Salesforce: Bigger is Better These Days
Dreamforce kicks off today, as the SaaS pioneer weathers the current tech rout and macro upheavals. By Benjamin Tan.
The Largest SaaS Company in the World Giving the Greatest Show on Earth at Dreamforce
Salesforce ($CRM) is big. With FY 2023 revenue projected to top $30 billion, it is the largest SaaS company in the world, and the only one included in the Dow Jones Industrial Average.
Marc Benioff, founder of Salesforce, is also big - literally. At well over six feet tall, he towers over almost everyone. And everything he does is also big, most evidently at the annual Dreamforce event. With the 20th Dreamforce kicking off today (September 20th, 2022) in San Francisco, Benioff is expected to put on the biggest show ever:
We have an amazing line of product announcements and innovations and speakers and giving back. It's going to be a big Dreamforce. It's going to be really the biggest Dreamforce ever, our 20th ever Dreamforce.
Red Hot Chili Peppers is performing at the event. No apparent budget cuts there.
Size Matters: Enterprise Customer Base Providing Topline Resilience
Amidst a weakening macro environment, size is proving to be a real competitive advantage for any SaaS company weathering the economic storms. As the largest (and default) customer relationship management platform in the world, Salesforce counts more than 150,000 companies as customers, and its key accounts include many government agencies and Global 2000 entities. With the global economy coming under pressure, it is usually the small and medium-sized enterprises (SME) that suffer more, given their weaker financial positions. Software companies that cater primarily to the SME cohort are already seeing greater impact on their pace of customer add, retention and churn. For Salesforce, having a marquee customer base provides much more business stability and durability.
Renewal deals have become even more important than landing new logos these days. As IT budgets get slashed and deal scrutiny heightens, many software companies are reporting longer sales cycles with increased levels of required approvals and negotiations. Customers are reevaluating spending and investment priorities - this has a disproportionate effect on new deals versus renewals. Point solutions are also more at risk of getting displaced as customers look to consolidate technologies onto larger platforms to reduce complexities and costs. All these factors favor larger software companies that already provide comprehensive platforms with multiple modalities. The likes of Salesforce, Crowdstrike ($CRWD), ServiceNow ($NOW) and Zscaler ($ZS) continue to thrive on renewal deals from their existing enterprise customers, while enjoying record retention. With sticky and fiscally healthy customers, there is less pressure to replenish logos, which can be very challenging and expensive in this environment.
The rich does get richer among corporations too.
Salesforce Q2 2023: A Review
If Larry Ellison - co-founder, chairman and CTO of Oracle - is the king of self-promotion, as demonstrated on the most recent Oracle earnings call, then Marc Benioff is the prince. He was, after all, Ellison’s protégé at Oracle for 13 years. When announcing Salesforce’s first ever share repurchase program, Benioff does so in his bombastic way:
And I'm excited to tell you we have found a great cloud company, growing revenue for 73 consecutive quarters through every economic cycle. It's got great cash flow, number one market share, an incredible brand, one of the most admired companies in the world, great values, fantastic community of 17 million Trailblazers, fantastic commitment to its community, runs across 90 countries and that company is Salesforce. We're thrilled that our Board of Directors has authorized up to $10 billion in our first-ever share repurchase.
Q2 2023 was a solid quarter compared to other software companies. While sales outlook is reduced - by a small margin outside of FX adjustments - FY 2023 revenue is still expected to grow by 20% in constant currency, which is impressive considering the massive scale at which Salesforce already operates. Q2 revenue attrition remains at record low of 7.5%. Non-Gaap operating income margin is projected to be maintained at 20%, with multiple levers being pulled to generate cost savings that offset a slightly lower topline. On the other hand, Salesforce also printed slower RPO numbers and billings, as deals are taking longer to close, even if they are just renewals. Fundamentally, Q2 2023 is both a reflection of macro weakness and the enduring strength of a SaaS giant welded to the software architecture of modern day enterprises.
At current enterprise value of less than $150 billion, Salesforce is trading at a mere 4.6x FY 2023 revenue. Profitability is still rising with scale, and its FY 2026 revenue target of $50 billion was reiterated on the Q2 2023 earnings call.
Perhaps Benioff betting big ($10 billion in share buybacks) on Salesforce - versus acquiring another target - is blazing a new trail for investors to follow. And a safer one than other SaaS options out there.
(Author is long Salesforce)
Join Consume Your Own Tech Investing to receive a welcome email with the following:
Latest Top 10 conviction Consumer and Tech positions in my portfolio
Book recommendations on investing, consumer and technology sectors
One article delivered into your inbox every Tuesday
Preview of upcoming articles
In addition, you will receive Subscriber-Only emails with updates to my portfolio and latest recommendations on books to read.
Follow me on Twitter @ConsumeOwnTech