Salesforce 1Q FY27 Earnings Update: Solid Quarter, Stricter Multiple

• Salesforce delivered a solid first-quarter performance, with both revenue and earnings topping market expectations. Revenue growing 13% y/y to USD 11.1 billion, while operating margin expanded to a record 34.8%. 
• Under the new FY27 reporting structure, Agentforce Apps grew 7% y/y to USD 6.91 billion, while Data 360, Headless Platform and Other grew much faster at 23% y/y to USD 3.68 billion. 
• Rising competition from enterprise software players such as Oracle and Microsoft is starting to show in the legacy product mix , where Service Cloud slowed to 5% y/y, Marketing and Commerce declined -2%, and Integration and Analytics grew only 1%, while Platform, Slack and Other accelerated to 43% y/y. 
• Despite management remained confident in a stronger 2H recovery, softer growth across several legacy clouds and cRPO growth of 13% y/y (in line with expectations), point to a gradual rather than sharp recovery. 
• In 1Q FY27, more than half of Agentforce and Data 360 bookings came from existing customers, while premium Agentforce SKUs anchored around Sales and Service grew bookings by nearly 60% y/y, showing that AI adoption is being monetised through Salesforce’s existing customer base.
• 1Q results suggest this open-platform (headless 360) approach is working without cannibalising the existing business model — the company continues to see net seat growth, with seven of the top 10 mega-deals adding new seats alongside the AI consumption layer, and premium Agentforce SKU bookings grew at about 60% y/y. 
• 1Q strengthens our view that Salesforce remains a high-margin software compounder even as AI usage scales. Operating margin expanded 250bps y/y to 34.8%, while operating income grew 22% y/y to USD3.9 billion. 
• Encouragingly, we are not seeing higher Agentforce usage and token consumption pressure the company’s profitability, as Salesforce is using AI internally to absorb more engineering, support and employee workflow activity without adding the same level of headcount.
• We maintain our BUY call on Salesforce but revise our fair P/E from 17 times to 15 times, deriving a target price of USD260 and implying upside of 39%.

Salesforce delivered a solid first-quarter performance, with both revenue and earnings topping market expectations. Revenue growing 13% y/y to USD 11.1 billion, while operating margin expanded to a record 34.8%. Meanwhile, EPS rose 50% y/y to USD3.88, although the headline beat was partly supported by strategic investment gains and the accelerated share repurchase. More importantly, Agentforce ARR crossed USD1.2 billion this quarter, supported by stronger net-new AOV and steady cRPO growth of 13%, suggesting AI adoption is continuing to build.

Top-line growth remained steady

Though not a strong upside surprise, Salesforce’s top-line remained steady in 1Q, with revenue rising 13% y/y to USD11.1 billion while subscription and support revenue increasing 14% y/y to USD 10.6 billion. Notably, the subsegment performances are showing that the growth is increasingly coming from the data, platform and AI-related layers rather than the traditional application stack alone.

Under the new FY27 reporting structure, Agentforce Apps grew 7% y/y to USD 6.91 billion, while Data 360, Headless Platform and Other grew much faster at 23% y/y to USD 3.68 billion. The split in reporting likely suggests that Salesforce’s next phase of growth will be driven less by traditional seat expansion alone and more by how deeply customers use its data layer, workflow engine and AI capabilities. Meanwhile, within the app layer, Sales Cloud was the key positive, growing 10% y/y, while Slack also performed well, with its MCP surpassing 1 million active users within six weeks of launch.

That said, rising competition from enterprise software players such as Oracle and Microsoft is starting to show in the legacy product mix , where Service Cloud slowed to 5% y/y, Marketing and Commerce declined -2%, and Integration and Analytics grew only 1%, while Platform, Slack and Other accelerated to 43% y/y. As such, we are seeing a steady but narrow recovery, with Sales Cloud, Slack, Data 360 and Agentforce carrying the major growth, while Marketing, Commerce and Tableau remain the main drags.

Table 1: Salesforce’s 1Q FY27 Key Financial Performance.

Despite management remained confident in a stronger 2H recovery, softer growth across several legacy clouds and cRPO growth of 13% y/y (in line with expectations), point to a gradual rather than sharp recovery. That said, net-new AOV continued to outpace total AOV growth, supported by stronger new bookings and lower leakage. We see this as a better read of underlying demand during the current transition, as more deals are being structured around ELAs, Flex Credits and Agentforce-led consumption, which may not flow through cRPO as cleanly as traditional seat-based contracts.

Figure 1: cRPO came in largely in line with expectations, pointing to a gradual recovery ahead.

AI-related revenue shows notable growth

Salesforce’s AI-related revenue continued to scale, with Agentforce ARR reaching USD 1.2 billion, up 205% y/y, while combined Agentforce and Data 360 ARR reached USD 3.4 billion. In 1Q FY27, more than half of Agentforce and Data 360 bookings came from existing customers, while premium Agentforce SKUs anchored around Sales and Service grew bookings by nearly 60% y/y, showing that AI adoption is being monetised through Salesforce’s existing customer base, where the company already owns the data, workflows and enterprise relationships.

