It is reporting season – and I am actually already somewhat late to have a look at Salesforce’s Q1 figures of fiscal year 20/21 and to think about some implications. The earnings presentation makes for an interesting overview, more details are in the quarterly filing, the earnings release, and the transcript of the earnings webcast.
So, let’s get into it and look at some figures, concentrating on the company overview, result highlights, revenue and margin developments, revenues by cloud and region.
Right on the first content page Salesforce states that it
- Is #1 CRM software provider worldwide
- Consistently delivers durable revenue growth
- Is the fastest growing top five enterprise software company
- Is uniquely positioned to help customer drive broad-based digital transformation
Revenue is up 31 per cent (at constant currency) to nearly $4.9 billion for this quarter, which is slightly below the Q4/FY20 guidance. Operating cash flow shrank slightly to $1.86 billion year over year. The company adjusted the revenue guidance from $21 – $21.1 billion as per the Q4/FY20 down to $20 billion. GAAP earnings per share are adjusted to ($0.06) to ($0.04) from $0.12 to $0.14. Growth of FY21 operating cash flow is adjusted to 10 – 11 per cent from 20 per cent.
GAAP operating margin went down by 8.5 per cent points to a negative 2.9 per cent with the non GAAP operating margin going down by 5.1 per cent points to 13.1 per cent.
On the revenue distribution frontier it shows that Salesforce’s growth happens in the ‘Sales Platform & Other’ category, which vastly outpaces the other clouds already since Q4 last year with a growth of 62 per cent points. The result of $1.4 billion includes around $300 million coming from the Tableau acquisition of August 2019.
The bigger picture
As usual, Salesforce reports about a month earlier than the competition. So, it will be interesting to have a look at the July figures of Microsoft and SAP, once they are released.
This is the first Salesforce earnings report that can show some impact of the Corona crisis, during which Salesforce, fully in line with its values, showed considerable loyalty to its employees, customers and community.
On the other hand, a lot of vendors strengthened its capabilities to support remote work early during this crisis, e.g. Microsoft improving Teams to compete with Zoom or Zoho with its Remotely suite that the company released early in the pandemic.
The business applications market changes from a pureplay application market to a platform market. This is a trend that can be observed for some years now and which all major players, including Salesforce, cater for. Salesforce itself is fairly strong in three of four categories of what defines a platform, and has recently announced Salesforce Anywhere, to increase the capabilities of its productivity suite, which can also be seen as a reaction to Covid-19.
However, as a platform market is a winner takes it all market, it is important to be positioned strong enough to be able to dominate the current oligopoly of Microsoft, Oracle, Salesforce and SAP as tier 1 vendors plus a number of smaller vendors with platform ambitions, plus the hyperscalers (Alibaba, AWS, Google, Microsoft), which partly do business applications, too.
My analysis and PoV
Salesforce, similar to SAP, is not in the infrastructure business. So, the words of SAP CEO Christian Klein’s “[…] we have to own the business platform, we have to own the application layer” hold true for Salesforce as well. Or else the company needs to invest into infrastructure. In addition, Salesforce concentrates on the front office and does not have significant ERP or any supply chain capabilities.
I have written about the business applications market having turned into a platform play multiple times, not in the least in my ‘Clash of Titans’ series (Platform Play, Microsoft and SAP weigh in, The War Cry: Oracle and Salesforce, The IaaS Platform Providers). This shift has made the platform crucial – with platform not equating the technical platform.
Salesforce has clearly understood the importance of the platform. Evidence for this is how the revenues are distributed, with the biggest gain by far being on the platform side. A grain of salt in this number is that nearly half of this growth figure is coming from Tableau, a 2019 acquisition. Still, this proves the point that platform is more than a technical platform but needs to include additional services, including AI and analytics.
What is a little worrisome is the low operating margin, which is actually negative. This suggests that, to some extent, Salesforce is buying growth, with it being doubtful that an Amazon type of model works in this type of market.
On the other hand, Salesforce shows growth that well outpaces the predicted CAGR of 14.5 per cent for the next years and with 18.4 per cent the company has a market share that is as high as the next for competitors hold jointly. Additionally, remaining performance obligations remain high, so that Salesforce can sustain its low profitability model for some time.
What should be really looked at by SAP is that Salesforce’s biggest growth market is Europe, SAP’s home turf. While the Americas account for three times of Europe’s revenue, this is a clear sign that Salesforce makes inroads in Europe and shows an increased win rate over SAP.
Lastly: Lots of kudos to Salesforce for how it acted in and reacted to the current crisis, especially when it came to providing financial relief to customers and supporting own staff as well as the communities surrounding the companies.
I am very eager to see what numbers Microsoft and SAP have to report these days.