Salesforce: The Bear Awakens

Before I look at the Salesforce numbers each quarter, I always fear it will be more of the same. Not the case this time around with more mixed signals than a Morse code operator with a hand tremor. We also have my predictions to weigh up so let us see how I fared.

The Numbers

I was asked last week if I make these numbers up. The answer is no. The majority come directly from Salesforce’s own website. The ‘earnings’ call transcripts I get from Seeking Alpha, Google statistics from Google Trends and the insider trade statistics from Yahoo (which get them from the SEC filings lodged by Salesforce). All I bring to the table is Excel’s graphing and trend analysis tools.

	2014 Q3	2014 Q4	2015 Q1	2015 Q2	2015 Q3
Revenue	1,076,034	1,145,242	1,226,772	1,318,551	1,383,655
Subscription Revenue	1,004,476	1,075,001	1,147,306	1,232,587	1,288,513
Revenue Cost	268,187	273,530	292,305	307,831	333,211
Operating Cost	905,778	975,458	989,808	1,044,154	1,072,486
Salesforce Income	-124,434	-103,746	-96,911	-61,088	-38,924
Highest Transaction				2,037,819,946	2,502,030,346
Transaction Growth qoq					23%
Revenue Growth # yoy	287,636	310,561	334,139	361,457	307,621
Revenue Growth % yoy	36%	37%	37%	38%	29%
Revenue Growth % qoq	12%	6%	7%	7%	5%
Total Cost % yoy	39%	46%	37%	36%	20%
Staff	12,770	13,312	14,239	15,145	15,458
Staff Growth (yoy)	37%	36%	38%	20%	21%
Margin	-11.56%	-9.06%	-7.90%	-4.63%	-2.81%
Growth Difference	-3%	-9%	1%	2%	9%
Cash	651,750	781,635	827,891	774,725	846,325
Accounts Receivable	604,045	1,360,837	684,155	834,323	794,590
Cash/AR	108%	57%	121%	93%	107%

There is a new addition to the rows here with the ‘Highest Transaction’ row. This is taken from the trust.salesforce.com site and is the highest Transactions value shown for the date range at the time of writing. As discussed previously, the transaction count is my new basis for predicting an approximate user base for Salesforce. Quarter on quarter, transactions (and therefore subscribers) rose 23%. Nice work.

Staff growth is still low and is suggesting a new normal for Salesforce. The loss for the quarter was a mere $38 million which is the smallest it has been for about two years so also not a bad result.

Revenue and Cost Growth

The big change is in Cost Growth. At an annual growth rate of 20%, this has practically halved, compared to recent quarters, and is close to the growth rates from five years ago. Marc has put the brakes on sales and marketing spending. This, in turn, has put a dent in Revenue Growth but not to the same level. Revenue Growth was down to 29% meaning Salesforce has reversed the trend of costs outpacing sales and, if they keep it up, means they can sustainably return to profit. This is reflected in the Growth Difference where we now see three quarters of positive difference (revenues accelerating away from costs). Another great outcome.

Here it is graphically.

Both Revenue Growth and Cost Growth have dropped but Cost Growth more so. The moving averages are now at about the same point meaning, if things progress as they are, we are moving from costs spiralling out of control to sustainable profitability.

Subscribers

Using the formula derived previously, as mentioned, subscribers have grown 23% to around 17 million. In terms of how profitable they are, in line with the growth changes, we see a positive result.

The key line here is the bottom one. Income (profit/loss) is still negative (about -75c per user per month) but is trending in the right direction (it is about half of what is was last quarter) and could well be close to positive next quarter.

Cash and Accounts Receivable

The two remain entwined this quarter with Cash nudging slightly above Accounts Receivable. While this is good, it is too early to call this a win with the moving average remaining largely unaltered.

Earnings Call Buzzword Bingo

The rule is the words on the list have had ten or more mentions in the past five periods with the text used being the call transcript after the introduction and up to, but not including, questions.

	2014 Q3	2014 Q4	2015 Q1	2015 Q2	2015 Q3
Number of words	3700	3700	2400	4731	3922
Customers/Customer	39	25	22	38	34
Revenue	37	29	19	27	26
Cloud	31	14	15	22	47
ExactTarget	21	15	7	8	1
Platform(s)	21	12	10	13	27
Service	19	13	13	15	12
Sales	16	4	6	6	7
Growth	14	12	9	18	16
Marketing	12	11	5	10	8
Cash	10	16	10	11	9
Mobile	7	5	2	8	8
Operating	7	10	11	11	8
Enterprise(s)	7	3	8	10	8
EPS	5	6	6	6	5
Salesforce1	0	11	6	7	7
Dreamforce				11	14
Analytics					14

This quarter we say goodbye to ‘Mobile’ and ‘EPS’ (Earnings Per Share). As to why Marc is no longer pushing his EPS statistics, I am not sure. The magical non-GAAP treatment is still turning a standard EPS loss into a non-standard EPS profit so why not? Could Marc be finally distancing himself from the black art of non-GAAP numbers?

Similarly, the push for mobile seems to have waned with “Cloud” and “Platform(s)” being the Salesforce catchcry of the quarter. In the case of both of these words, mentions literally doubled since the last call.

Salesforce, it seems, is no longer a social CRM and it is not a mobile app development tool; it is a cloud development platform.