On top of that, usage also accelerated sharply, where Salesforce delivered 1.6 billion AWU (Agentic Work Units), bringing cumulative AWUs to 3.8 billion, while tokens processed rose 152% q/q to 28.6 trillion.

Meanwhile, against the backdrop of rising AI disruption risk, enterprise workflows may increasingly move into external AI models and agent interfaces. By opening Salesforce data and actions through Headless 360 via MCP and APIs, Salesforce reduces the risk of being bypassed by external agents. Encouragingly, Q1 results suggest this open-platform approach is working without cannibalising the existing business model — the company continues to see net seat growth, with seven of the top 10 mega-deals adding new seats alongside the AI consumption layer, and premium Agentforce SKU bookings grew ~60% Y/Y. That said, we believe further monitoring is needed, as upside still depends on whether off-platform usage can convert into Flex Credits, Data 360 consumption, larger renewals and recognised revenue. With 4.5 million MCP calls and 1 million Slack MCP users in the first few weeks, early adoption is encouraging, but Headless remains monetisation optionality rather than a proven revenue driver.

Figure 2: Agentic Work Unit (AWU) surged 111% q/q on the back of rising AI agent adoption.

The earnings wheel is still rolling

1Q strengthens our view that Salesforce remains a high-margin software compounder even as AI usage scales. Operating margin expanded 250bps y/y to 34.8%, while operating income grew 22% y/y to USD3.9 billion. The expansion was primarily driven by sales and marketing leverage, as can be seen in the S&M expense fell from 30% to 28% of revenue as larger deal sizes, a higher mix of existing-customer expansion, and AI-assisted selling generated more revenue per sales dollar. Although margins remain in the mid-30s, we believe Salesforce’s path toward its ambitious Rule of 50 still depends on sustaining low-double-digit subscription growth and continued productivity gains.

Encouragingly, we are not seeing higher Agentforce usage and token consumption pressure the company’s profitability, as Salesforce is using AI internally to absorb more engineering, support and employee workflow activity without adding the same level of headcount. This gives us more confidence that AI can scale as both a monetisation layer and a productivity tool within Salesforce’s own cost base.

Meanwhile, cash generation remains strong on an annual basis, with FY27 operating cash flow and free cash flow margins still expected in the low-to-mid 30s despite higher ASR-related financing costs. On top that, EPS grew 50% y/y to USD3.88, although that was boosted by the lower share count following the USD25 billion accelerated share repurchase.

In terms of guidance, Salesforce maintained FY27 operating margin guidance at 34.3% and raised EPS guidance to USD14.06–14.12. As such, although the buyback is accretive at the current valuation, we expect Salesforce to continue demonstrating its ability to convert recurring revenue into high-margin earnings and cash while AI monetisation builds.

Figure 3: Operating income continued to expand despite steady top-line growth.

Table 2: Management guidance.

Lower fair P/E; Reiterate BUY call

We maintain our BUY call on Salesforce but revised our fair P/E from 17 times to 15 times, on the back of 2 structural challenges that validated in this quarter:

1.      Salesforce’s shift from seat-based subscriptions toward Flex Credits, ELAs and usage-based Agentforce consumption reduces near-term revenue visibility. While the consumption-based model may unlock stronger growth over time, it is less predictable as this form of revenue will bypasses ARR entirely.

2.      Agentforce AI remains early. Agentforce run-rate is strong, (ARR reached USD1.2 billion, up 205% y/y) but still represents only around 3% of Salesforce’s annualised subscription revenue, with usage still concentrated in customer support.

That said, with estimated revenue CAGR of close to 10% over the next 3 years and operating margin expected to expand to approximately 37%, we believe Salesforce remains a high-quality company trading at an attractive valuation. Accordingly, we maintain our BUY recommendation on the stock, with a target price of USD260, implying upside of 39%.

Table 3: Salesforce’s Valuation

Investment risks

1.      Stagnating top-line growth 

Although management is still guiding for a stronger 2H revenue acceleration, cRPO came in broadly in line for two consecutive quarters, while several legacy clouds remain soft.

2.      Competition remains intensified.

Slower growth in Service Cloud reflects the fact that customer service is the use case where AI-native vendors (Sierra, Decagon and Intercom) compete most directly, while established SaaS leaders such as Microsoft Dynamics 365 continue to gain traction.

3.      Agentforce ROI remain unclear.

The USD25 billion ASR is accretive at the current valuation, but part of the EPS uplift came from lower share count and strategic investment gains. Sustained upside still depends on organic revenue recovery, AI monetisation and continued margin discipline.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report holds a position in the abovementioned securities.

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.