CEO confidence and digital investment fuels strong Q3 for Salesforce

Another quarter of big numbers from Salesforce yesterday to end calendar 2018 on a high with revenues up 26% to $3.39 billion from $2.70 billion a year ago and an upgraded forecast for fiscal 2020 to a $16 billion run-rate. Net income was $105 million, slightly down on last year’s $107 million.

By cloud, the breakdown for Q319 was:

• Sales Cloud is still the largest contributor on $1 billion, but turned in the slowest year-on-year growth rate on 11%.
• Services Cloud reported 24% growth to hit $0.9 billion.
• Platform up 51% to $0.7 billion.
• Marketing & Commerce Cloud up 37% to $0.5 billion.

The US market continues to contribute most, up 25% to $2.4 billion, with Asia Pac on $326 million, also up 25% year-on-year and EMEA revenue on $641 million, up 29% in dollars. Those numbers reflect the economic confidence that co-CEO Marc Benioff says he’s seeing around the globe, with the US market particularly buoyed up by the recent tax cuts:

When I speak to CEOs - and that happens probably every single day - especially since some of these tax cuts that have happened, CEOs have been investing aggressively and the economy has really been ripping. I think that a lot of the forecast that I've seen in the 4% level in the United States, we felt that before that happened and we were talking about [how] the economy was ripping before those aggressive growth estimates.

When we look out for next year, I'm not sure I can see it going faster than it is now because I'm not sure where we would get all the people to hire that we need to hire…if it's 2% to 3% next year of the GDP, I wouldn't be hugely surprised, but I don't see some huge sea change in the economy, I consider to see strong growth because I've seen so much investment this year, it's going to pay out for these companies going forward. So, I see still several years ahead of good solid growth for the economy.

Where that gets tempered, I think I've mentioned this before, is when I talk to European CEOs. They tend to be more conservative. Some of those CEOs, maybe specifically in their region, are not as optimistic potentially as I would say American or Asian or CEOs based in Asia.

How Brexit plays into that EMEA sentiment in 2019 remains to be seen, but CEO-level engagement is on the rise, adds co-CEO Keith Block, regardless of what macro-economic factors are in play:

I have been on the road quite a bit actually in the quarter. So, I had the opportunity to spend a lot of time on the front lines with the troops and our customers. And here is the message I'm hearing - it is all about digital transformation. I am not going to make any comment about the macro environment; from what we see, it's all good. This is a CEO level agenda. This transformation is important. The sense I get, regardless of any speculation around the economy, is that this has really become a mandate. And this wave of innovation, this wave of technology that is sweeping the globe is an imperative for these CEOs to be those Chief Transformation Officers.

This is translating into more spend, he notes:

In Q3, the number of deals generating more than $1 million was up 46% over last year and the number of $20 million plus relationships we have continues to grow significantly. In fact, in the quarter, we renewed and expanded a nine-figure relationship with one of the largest financial services institutions in the world..an overwhelming majority of our revenue is multi-cloud. Customers like DuPont, Citi, Uber, many others, are all driving more meaningful relationships with our customers across sales, service, marketing, commerce, integration and more.

For specific examples, Block points to the firm’s industry-focus strategy, highlighting Financial Services Cloud and Health Cloud successes:

Mutual of America Life Insurance also selected Financial Services Cloud and they're leveraging Salesforce Einstein to improve their go-to-market strategy and customer engagement. Heading on, Federal Credit Union, with nearly 2 million members is also going all the way with Financial Services Cloud as well as Community Cloud, Einstein and MuleSoft to deliver a best in class member experience…With Health Cloud, we formed a new relationship with WorkSafe Victoria in Australia and we expanded our existing relationship with Alcon, one of the world’s leading eye care and medical device companies.

CRM first

In the end, it all comes back to CRM, says Benioff:

CRM has never been more strategic. You could see that in the growth rates for the CRM marketplace. It remains the fastest growing market segment in enterprise software. That’s a big change from when Keith and I started in the enterprise software industry in 1986. It was all about other types of technologies that have been downplayed. Now, it’s all about the customer, it’s about CRM.

This is a big and exciting market. We’re obviously largest player. We have these incredible growth rates that we’re putting up. When we look at other companies in the CRM marketplace, a lot of companies are doing very well, because this is what it’s all about; it’s all about the customer.

As for those other companies he alludes to, it is the season of goodwill, quips Benioff:

I'd love to talk about specific companies and other CEOs. Every time I do, I get a phone call. They’re very sensitive and I don't want to hurt anybody’s feelings during the Holidays.

My take

A strong quarter that will help steady Wall Street’s recent skittishness about fears of slowing growth, with the confident forward forecast for fiscal 2020 and beyond backing that up. The post-results analyst conference call was again indicative of the shifting executive responsibilities at the top of the firm, with Block leading off on company specifics and customer wins, complemented by Chief Product Officer Bret Taylor on product direction. Meanwhile Benioff took his remarks out into the societal issues, such as public education and homelessness, as well as Salesforce issues.

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