Salesforce has done it. The elusive goal of making a profit. Will Marc return to GAAP reporting? Is this a one-off like that tax write-off from a few years ago? Is this the start of a golden era for Salesforce? The numbers will reveal all.
Salesforce Quarterly Results
The numbers are from Salesforce’s Financials page. These are the numbers reported to the Securities Exchange Commission and are the GAAP numbers, not the non-GAAP numbers we hear in the press releases.| 2015 Q1 | 2015 Q2 | 2015 Q3 | 2015 Q4 | 2016 Q1 | |
| Revenue | 1,226,772 | 1,318,551 | 1,383,655 | 1,444,608 | 1,511,167 |
| Subscription Revenue | 1,147,306 | 1,232,587 | 1,288,513 | 1,345,358 | 1,405,287 |
| Revenue Cost | 292,305 | 307,831 | 333,211 | 355,923 | 381,802 |
| Operating Cost | 989,808 | 1,044,154 | 1,072,486 | 1,123,501 | 1,098,260 |
| Salesforce Income | -96,911 | -61,088 | -38,924 | -65,765 | 4,092 |
| Highest Transaction | 2,037,819,946 | 2,502,030,346 | 2,872,068,400 | 3,186,923,759 | |
| Transaction Growth QoQ | 23% | 15% | 11% | ||
| Revenue Growth # YoY | 334,139 | 361,457 | 307,621 | 299,366 | 284,395 |
| Revenue Growth % YoY | 37% | 38% | 29% | 26% | 23% |
| Revenue Growth % QoQ | 7% | 7% | 5% | 4% | 5% |
| Total Cost % YoY | 37% | 36% | 20% | 18% | 15% |
| Total Cost % QoQ | 3% | 5% | 4% | 5% | 0% |
| Staff | 14,239 | 15,145 | 15,458 | 16,227 | 16,852 |
| Staff Growth YoY | 38% | 20% | 21% | 22% | 18% |
| Margin | -7.90% | -4.63% | -2.81% | -4.55% | 0.27% |
| Growth Difference | 1% | 2% | 9% | 8% | 8% |
| Cash | 827,891 | 774,725 | 846,325 | 908,117 | 941,956 |
| Accounts Receivable | 684,155 | 834,323 | 794,590 | 1,905,506 | 926,381 |
| Cash/AR | 121% | 93% | 107% | 48% | 102% |
| Expenses Relating to Stock Based Awards | 131,092 | 142,411 | 139,460 | 151,802 | 142,560 |
| Stock Based YoY | 14% | 29% | -1% | 11% | 9% |
Numbers of Note
In terms of what is jumping out at me is a general slowing down in the growth of the business. Transaction growth (the growth in the number of ‘operations’ done on the Salesforce servers) has halved in six months. Revenue growth year-on-year is showing a steady decline over the five quarters above and is the lowest it has been in five years. Thankfully cost growth has also slowed down and, by comparing the revenue year-on-year to the cost year-on-year we see growth is decelerating faster, which is good for profit. Like revenue growth we are seeing a cost growth similar to that of five years ago.
Here it is in graphical form. The solid green line (Cost) is running pretty much parallel now with the solid red line (Revenue) with both declining. Cost is also as lot less volatile than the past which is also a good thing. Note that while the lines are parallel, as this is growth, revenues are still growing faster than costs which means we are on a path to profitability.
Staff growth is a similar story. A steady deceleration with growth numbers similar to those of the start of 2010.
The business growth slowing is good because the aggressive growth strategy was unsustainable and unprofitable. By putting the brakes on, especially on marketing and sales spend, Salesforce has returned to a break-even position. As mentioned, the financials are similar to those of five years ago. Five years ago Salesforce was profitable.
Unusual Entries
It will be interesting to see how the next quarter pans out
Cash and Accounts Receivable
Like our Revenue and Cost measures, the Cash and Accounts Receivable are starting to level out.
