The Six Five team talk through the latest earnings report from Salesforce.
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Transcript:
Patrick Moorhead: Let’s move into SaaS, gigantic, gargantuan company, Salesforce, and the Slackquisition. How did Salesforce do for the quarter?
Daniel Newman: I keep tweeting the Slackquisition and I keep hoping it catches on. I’m not entirely sure it has, but I think I’ll trademark that, the Slackquisition. Another great quarter for the company, 23% growth followed up from 23% growth. Again, another law of large numbers situation. Now jettisoning past six billion on the quarter, beating expectations or strong beat over 50% on the earnings side as well, so more profitable. Something very interesting that was going on there was, I think in the top end, it gained about a billion dollars in software revenue, while only adding about cost at about a 10%. So, there’s really interesting economics of scale, economies of scale with software that you buy capacity, infrastructure, support, and then you can grow to a certain point without adding a ton of cost.
Eventually you have to buy more, so you’ll see those margins compress over periods of time. But the bigger story here, what’s really interesting is CRM, CRM both as a category and as the ticker for Salesforce, we always thought about the sales cloud. I mean, that’s really where it was at. That was what the business was. Well, just so you know, there’s four major segments, sales, service platform and marketing and sales is now the slowest growth category. It’s also the second smallest of the four categories now. The missing story here, and I wrote a piece on MarketWatch about this and I’ll put it in the show notes, is that what investors, and what the market, and what industry really should be paying attention to when it comes to Salesforce, is their whole platform play.
Really the story as I see it, is there are many players in each of the four categories. If you go to CRM, if you go to service cloud, if you go to marketing, you have competitors. Some really good companies, you’ve got the SAP’s, Oracles, you got Adobes. But what Salesforce eye is on is not any of those individually. Salesforce’s eye is on this two horse race with Microsoft. It’s very clear what’s going on here and the $27 billion acquisition of Slack, a company that was only running at a billion dollar run rate at the time of the acquisition, 27 times revenue and a company that was growing at about 10% as fast as Zoom during a pandemic that was powering remote work, was all about building this operating system for work of the future.
Salesforce and Marc Benioff understand that if you want to win the net revenue expansion across all your products, what you need to do is build the epicenter of how people engage with work. The past was email, the future is asynchronous collaboration and communication. There are many tools that allow us to video meet. There are many tools that allow us to chat, but there are a few tools out there that allow us to connect, our ERP, our CRM, our marketing stacks, our entire data, our platforms, our infrastructure, our unstructured data sets, social media, contact center, services and make it all available. And by the way, connect at all where you can use a chat app to make meaningful changes, inputs and communications throughout your organization. That’s what’s going on with Salesforce. So, while the growth in their platform of 24% powered by Tableau and MuleSoft at this point largely, now Slack is going to get added into that category, but it’s not just about the revenue that Slack is going to add into that category, it’s about the fact that all of these other things that Salesforce wants to sell are going to become more saleable because of Slack.
That’s the whole gamut here. Salesforce nails this, they’re going to be very competitive with Microsoft. Now, there’s some gaps, Salesforce doesn’t have IaaS, but they have a very deep partnership with AWS. Salesforce doesn’t have video yet, in the sense of Slack is not really the tool for doing video and that’s where a Zoom tie up with Five9 gets more interesting. That’s where Teams is obviously interesting, WebEx from Cisco, but I believe it’s an easy add, including they could use Chime if they really wanted to go there through their AWS partnership to add that layer in there.
They have a productivity stack with Quip. It’s been underutilized and undersold. So, there’s just a lot going on here, but that is the untold story of these earnings. The numbers were good, the numbers were fine, but the question mark is can Marc Benioff, who’s talking heavily about the future of work being remote and hybrid and not changing back to an office-based work environment, capitalize on a $27 billion acquisition by tying in his entire stack of services, using a few strategic partners and trying to compete with the amazing job that Microsoft has done building an entire, IaaS, PaaS, SaaS ecosystem, head to toe, fully integrated and ubiquitous all on the Teams surface? I guess we’ll have to see, Pat.
Patrick Moorhead: Yeah. So I do appreciate you leaving me content. I mean, listen, I’m … first of all, congratulations on financially architecting a great quarter. Big questions I have are, do you know, a single person who uses Quip? Have you ever met anybody who uses Quip? And how many people are using Salesforce email systems or Salesforce video? Most of the information, at least about companies, is being created in email and video and in productivity applications. How does Salesforce get access to that information?
Now, it has good access to customer information, hence Salesforce from a CX perspective. I give them credit there, but how do they tap into any of that information without buying their own video service, building their own video service with AWS, like I think they’re doing now, where they can get access to that video?
And to your IaaS commentary, compared to Microsoft, Salesforce cannot access that profit pool. So, AWS has a 31% op inc and let’s say they give Salesforce 50% discount, which takes you to 15% op inc, that’s 15 points. By the way, they would never do 50% for them. But let’s just say worst case, that’s 15 points of margin that the company doesn’t see. The other thing that I’m going to start digging into are acquisitions. Like you said, sales was basically flattish. If you look at the acquisition of Slack, Acumen, Velocity, Evergage, ClickSoftware, Tableau, Datorama, MuleSoft since 2018, those businesses were generating $3 to $4 billion annually on their own. So, I’m wondering what is the net additive effect? I give credit to Salesforce salespeople for doing this, but I have yet to really see the true power of integration aside from selling, which is important.
So, those are my thoughts. Congratulations to Salesforce on their quarter. Daniel, let’s move on. We said chips and Saas, but let’s go from Saas to chips.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