The newcomer our list is ‘Analytics’. Now that Salesforce actually has some Business Intelligence tools in the form of the “Analytics Cloud”, it is doing its best to promote them.

The only word in danger of dropping off the Salesforce newspeak vocabulary list next quarter is “Sales”. The origins of Salesforce as a sales force automation tool are being lost as it diversifies to be more than just CRM.

Google Trends

Nothing too surprising here. Salesforce continues to focus on North America, with Dynamics CRM being more spread across North America, Europe and Australasia.

Insider and Institutional Sales

I tweeted earlier this week about a significant shift in insider sales. Here are the numbers from Yahoo.

	2014 Q3	2014 Q4	2015 Q1	2015 Q2	2015 Q3
Insider Sales	0.50%	0.50%	0.50%	0.40%	4.70%
Institutional Sales	2.75%	2.72%	2.71%	2.67%	3.20%

Insider sales (sales of shares by the Salesforce executive) have jumped tenfold. I have often talked about the constant sales for shares by key figures such as the CFO but a tenfold increase in offloading in the previous six months of transactions is huge.

In fact, digging into the details, it is only one of the executive whose selling has caused this shift: Marc Benioff, CEO and Chairman. Marc used to sell a lot of shares, back in the old days, but had not sold too much for close to two years. Then, in June this year, something changed. Marc, between 9 June and 7 November offloaded something like 1.8 million shares (roughly worth $100m). Yahoo also tells us Marc has 39 million shares in Salesforce (about 6% of all the shares in the market according to the Salesforce financials) which means this little sell off was about 5% of his holdings.

I cannot guess why Marc has retained so little of his company or why he is striving to own less, when he speaks so positively about the future prospects of Salesforce and, in this quarter, the numbers show optimism.

Looking to the Future

Last quarter I predicted revenues of $1.4b (they were $1.38b) and a loss of $40m (it was 39m) so I am pretty happy with my work, especially with the predicted loss, which Salesforce predicted would be twice as high.

Next quarter I predict revenues of $1.46b-1.48b and a loss of around $20m (Salesforce predict $1.44b in Revenue and around $60m in loss)

Conclusions

Salesforce are fighting back to profitability and, if it was not for Marc offloading his ownership of the company, this would be a glowing report card for the company. Diversification of their product offering seems to be working and, if it is, it will become evident in the next couple of quarters.

Why Marc and other members of the executive continue to wax lyrical about the future of the company only to immediately sell their ownership of the company confuses me to no end. One possible reason is that they feel the price of the shares is too high and, even if Salesforce go from strength to strength, their money can be better invested/spent elsewhere. This is pure speculation, of course.

Profitability and sustainable growth has eluded Salesforce for years now. This quarter has been the first to give me hope that such goals are possible for them. The full year results and the next couple of quarters will confirm if my optimism is well founded.

Another Successful Summit

Winding up after another really great MVP Summit. For the CRM MVPs, Summit was a little unusual this year. Microsoft’s CRM Product team were in Barcelona for Convergence 2014 Europe when the main MVP Summit was on, so Microsoft generously put on a ‘Special Summit’ just for the CRM group a week later, on the product team’s return. Microsoft was under no obligation to do this, so it was greatly appreciated by all.

What’s Coming

The product team have been very open this year with the MVPs, including them in giving feedback on design elements and opening up the pre-release programs to them for testing. As usual I am under NDA on this week’s content but I can say I am very excited about the upcoming ‘Fall Release’ and beyond. There is a nice balance of new features and tidying up the existing system, which is great.

If you are curious about what is coming, some information was released at Convergence 2014 Europe and the videos are available here.

What is really impressive is how much the product team are doing, given the product family has increased so much. Not only are they working with the core CRM product but they now have Parature, Social Listening, Dynamics Marketing and the Unified Service Desk to either develop directly or integrate with (all on the existing  six month release cadence). Getting all these moving parts to work with each other is no simple task and I do not envy them in this but they appear to be tackling it very well.

The MVPs

A big part of Summit is meeting up with ‘The Family’. It was a term used a lot this week to describe the group and it is accurate. We are, despite being from all over the world, quite closely knit. There were also a few new MVPs this year, which is great. As the product grows, it is almost impossible to be across everything so mixing with other individuals, passionate about the product, is a great way to ‘fill in the gaps’ on the knowledge (and share a few war stories).

Another thing which was apparent was there is a bit of consolidation going on in the CRM partner ecosystem. Oakton has two CRM MVPs on staff (me and Andre Margono). This used to be quite unusual but there were two partners, represented at Summit, which have three CRM MVPs on staff, which is unheard of.

The other thing I noticed this year was the proliferation of Surfaces (you can see some of them in the first photo). While there was one or two Apple devices in the room, I believe there used to be more, but the Surface seems to have supplanted them. I am writing this on my old Surface Pro 1 and it still does the job.

Conclusions

Flying close to 20 hours (each way) for a few days with Microsoft seems like a crazy endeavour but I never regret it. It is easy to forget there are real people behind the products so meeting them is both impressive and humbling. Interacting with the product team and with my fellow CRM MVPs is always a revitalising and enlightening experience. I have said it before and maintain it is still true; there are none more generous and giving than the Microsoft MVPs. I am proud to be a member of this family and hope to be so for as long as possible.