Activist pressure Salesforce has committed to profitability over the long run, management reiterated at an investor day in September. The company set new targets of $50 billion in revenue, with operating margins of 25% or higher, for 2026. In a research note Sunday, analysts at Stifel described the margin expansion forecast as "intriguing in a slower growth environment," while calling the target "highly achievable." At its recent investor event, Salesforce also provided insight into its $10 billion share repurchase program, the first in the company's history, saying it plans to return average free cash flow of 30% to 40% to shareholders. Still, investors would like to see management do more. Activist investor Starboard Value has said Salesforce can create more value for shareholders . The hedge fund, run by Jeff Smith, announced a stake in the cloud giant in October. He sees Salesforce as a leader in the industry and argues that the stock trades at a discount to peers due to slower revenue growth, arguing the company hasn't generated enough profitability to offset those weaker sales. Starboard sees "significant additional opportunity to expand margins beyond 25%" and wants Salesforce's management to be more aggressive in driving incremental margins, while growing free cash flow, in the coming years. Demand environment Salesforce could see softer demand, as enterprise customers are forced to tighten budgets and manage expenses in a slower global economy. That concern ultimately led the company last quarter to lower its revenue forecast for 2023 by approximately $800 million. Last quarter, Salesforce warned that its customers have taken a more "measured approach" to their businesses due to macro uncertainty. That's resulted in stretched sales cycles, additional deal-approval layers and deal compression — all common themes across enterprise software companies that have impacted sales growth. Indeed, many enterprise software companies are learning the hard way that their businesses are not as immune to the economic slowdown as previously thought. Still, Morgan Stanley calls concerns of a "meaningful slowdown" in growth to be "overblown." "Salesforce remains well positioned within the highest priority IT budget initiatives," analysts at Morgan Stanley wrote in a recent note. (Jim Cramer's Charitable Trust is long CRM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Dado Ruvic | Reuters