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Salesforce – “The Blizzard Doesn’t Last Forever, It Just Seems So.”
The above sub-heading comes from a quote by Ray Bradbury, a well-known author, whose most famous work was “Fahrenheit 451.” I thought it particularly appropriate after the months of share price bloodletting. I have not written about Salesforce (NYSE:CRM) on the SA platform for about 4 years now. I liked the shares at that point. I liked it at that point when the shares were $130, and I think it is an interesting portfolio addition now, with the shares currently near $170 on Monday morning, July 17th. In the interim, since I last wrote about the company, its shares have seen as wild a ride as many much smaller companies, with shares peaking at $305 last November, before rerating sharply in the last several months.
Salesforce – A recommendation for a perilous market
The backdrop for investing in equities of most kinds, or indeed in any kind of risk assets is troublesome, and far more troublesome than this author had envisaged some months ago. Geopolitical risks have risen and the war in Ukraine has seen no signs of resolution. The rise of the dollar has impacted most IT vendors whose business has a significant international contribution. Inflation headlines have been at crisis levels. Economic growth is deteriorating, and despite June’s job report, the trend of unemployment and layoffs particularly June’s Challenger layoff data seems to inevitably portend lower or even negative job growth in coming months. Supply chain issues are still troublesome and impacting many businesses. Commodity prices have plunged; even oil prices, the major factor in recent crisis inflation numbers have retreated 10% in the last month. Most recently, the CEO of ServiceNow (NOW) talked about macro concerns weighing on demand, and the survey results on CIO intentions are flashing amber after a long boom.
Given that backdrop, how should investors focus their portfolios. The July Fund Manager Report as compiled by BofA Securities shows that 58% of panelists are taking less risk, and are “in full capitulation mode.” Most market strategists, and many other commentators are talking about owning what are considered defensive stocks, and those with significant yields.
Salesforce, as an investment is nothing like that, although this article tries to build a case as to why the company’s business model is more recession resistant and “defensive” than appreciated.. I have focused on companies in the IT space whose unique positioning is leading to market share gains of sufficient magnitude to tame macro headwinds. Salesforce is not quite that either, although it has and continues to enjoy market share gains.
Salesforce is one of the largest enterprise software companies in the world. Depending on definitions Salesforce is either the 2nd or 3rd largest enterprise software company. So, it is not easy for a company with this level of penetration into so many markets to grow its market share, or even to grow as fast as the overall market. And yet that is exactly what the company has accomplished. Of course, some of the recent growth of Salesforce has been inorganic, with Slack its most recent significant acquisition. That said, the Slack transaction closed on July 21, 2021 and thus future results of Salesforce will show just organic growth…unless of course, the company makes a significant acquisition.
At this point, unless one has been living under a cairn of rocks, almost everyone is aware of all the problems in the economy from inflation, crashing commodity prices, stock price rerating and now recession. If everyone already knows about these factors, it seems difficult to believe that the portfolio strategies suggested by strategists are going to produce decent returns, although they probably will avoid steep drawdowns.
My recommendation of Salesforce isn’t because the shares are “defensive.” I do believe, however that the company’s size, its breadth of product offerings, its unparalleled sales execution and some of its technologies are likely to spare the company from the worst business ravages of the coming recession. But more important for me, is the opportunity of the company and the shares in the rebound that will arrive at some point. Just as there are signs that the peak inflation has been reported, soon traders will start to speculate about counter-cyclical measures, and at some point, the long-term growth drivers of enterprise software will reassert themselves, with Salesforce being a disproportionate beneficiary.
Being one of the larger dogs in the kennel has particular advantages in a recession. In particular, given the strong cash flow this company generates, and its decent balance sheet, it is in a position to make acquisitions in the software space that would have been uneconomic a few months ago. Just as Unity Software (U) was able to essentially “steal” ironSource (IS) with its acquisition, I think it almost inevitable that Salesforce will find a couple of strategic steals over the coming months.
Taking a brief look at what Salesforce is about these days
At this point, Salesforce offers 6 major clouds. These are its sales cloud, the company’s historic foundation, its marketing cloud, its commerce cloud, its service cloud, its experience cloud, and its analytics cloud. And then, of course, it offers what it calls Customer 360 which is the combined offering of all what the company sells. I will just briefly review the functionality of each of the 6 major clouds as a reference point and to provide a background to those readers who are not particularly familiar with the company.
