3 Things to Watch When Salesforce Reports Earnings on Tuesday

Salesforce's second-quarter earnings will reveal how COVID-19 has changed its customers' priorities.
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With Salesforce earnings up next, investors are about to learn more about how enterprise software is faring in COVID-19.

Salesforce  (CRM) - Get Report, which reports its second-quarter results on Tuesday, kicks off a days-long stretch of enterprise tech earnings. And Salesforce's results will reveal how COVID-19 has changed its customers' priorities and purchasing decisions. 

"Enterprise companies largely began settling into the realities brought about by COVID-19 in the past quarter with remote work becoming the new norm," said Craig Traxler, co-founder at digital services firm and Salesforce partner Avionos. "We saw a shift in priorities as digital initiatives that drive revenue and improve customer engagement replaced operational efficiency and internally focused initiatives...Salesforce has worked to counter that slowdown by incentivizing customers to purchase now and new product offerings such as Work.com.”

For the quarter ending in July, analysts are expecting EPS Of 67 cents on sales of $4.9 billion. Here's what to watch when Salesforce reports its latest results.

1. Software Demand

Recent research points to a mixed bag for Salesforce's demand. According to a recent survey by Deutsche Bank, some of Salesforce's products, such as its Service Cloud, appear to be trending higher during COVID; others, like its productivity tools, "are not being prioritized at the moment," wrote analyst Taylor McGinnis. Feedback on Salesforce's Sales and Marketing clouds was more mixed, according to Deutsche Bank. 

The bank's checks with Salesforce partners indicate that while "the broader business still remains under pressure, a few areas are outperforming and helping to offset the negative impact from the current environment." Salesforce investors will find out Tuesday whether the good outweighed the bad, and management will likely offer commentary on the demand outlook. 

2. Billings Growth

As with any enterprise software firm, billings growth are a key indicator of the health of the business. Heading into earnings, Wall Street's consensus for Salesforce billings growth is around 14% year over year. Barclays analyst Raimo Lenschow is a bit more bullish, forecasting 16% growth along with "room for a beat" given easier compares with last year. 

Further, Salesforce's prior conservative guidance -- which established modest expectations for this year -- could make a beat across the board more likely, according to Barclays. "We see this as a 'measure twice, cut once' approach adopted by the management team, something we also saw during the last financial crisis when Salesforce delivered beats and raises consistently after the initial reset," noted Lenschow. 

3. Operating Margins

Salesforce's operating margins have been a key debate for investors in recent years, and they will surely remain a point of focus on its second quarter earnings call. The company guided for flat year-over-year operating margin improvement for fiscal 2021, which "left investors questioning why Salesforce is not messaging more improvement when other software vendors are in this environment (notably Workday)," Deutsche Bank noted.  

More than 50% of investors expect Salesforce to raise its operating margin guidance by somewhere between 10 and 50 basis points, according to Deutsche Bank. But the initial flat guidance could also indicate that Salesforce is giving itself leeway to invest if the opportunity arises. Investors will be tuned in for any clues on Tuesday.