Salesforce: Second Quarter Second Wind

How quickly time flies. Doing my three-part Flow blogs meant my review of the Salesforce second quarter results was delayed. Salesforce is again flirting with profit but at the cost of growth. Let us set sail.

Whispers on the Wind (Salesforce in the News)

Benioff Closing the Gender Pay Gap: A good news story. Benioff has been steadily working to eliminate the gender pay gap at Salesforce. So far he has thrown US$6m at the problem. This is a good thing. Looking at the executive (five women to seven men is not bad) they are doing well compared to many companies although the board (three women to nine men) still needs a bit of work (not that Microsoft’s board is any better). See if you can spot Marc in the line up. Hint: he is the one who cannot look at a camera.

Salesforce vs Dynamics 365: Not a bad summary of the differences

Salesforce Culture is About Control: This is an article about a couple of Salesforce speakers who spoke out of school at a conference and got fired for it. This is one of the big differences between the Microsoft and Salesforce cultures.

As an MVP, for example, I can say pretty much whatever I like about Microsoft and Dynamics 365. I can talk at whatever conference I like and Microsoft has no say in the matter. If I was asked to go on stage at Dreamforce and talk about the ten biggest things that suck about Dynamics 365, as long as I do not break NDA, Microsoft would not stop me. I never ask permission from Microsoft about what community activities to engage in, ever, and neither does any other Microsoft MVP.

In contrast, Salesforce MVPs need to get permission from Salesforce for their speaking engagements. If Salesforce do not like the idea of one of their MVPs speaking at a specific event or engaging in a specific interview, that MVP can either go along with Salesforce or risk losing their status.

In other words, Microsoft MVPs are community advocates whereas Salesforce MVPs advocate in the community.

The Prevailing Winds of the Stock Price

Clearly the market was favorable towards Salesforce over this quarter taking the stock from around 90 to just over 95 (stock currently at 93). As we will see, Salesforce edged into profitability this quarter which may explain the rise but, usually, it is growth that gets the market excited, not boring sustainability.

Where the Wind Blows (Numbers of Note)

Salesforce Turns a Profit

Salesforce has edged into the black this quarter with a margin of 0.7% ($17m in profit). As can be seen, the graph is erratic and not under control but it is heading in the right direction. Let us see if the other numbers of note can explain how they got there.

Stable Revenue Growth

Annual revenue growth has been remarkably constant, at around 26%, over the last two years. In contrast, cost growth has danced around over the same period and has gone from being at a historic high last quarter to being on par with revenue growth.

This is certainly key to profitability. You cannot become more profitable unless your revenues grow faster than your costs. Reining in the costs can only be a good thing. Where cost growth will go from here is anyone’s guess but one hopes it continues to go down.

Staff Growth

Staff growth, while still growing, is the slowest is has been for two years. This could be part of the explanation for the profitability. If Salesforce can get the same workforce to do more work, they increase productivity without increasing salaries. The motto at Salesforce used to be “every month is end of quarter”. Maybe it is now “every week is end of quarter”.

Transactions are Declining

I have mentioned before that I do not understand the server transaction numbers when compared to the revenue growth of the company. One would expect that revenue is a function of subscribers and server transactions would also be a function of subscribers but while annual revenue growth is constant at around 26%, the number of server transactions is actually shrinking.

At the time of writing (30 September) the largest daily transaction, according to Salesforce, is 5.7b transactions on 28 September. In comparison, when I wrote the last article, three months ago, the largest was 5.8b. Somehow, in three months, revenues have gone up but transactions have gone down. I can only think that the Salesforce services in high demand take less computing power than the less desired ones. It is strange, though.

Three Sheets to the Wind (GAAP vs Non-GAAP)

GAAP did get mentioned twice but NON-GAAP (the watered cocktail of the accounting world) got mentioned six times so we have four hurricane glasses this quarter (image courtesy of http://www.wowcher.co.uk).

I continue to predict that if profitability continues GAAP mentions will increase.

Lots of Hot Air (Buzzword Bingo)

	2017 Q2	2017 Q3	2017 Q4	2018 Q1	2018 Q2
Number of words	2511	2505	3317	3278	3000
Customers/Customer	17	20	26	28	25
Revenue	19	18	31	28	21
Cloud	16	12	14	22	16
Growth	9	10	15	16	19
Operating	6	3	18	11	7
Salesforce/Salesforces		20	18	40	26

Nothing has changed on the buzzword bingo front. It is the same keywords which have got ten or more mentions over four quarters. We can see an increasing emphasis on growth (despite revenue growth being flat) and no focus on profits (of course).

Which Way the Wind Blows (Future Prediction)

Last report I predicted revenues of $2.5b (we got $2.56b so all good there) and breakeven which is also close to the 0.7% margin achieved so I am quite pleased with myself.

For next quarter, I predict another profitable quarter (maybe $30-40m) on revenues of just over $2.7b.

Conclusions

Nothing too exciting to report other than Salesforce achieving the unicorn of a legitimate profit. It will be interesting to see if profitability increases and, if so, what happens to growth. So far Salesforce has managed to keep revenue growth constant but profitability will put pressure on this as marketing and sales dollars are restricted.

Also, what of that weird transactions result? Next quarter will reveal whether this was an outlier result or a continuing trend. If transactions continue to decline, what does this mean for Salesforce and their future prospects?