Salesforce: Is The Bear Going Into Hibernation?

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It has been a long break but it is back to the blogs and to start off the new year, it is the Salesforce quarterly review. Salesforce hit their third quarter just before the break and here is the breakdown.

Salesforce on the Grapevine (Salesforce News)

Salesforce and Google: The New Celebrity Romance

A while ago, Salesforce and Microsoft were going steady but things went bad. Salesforce now has a new love in their life in the form of Google and their ‘strategic partnership’ together. When it was Microsoft, a ‘strategic partnership’ meant ‘grooming for acquisition’. Interesting times if this is Google’s intention. The news for now is Google is building integrations to Salesforce; the first of which is allowing Salesforce sales data to be analyzed with Google Analytics. This fills a nice BI gap for Salesforce. A romance to watch.

Benioff Compares Facebook to Tobacco

Marc Benioff, suggesting “technology has addictive qualities”, believes it should be legislated like cigarettes. For Australia that would mean a warning splash page showing the detrimental effects of Facebook arguments and unproven health remedies and a ban on using social media within pubs and restaurants. He might be onto something.

Salesforce to Buy Twitter?

As well as the rumor of Google buying Salesforce, there is also the rumor of Salesforce buying Twitter, although the evidence is thin at this stage. This could be Benioff biting his thumb at Microsoft’s acquisition of LinkedIn or it could be a stronger play into the social media market to enhance their CRM suite.

The Undulating Hills of the Stock Price

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Again a favorable quarter for the share price, probably due to the improved profitability with revenue growth uncompromised.

Landmarks (Numbers) of Note

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While it is hard to divine a pattern in the margin graph, it is true that in the last year, the curve has mostly improved and Salesforce is making a few percent in profit.

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While the cost growth has waivered around, for two years the revenue growth has sat steady at around 25% year on year. As mentioned before, the game here is to keep the red line above the green one to improve profitability. As we can see, red is flat and green is heading downwards. This bodes well for Salesforce’s continued profitability. In fact, at the biggest gap between the lines in two years (5%), this is probably the best news in the financials.

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Here is the interesting one and the reason for the title. While revenues are growing, transactions shrank, again. This time down from 5.7b transactions to 5.4b. If more customers are embracing Salesforce, as suggested by the revenue growth, why are transactions falling?

As I see it, there can be only two explanations: either the customer base is not increasing and revenue is being driven by price increases or people are getting the same services with less transactions somehow being committed on the servers.

False Trails in the Woods (GAAP vs Non-GAAP)

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Just like last month, GAAP was mentioned twice and Non-GAAP six times so we drink four mason jars of moonshine this quarter. I maintain my prediction the gap will reduce as Salesforce becomes profitable.

Noises in the Dark (Buzzword Bingo)

First of all we have the unusual occurrence of a phrase getting more than ten mentions. In this case Marc and the gang said the phrase “our customers” exactly ten times. It is an admirable focus. How about the single words?

2017 Q3

2017 Q4

2018 Q1

2018 Q2

2018 Q3

Number of Words

2505

3317

3278

3000

3018

Customers/Customer

20

26

28

25

21

Revenue

18

31

28

21

19

Cloud

12

14

22

16

13

Growth

10

15

16

19

13

Operating

3

18

11

7

8

Salesforce/Salesforces

20

18

40

26

30

CRM

15

7

5

No changes in the key words thrown out in the quarterly transcript proving that nothing new is really said each quarter; just a recrafting of the same messages. The only discernible pattern is all words have gone down in total mentions since 2018 Q1.

Getting the Lay of the Land (Predicting the Future)

Last quarter I predicted a profit of $30-40m (they made a little over $50m so well done Salesforce for exceeding my expectations). For revenue I predicted $2.7b which hit the mark.

For next quarter, I predict revenues just shy of $2.9b and for profitability, I am going to go out on a limb and predict Salesforce to break through the $100m mark.

Conclusions

In terms of acquisitions, it is obviously interesting times. Google and Salesforce together would be a formidable competitor to Microsoft. This being said, while I consider Salesforce and Dynamics 365 as on par with each other, I am still a fan of Microsoft Office over the Google office apps. Then there is the question of Salesforce’s lack of an ERP offering to counter Dynamics 365.

Financially, things are not too bad at all. Salesforce has a profit and growth remains steady. The fly in the ointment is the diminishing transactions which appears to be a trend and not an aberration. It is like a company which sells cars getting more profitable but having no cars on the lot; there is something strange afoot.

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