The Salesforce sales cloud is essentially a template in which to record account data, contact management, lead management and tracking, product management and specific campaigns. Just about everyone in the enterprise software space offers a set of products that are competitive. Probably the most significant competitor these days is Microsoft (MSFT) with its Dynamics 365 offering. Of course, Oracle (ORCL) and SAP (SAP) are important competitors. Pegasystems (PEGA) is also a competitor along with HubSpot (HUBS) and Zendesk (ZEN). It would be hard to make a case that Salesforce has a “better” or more featured product than its competitors. That is an argument that could never be resolved and “better” means different things to different users. But Salesforce has one of the great enterprise sales engines of all times. And almost inevitably, when users consider updating any kind of sales automation capability, Salesforce will be at the evaluation. Finally, the sales cloud is part of a platform.
Salesforce also offers a marketing cloud that is not at all the same as its sales cloud. This cloud was initially built on top of the acquisition of Exact Target, an email marketing company. One of the offerings in the marketing cloud is what is called Email Studio, which is the updated version of the Exact Target e-mail solution. These days, email marketing is most often used as part of an integrated, cross channel platform which Salesforce calls Advertising Studio. And there are additional SKU’s as well.
After all these years, it is hard, I think, for anyone to suggest that there is one email marketing tool that is unique and really differentiated from the many alternatives in the space. Oracle acquired both Eloqua and Responsys in the space. Twilio (TWLO) bought SendGrid, Hubspot has a marketing hub alternative and Adobe (ADBE) has a solution it calls Campaign. And there are many, many others. It is very difficult for anyone not involved in making a purchase decision to evaluate the differentiation between the various competitors. It would be challenging in the extreme to try to make the case that Salesforce has some kind of existential technology advantage. That is almost certainly not the case. But again, two factors have enabled the growth of the marketing cloud. One is the massive and efficient sales and marketing spend of Salesforce, and the other is that the Salesforce marketing cloud is part of a complete set of solutions with integration possibilities and growth paths.
Salesforce offers what it calls a Commerce Cloud which is used to manage ecommerce activities and it is designed to enable B2C functionality. The offering was built on the 2016 acquisition of Demandware. Demandware was a relatively small company when Salesforce bought it for almost $3 billion. Salesforce wanted a consumer-centric offering, and this is it. When Salesforce bought Demandware the ecommerce space was nascent. Subsequently, the emergence of Shopify (SHOP), BigCommerce (BIGC) and many other companies has upended the competitive dynamics of the space. While there are a few well-known brands such as Kellogg (K), New Balance, Godiva and adidas (OTCQX:ADDYY) using the Salesforce solution, its growth trajectory has been far more modest than had been the case before acquisition.
Most entrepreneurs seeking to build a new ecommerce store are going to gravitate toward the industry titan, Shopify, or its most recognized competitors. The most significant attribute of the Salesforce Commerce platform is that it is part of the overall Salesforce offering, and it offers tight integrations with other Salesforce applications, although it is easy to over-value those integrations since at this point almost all ecommerce platforms are well integrated into Salesforce.
Salesforce offers a Service Cloud which functions as a help desk and provides a customer service platform. The Service Cloud has basically been built on the foundation of Click which was acquired about 3 years ago. Click had essentially developed the Salesforce Field Service Lightening product and thus it was a natural integration. The offering uses AI to develop scheduling solutions that greatly enhance the productivity of mobile workforces, and also improve customer satisfaction with the field service experience.
Looking at the market for service management can be a bit tricky. For example, one might think a company called ServiceNow is a Service Cloud competitor, but the reality is quite different. ServiceNow dominates the ITSM (IT Service Management) space, but it is not really used as field service solution to manage service requirements beyond the IT space. There are numerous alternatives that provide customer service and field service solutions of various kinds and complexities. LiveChat is fairly well known. Oracle as a comparable product, as does Atlassian (TEAM). SolarWinds (SWI) also offers a help desk solution. There has been a fair amount of functional convergence amongst the competitors, and it would be next to impossible to grade their respective capabilities. Atlassian’s Jira Service Desk is far cheaper than the other competitors and its integration with the Jira platform gives it some significant advantages.
Salesforce offers an experience cloud. It is not an enormous revenue generator, but is instead intended as a service that facilitates communications between customers, employers, partners, and agents. It basically allows an organization to create an in-house social media platform. It is one of the features that have made Salesforce apps as sticky as they have been.
