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Salesforce profit outlook buoys software maker against activist investors

Salesforce hopes that the improved profitability it has gained from layoffs, especially in its Mergers and Acquisitions group will ward off attacks by activist investors.

Salesforce Inc.’s latest results and coming changes such as disbanding its deal-making committee might be enough to undercut some of the chief concerns floated by activists against the business-software provider, according to analysts.

Salesforce on Wednesday reported better-than-expected fourth-quarter earnings and upbeat guidance for the year, including improved profitability amid a cost-cutting push. Co-founder and Chief Executive Marc Benioff said the company is focused on improving its profit by reducing its head count, paring real-estate costs and eliminating a committee focused on mergers and acquisitions. 

The results should placate some activists that have pressed Salesforce to focus on improving profit amid a revenue slowdown, analysts said. Salesforce shares surged as much as 16% to $193.91 on Thursday morning. They closed at $186.59, up 11%.

"We believe a strong quarter and guidance should help [Salesforce] conclude its activist investor episode," D.A. Davidson analyst Gil Luria said in a research note, adding that the projected growth rates, cost cuts and steady share buybacks "should help defang the activist argument that [Salesforce] is not making sufficient progress."

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Salesforce expects adjusted operating margins of about 27%, up from 22.5% in the previous year and pushing past an earlier target to hit 25% by 2026. Stifel analyst J. Parker Lane said the results and outlook should help put to rest investor concerns. The company might still face questions about a tough macroeconomic environment and succession planning, but "Salesforce appears poised to successfully execute the pivot to sustainable profit growth while maintaining its category leadership," he added.

The company is ratcheting up its focus on margins after delivering top-line growth of 17%, after stripping out currency effects in the fourth quarter. The better-than-expected growth, along with guidance for coming double-digit revenue increases, should make it "harder for activists to ask for more short term cuts," said Mr. Luria, the Davidson analyst.

Salesforce is facing pressure from at least five activist investors, including Elliott Management Corp. and Starboard Value LP, that are lobbying management for change. The Wall Street Journal reported in January that Elliott was preparing to nominate its own slate of directors. Last month the activist investor privately nominated a slate, according to people familiar with the matter, The Wall Street Journal reported.

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Elliott praised Salesforce’s plans in a statement on Wednesday, saying the company needs to deliver on what it has outlined and go further.

"Salesforce needs a sustainable leadership plan and a board that demonstrates it can provide accountability through proper oversight," Elliott said. "Elliott intends to continue working with Salesforce as we evaluate the level of engagement necessary to achieve the best outcome for the company."

The return of capital was a sticking point for activist investors. Salesforce said Wednesday that it has increased its share-repurchase program to $20 billion after buying back $2.3 billion of its stock in the fourth quarter—a move that makes it "very hard to argue [Salesforce] isn’t returning value to shareholders," wrote Mr. Luria of Davidson.

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Mr. Benioff said the company, which has long relied on mergers and acquisitions to grow, is also disbanding its M&A committee as it focuses on driving efficiency. The move away from M&A should help soothe "the activist chatter," Wedbush analysts said, adding that they believe other strategic options, such as a potential spin-off of the business-messaging platform Slack, could remain under consideration.

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