Earnings Call Buzzword Bingo
I was especially interested in this one because we now have a profit to brag about. At 3,500 words this was one of the shorter transcripts in recent quarters. Regardless he managed to utter the phrase “We are all about customer success” twice and his version of bragging about the profit, “Non-GAAP EPS of $0” three times. The words “profit”, “profits” and “profitability” got mentioned once each.Not a huge amount but they are words Marc is unfamiliar with so you can forgive him for not over-working them.
Four times his used the phrase “our customer success platform” which is the new branding for the Salesforce stack; the develop platform most dreaded by developers, according to StackOverflow.
The rules for Earnings Call Buzzword Bingo are simple. We get the quarterly transcript and count up the words and phrases. 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.
| 2015 Q1 | 2015 Q2 | 2015 Q3 | 2015 Q4 | 2016 Q1 | |
| Number of words | 2400 | 4,731 | 3,922 | 4,017 | 3,495 |
| Customers/Customer | 22 | 38 | 34 | 23 | 34 |
| Revenue | 19 | 27 | 26 | 25 | 24 |
| Cloud | 15 | 22 | 47 | 32 | 28 |
| Platform(s) | 10 | 13 | 27 | 18 | 14 |
| Service | 13 | 15 | 12 | 5 | 9 |
| Growth | 9 | 18 | 16 | 13 | 16 |
| Marketing | 5 | 10 | 8 | 4 | 8 |
| Cash | 10 | 11 | 9 | 10 | 11 |
| Operating | 11 | 11 | 8 | 20 | 11 |
| Enterprise(s) | 8 | 10 | 8 | 7 | 8 |
| Dreamforce | 11 | 14 | 2 | 1 | |
| Analytics | 14 | 11 | 9 | ||
| Software | 12 | 4 |
In terms of words we have lost, unfortunately ExactTarget and Salesforce1 are no longer the golden children they once were and we lose them from the list.
No new words stood out other than ‘incredible’ (ten times), ‘world’ (17 times), and ‘success’ (12 times). These are a bit generic though so I am not adding them on.
Google Trends
Our quarterly review of Google searches for “Dynamics CRM” and “salesforce.com”.
People are still more interested in Googling about Dynamics CRM.
In terms of regional interest, nothing really has changed in terms of the countries looking at the two terms but the cities is interesting. Firstly, let us look at “salesforce.com”:
Clearly the interest is from the Americas where five of the seven cities are based. The other two are in India.
For “Dynamics CRM” we have:
I did not know where Chiyoda was and had to look it up; it is, effectively, Tokyo for the purposes of our review. Of these top seven cities precisely zero of them are in the Americas.
It is clear which is the more metropolitan of the products and which one the international community is curious about.
Insider and Institutional Sales
So how has the slowing growth affected those in the know?| 2015 Q1 | 2015 Q2 | 2015 Q3 | 2015 Q4 | 2016 Q1 | |
| Insider Sales (as a percentage of holdings) | 0.50% | 0.40% | 4.70% | 4.60% | 4.50% |
| Institutional Sales (as a percentage of holdings) | 2.71% | 2.67% | 3.20% | 3.11% | 3.04% |
No clear patterns here other than a small decline in Insider and Institutional Sales over the last three quarters. Given this is the case, they do not seem overly concerned with the slowing growth. This being said no executive has made a purchase of Salesforce shares in the past six months and they are still selling an awful lot of shares.
Looking to the Future
Last quarter I predicted revenues of $1.56b and a loss of around $50m. Obviously the loss was off, although I would be closer if not for the $37m lease termination. I did ok with the revenues though being only 3-4% off.In terms of the next quarter, I predict revenues of around $1.66b and an income around the breakeven mark i.e. $0b.
Conclusions
The frictional forces of the market are finally affecting the turbulent trajectory of Salesforce and it is slowing down. In this case, though, a slowing of growth is not all bad. The slowing has given Salesforce the opportunity to return to profitability or, at least a break-even point. Also, the slowing of the business has brought a stability to the figures.It will be interesting to see if this is the start of a profitable Salesforce or an outlier with more losses to come.
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