Like many companies, Salesforce had wanted to develop a set of advanced analytics solutions. Tableau, whose portfolio never had been that, had stumbled badly and its transition to a subscription model was messy, and resulted in disappointing financials along with a compressed share price valuation. Enter Salesforce, and the Salesforce Analytics Cloud was born. Tableau’s basic offering was an intuitive visualization solution-intuitive enough so that this writer could use it. Of course, it has evolved in the 3 years since it has been owned by Salesforce and now includes Einstein, the AI technology that has been incorporated into many Salesforce applications.
There are many competitors in the analytics space. Probably Power BI from Microsoft has the highest market share, but it can be difficult to obtain accurate statistics for the space. All of the substantial application vendors have their own analytics solutions that are, of course, optimized to work well with the solutions offered by the different vendors. IBM (IBM) offers its Watson Explorer which uses that well known AI capability. The most direct competitor of the Salesforce analytics cloud is probably Qlik, which these days is owned by P/E. While Alteryx (AYX) is often listed as a competitor, it has a dramatically different set of functionality that is application neutral and solves more complex queries than is typically the case for the Salesforce analytics cloud.
Salesforce currently offers 9 other clouds of which its Integration offering is probably the most significant. The integration Cloud was initially built on the foundation of Quip which Salesforce acquired in 2016. It was integrated into other Salesforce apps about 3 years later. Today, with Mulesoft, which Salesforce acquired in 2018, the company has a very robust integration framework. The former CEO of Quip, Bret Taylor, is now the co-CEO of Salesforce and is the likely successor of Marc Benioff..
While none of the Salesforce Clouds are unique or embody some specific advanced technology, the company’s success and outlook is built on the integration of its clouds, and their ability to function together. While it is often said in many fields of endeavor that the sum of the parts is worth more than the whole, that is particularly true for Salesforce. The whole at Salesforce provides users more than they might get in terms of functionality from the individual parts. Many other software companies try to build integrated platforms; few have done so as effectively as has Salesforce. The other factor that has made Salesforce as successful as it has been is simply sales execution. It can be difficult to evaluate this attribute as there are no particular quantitative metrics, not even Magic Number analysis, that can define this. But the fact is that Salesforce consistently grows its different business clouds on an organic basis faster than the particular markets in which it operates seem to be growing. That, I believe, is a function of superior sales execution, and anecdotal checks that I access have long supported the quality of the Salesforce go-to-market process.
Salesforce-Another quarter of strong results
Salesforce reported the results of its latest quarter at the end of May. Investors and analysts were impressed, both by the results, and raised operating margin guidance. In the 5 days after earnings were announced, the shares rose by 17%. But like much else in this market environment, after the spike the shares have retreated, and they are now just 6% above where they were before earnings were released as of Tuesday morning, July 18th.
Like many other IT companies, Salesforce shares no longer have a premium valuation, a combination of share value evisceration coupled with revenue growth and margin expansion. Quarterly revenues were a modest beat, although the company overcame noticeable FX headwinds. The company’s revenue guidance for the balance of the year was adjusted by about $300 million, or less than 1% to account for additional FX headwinds.
The company had forecast non-GAAP earnings for the quarter of $.94. Non-GAAP EPS for the period was $.98. The company had forecast non-GAAP EPS for the year of $4.64; it is now forecasting non-GAAP EPS for the year of $4.76, basically a function of operating margin assumptions that have improved from 20.0% to 20.4% due to effective cost management. That is an operating strategy that is appealing to many investors concerned about pressures from inflation and the potential of a recession impacting future revenues.
Probably of greatest interest to most was the discussion about the current and foreseen business climate. Here are specifics comments from 3 Salesforce executives relating to that topic.
Marc Benioff
We’re carefully watching the economic data. I know all of you are doing that as well. And so far, we’re just not seeing any material impact from the broader economic world that all of you are in. Our demand environment where demand is very strong, and if you look over the last 23 years, Salesforce has proven to be incredibly resilient based on this incredible business model. We have an incredible technology model that we have, where we’ve been through all kinds of dot-com crashes and recessions and financial crises and global pandemics and all of you have watched us go through every possible storm, but we continue to weather these storms through the power and strength of our model.
