Now that I am writing a weekly tip for the CRM Tip of the Day, I have reduced my blog cadence down to one post a month. As Salesforce reports their finances quarterly, this means literally 1/3 of my posts in a year would be about Marc’s experiment in creative accounting.
With things like Flow, PowerApps, and the new unified interface, that is simply too much bandwidth to be devoted to the software Microsoft rejected. So I will do a financial report at the end of the fourth quarter and the lemonade stand cash flow analysis but save the rest for mostly Dynamics content.
It has been a big year for Salesforce from a financials perspective. Through one-off sales and tax write-offs in the past, Salesforce had shown an artificial profit. Now they seem to be generating a real one (the lemonade stand will confirm it but that will have to be another post). The margin is not great compared to the competition and, in my opinion, the stock price is expensive for what you get, but a profit is a good foundation for a business.
What is interesting about this quarter is what has NOT been reported. Salesforce love telling the good news and hiding the bad news. This is why they hold on to Non-GAAP accounting as tightly as they do. A couple of other trends have been working against them and these have mysteriously disappeared from the financials and their web site. Let us go to the numbers.
Salesforce in the News
Benioff has been petitioned from within by hundreds of Salesforce employees to cancel contracts with US Customs and Border Protection over its separation of children from their parents at US borders. This will be a true test of whether the organisation puts cultural values ahead of profit.
I must admit I was confused by Salesforce’s acquisition of MuleSoft. Reading this article makes me think this is Salesforce trying to create their own version of Microsoft Flow. Time will tell.
An interesting take on how LinkedIn fills a gap in the Microsoft sales ecosystem. There are a lot of great technologies out there. The winner will be the one who can bring them together in a way which is intuitive for users.
Numbers of Note
No More Transactions or Staff Numbers
In the last Salesforce review I called out their transactions were shrinking.
I wanted to update this graph but the information is conspicuously absent from the Salesforce Trust site. My guess is the line continues to move down. Show the good news, hide the bad.
Similarly, the financial report no longer reports staff numbers. In that case there was nothing really untoward. Staff growth was around 4% per quarter, which was less than revenue growth but that was about it. Perhaps they do not want to admit they are working their staff harder?
Costs Have Jumped
Cost growth has rocketed from 2% to 8% per quarter, rushing past the 6% revenue growth. As we have discussed before, if costs are growing faster than revenues, profitability will decrease.
GAAP vs Non-GAAP
Salesforce continues to embrace Non-GAAP reporting to the tune of ten mentions of Non-GAAP to three mentions of GAAP for a difference of seven. So many walnut shells, so few peas.
The same words again were the only ones mentioned more than ten times:
Every quarter, for the last four quarters this has been the case. The speech focus never alters and, arguably, the same could be said for the content. I started Buzzword Bingo to get an idea of the focus Salesforce was putting in the quarter; where their strategy lay. The truth is Marc never alters his patter. Every quarter is great and there are no problems or, at least, none he wants to mention.
Predicting the Future
As I am only going to do this review annually, it seems fitting to try and predict the revenue and profit 12 months out. This is much harder but here we go. For the next Q4 report, I predict a revenue of around $3.8b with a 2.5% margin giving a profit of $95m.
In terms of the measures, not a lot changes from quarter to quarter at Salesforce these days so, in terms of interest factor, moving to annual reviews is probably a good thing. It will be interesting to see in a year’s time what data is included and omitted and this, I think, will be where the gems will be.
For this quarter, while there is something suspicious happening with transaction growth, the company appears to be genuinely profitable from a GAAP perspective although costs are accelerating. I will enjoy doing the cash analysis to get a bit more insight into this new, profitable world to see exactly where the money is coming in from: genuine sales or something else.