In addition to the remarks of Marc Benioff, here is a quote from Gavin Patterson, basically the head of sales for Salesforce
Gavin Patterson
Thanks, Bret, and thank you, everyone, for being on the call today. I want to start by talking about the strong demand environment we’re in. As Bret and Marc said, even in this volatile environment, companies are continuing to invest in their digital transformations, and we’re seeing that in our strong pipeline and momentum in the business. I’ve been on the road this quarter across the U.S., Europe, Asia and most recently in Davos. And in all my conversations, there is a real sense of urgency with our customers. In this new or digital work-from-anywhere world, our customers need to create incredible customer experiences across every interaction to stay competitive. And at the same time, they need to realize productivity gains, efficiencies and resilience from their technology investment
And here is a commentary on the same subject by the company’s CFO, Amy Weaver
Amy Weaver
To close, while there is uncertainty in the macroenvironment, our customers are continuing to come to Salesforce to transform their businesses. The demand we are seeing from our customers is a testament to the strength of these strategic relationships and the relevance of our product portfolio. This gives us confidence in the durability of our business model, and we’re excited to help our customers navigate in this changing economy.
Amy Weaver
Great. Kirk, I’ll take the second part of your question here on the guide. Look, we feel good about what we’re seeing. And you’ve heard that from Marc, from Gavin, from Bret, to put about our pipeline. But we’re mindful of the uncertain macroenvironment, and that includes continuing FX volatility. And so I believe that our guidance is appropriately conservative under the circumstances.
Would these executives answer that question the same way in the 3rd week of July. My basic assumption is that most enterprise IT companies will moderate their growth estimates, and that includes Salesforce. But I think the question really is by how much. If Salesforce grows 14% rather than 18% next year, but improves operating margins by another 50-100 basis points with a concomitant increase in free cash flow margins, is that really worth the kind of share price hair cut it has experienced? Salesforce shares are down by 34% so far this year, despite EPS and cash flow estimates that have risen over that time; surely that has something to do with investor concerns about growth. There have been no recent changes in estimates or in ratings by analysts in the last several weeks since immediately after earnings. At that time, of course, estimates were raised to be congruent with company guidance. At this point, analysts estimate for fiscal ’24 call for growth of 18%-all organic, along with EPS of $5.84. My current model calls for a little less revenue growth, and a little higher EPS than the consensus.
I think that looking at RPO balances, when they are provided by a company, usually presents the most comprehensive view of the sales performance. Last quarter, the company’s RPO balance grew by 20% to $42 billion. About 5% of that growth was a function of the acquisition of Slack, while the balance was negatively impacted by about a corresponding amount because of FX.
Some of the clouds had unusual success last quarter. For example, growth in the Sales Cloud actually accelerated to 18% as reported. The company talked about its integration between Tableau and the Sales Cloud driving some of that accelerating growth.
Service Cloud achieved growth of 17% last quarter. To an extent unanticipated, but somewhat unique in such a large organization, the company has focused on extending use cases for applications that might otherwise be considered to be in their declining years. That to me is part of the superior sales execution that has been a key component of growth for many years.
Last quarter the company’s multi-cloud offering, Customer 360 was particularly strong. During the call, the company CEO called out…well specific customer relationships as a demand tailwind. The fact that the company has been around for a couple of decades, and has a stable of executives with strong personal relationships with many of its customers is surely one of those factors that will serve it well as a recession impends.
Why has Salesforce been able to sustain growth of nearly 20% as it reaches the $30 billion revenue plateau?
As I see it, there are 3 basic factors that have enabled Salesforce to achieve results that are quite surprising given its size. One of those is that it is in the right markets. For example, the largest business vertical for Salesforce remains its sales automation offering. CRM is hardly a new application, but according to the market research link here it still has a CAGR of above 13%. According to the chart presented as part of the study, it is actually growing at close to 20% this year and next, although some of that may be deferred if IT budget growth is constrained due to a recession.
The market for customer self-service which is a second key Salesforce offering is supposed to have a CAGR of 21% as this linked study shows. The marketing automation software market size is estimating to have a 13% CAGR for the next 5 years. And the sales analytics software market is anticipated to achieve a CAGR of almost 12%. It seems self-evident, but one overarching reason for the success of Salesforce is that its solutions are in the right markets and are large enough, and are amenable to new use cases to provide the company with a substantial growth runway. Not to take anything away from the success of Workday (WDAY) for example, but for it to maintain a high-teens growth rate requires very substantial market share gains because its target markets are only achieving mid-single growth at the most, and are probably far more prone to growth constraints from a recession than is the case for Salesforce.
Slack, which was acquired last summer, recorded growth of 26% on a constant currency basis this past quarter, moderately greater than had been forecast. The growth of Slack is obviously benefitting significantly from its integration with the overall Salesforce platform, and that will continue to be the case. Given the competition Slack faces from Microsoft Teams and Atlassian Jira, I think the integration with the other Salesforce offerings is a key strategy that is achieving success. Slack had just reached non-GAAP profitability when it was acquired by Salesforce, and its integration is having some moderate impact on margins this year, which should reverse in fiscal 2024.
A second major element of the success of Salesforce is the cross-functional appeal of its software. While most enterprise software companies have achieved success in selling platform based solutions, and have grown at elevated rates by doing so-just think of CrowdStrike (CRWD) and Datadog (DDOG) as examples-Salesforce has been amongst the most successful at executing this strategy. I am not trying to make the case that any of the different Salesforce clouds has superior functionality, although they obviously all function at high levels. But what I think is quite evident is that the tight integration, a consistent UI, and the ability for different applications to work seamlessly together is very attractive to large enterprise users and has been a principal factor in driving adoption, and achieving consistent market share gains.
Finally, and to reiterate, Salesforce is a company that has been successfully built on a high level of sales execution. Sales execution doesn’t matter as much during periods when software demand is strong. There are lots of opportunities, and most of the time the quality of sales management, and following disciplined sales execution strategies is less important than just having a product that fills a particular requirement. But that changes significantly in an environment in which IT budgets are under pressure, and there are more “duck hunters than ducks” as my Texas friends would have it. Not all sales personnel enjoy the Salesforce methodology; from what I have heard of it, I doubt I would. But it works; besides the disciplined methodology, the company’s depth of contacts is also likely to be a source of support that becomes more visible in a recessionary environment.
The Salesforce business model
Salesforce these days is a profitable company, even on a GAAP basis. From time to time some commentators on SA talk about the dilution due to the company’s SBC. I personally prefer to use trended shares outstanding in considering dilution. SBC is not nearly as straightforward as some would have it. The standard way to calculate it is the use of the Black-Scholes formula. And GAAP requires the recognition of SBC in certain quarters because of certain events. When shares fall precipitately, as has been the case for this company along with many others, there will be few exercised options as most will be under water, and the dilution potential will be reduced. I would rather see more dilution and a higher share price. Overall, in my valuation calculations, I used 1.05 billion average shares for the full year, compared to 1.01 billion fully diluted shares reported in Q1 results.
The debate about SBC far transcends its consideration in terms of an analysis of Salesforce. I am not going to settle it, and I am not sure how I might do so, given the different arguments that are presented on both sides of the question.
Most recently, average fully diluted shares at Salesforce have increased because of the recent acquisition of Slack, which was done using some stock as well as some cash. Shares outstanding have also increased because of the vesting of some options, particularly those granted by Slack which vested because of its acquisition. Last quarter, SBC was $763 million, or about 10.5% of revenue, compared to about 9.3% of revenues in the prior year. As it happens, SBC is below average for Salesforce compared to the average software company, but it is greater than SBC expense for some of the largest software companies as a percentage of revenues.
Slack contributed about 4.6% of revenues last quarter; as mentioned it had just reached non-GAAP profitability when it was acquired and given some acquisition expenses it probably has been about a 200 bps headwind to operating margins thus far.
Salesforce gross margins were 77.8% non-GAAP, compared to 78.1% of revenues on a non-GAAP basis the prior year in Q1. Research and development expense was 14% of revenues non-GAAP vs. 13% of revenues the prior year. Sales and marketing expense was 38% of revenues last quarter vs. 37% of revenues the prior year. General and administrative costs were 7.6% of revenues in this past quarter vs. 8.2% of revenues in the same quarter the prior year. Overall, non-GAAP operating margins for the quarter were 17.6% compared to 20.2% of revenues in the prior year.
Salesforce margins like its revenues follow a seasonal pattern, and the company is projecting full year non-GAAP operating margins of 20.4%. As mentioned, that was one of the more significant surprises of this past earnings release. Basically, the company has slowed hiring, reduced the growth of its travel expenses, and gone through an exhaustive review of costs. It was self-evident on the call that both operating margins and free cash flow have become existential priorities for this company. I have provided another comment from Amy Weaver that focuses on the subject of margins.
Amy Weaver
Sure. I’d love to. So, hi, Keith, thanks for the question. As you noted, I really am very, very pleased about the raise on our operating margin up to 20.4% for this fiscal year. This is not the result of any single change. It’s really driven by disciplined decision-making and trying to really unlock incremental efficiencies across the entire business. We’ve asked each leader to step up to really look across their business and to strategically prioritize their investments. And this is really to make sure that we’re getting the highest return for every dollar that we invest.
You asked about hiring, again, as a result, we’re going to continue to hire, we are hiring. But we’re doing it in a much more measured pace, and we’re focusing the majority of our new hires on roles that will support customer success and the execution of our top priorities. This focus on margin, this is really over the long term, and we are all committed that this is going to make us a stronger company. But I do want to reiterate, this is not just a finance-led initiative. This focus on discipline is being applied across our entire organization. This is supported by Marc, by Bret, by Gavin and truly by our entire leadership team.
If there is one thing that software companies can control, it is costs. Most of their costs are related to personnel, and items like travel, and office expenses. It is a pretty consistent theme across the enterprise software space these days, that operating expenses are going to be controlled.
In looking at the investment case for Salesforce, it is the commitment of the company to improve its business model that I see as a particular strength, particularly in the event of an economic downturn. No doubt, the company will be sacrificing some growth potential for a year or two, in exchange for building up its free cash flow margins and its cash balances, but that seems to be what investors are currently prioritizing.
The company is forecasting that its operating cash flow will increase by about 22% in the current fiscal year. That would bring that metric to about $7.3 billion, and would probably bring free cashflow to around $6.7 billion, or a free cash flow margin of 21%. All things being equal, that kind of free cashflow would bring the company’s net cash position to close to $10 billion. On this latest call, the company denied it had any plans for a significant acquisition or that it was seriously contemplating share buybacks. But there are more opportunities now to deploy cash than has been the case for years and while integration is a hard task as management highlighted on its call, the opportunities are considerable. I seriously doubt that Salesforce won’t use its resources to enhance its strategic opportunities on some kind of opportunistic basis, or at the very least start buying back stock in some meaningful way.
Wrapping up! – The valuation of Salesforce and the case to buy the shares.
In the past, it used to be said that Salesforce shares were expensive. And indeed, there are some authors on SA who still believe that to be the case. I have followed this company for many, many years. In all of that time, its valuation metrics have never been so attractive, and its market position has never been quite as solid as is the case these days.
Frankly, I usually like to find companies that are less well known, and which are creating new categories. Salesforce is not quite such a company, but the addition of Brett Taylor as co-CEO has given the company a sharper product focus that is a bit of a change for the company compared to era in which Keith Block was co-CEO and the focus on margins is also a bit of a change.
It is hard to believe, but these days, Salesforce has a valuation that can be expressed in terms of a P/E ratio. Based on the latest consensus estimates, the company should achieve a non-GAAP EPS of $5.30-$5.40 over the coming 4 quarters. So, its P/E ratio is now 31X. I really prefer to look at free cash flow yields as opposed to just a P/E ratio. I think the company’s free cash flow yield, again based on forward cashflow, is a bit more than 4%. That is more than a respectable free cash flow yield for a company whose longer term CAGR is still in the high teens percent. The company’s Rule of 40 metric is probably just shy of 40-although it is likely to exceed that level, either in FY’24 or the following year. For the first time since I have maintained a chart that adds the free cash flow margin and the EV/S ratio and divides by the growth rate, Salesforce share are valued below average. Using the assumptions I have made with regards to future operating performance metrics, and a weighted average cost of capital of 7.8%, the median value shown by Finbox, the current NPV of the shares is $255.
But aside from the raw numbers, I believe the investment case for Salesforce rests on a business model and a go to market process that is more resistant than most alternatives within the enterprise software space to an impending recession. I believe that there is a tendency in times of budget constraints to consolidate spending on fewer vendors. And I believe, as well, the company’s sales process is efficient and thorough. While Salesforce operates in business areas in which it is more or less impossible to proclaim winners and losers in terms of functionality, its platform approach is appealing to many larger enterprises. And while I expect most enterprise software company’s to “get religion” in terms of cost containment, Salesforce has a sense of urgency in that process that bodes well for achieving goals in terms of margins.
The company has had success thus far with its Slack acquisition, and with integration expenses peaking, it will provide some additional cost leverage.
I think the focus of some on SBC is misplaced, although I am obviously not going to solve that debate. If nothing else, lower hiring as planned is going to reduce SBC, much of which is created when employees are initially hired. The company has said that a major acquisition is “not part of the current playbook.” Still, in a recession, there will be opportunities for Salesforce to use its balance sheet to augment its CAGR that would not otherwise exist. I think Salesforce will produce significant Alpha for holders through a recession and even as the economy starts to recover.
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