Salesforce delivers solid Q3, but co-CEO Bret Taylor's resignation steals the spotlight

Salesforce turned in a solid set of Q3 numbers yesterday, but those were overshadowed by the unexpected announcement that co-CEO Bret Taylor is to depart the company at the end of January, just over a year after stepping into the role.

In a statement issued prior to the results announcement, Taylor, who joined Salesforce six years ago when his own firm Quip was acquired by the CRM giant, said he was going back to his roots:

After a lot of reflection, I've decided to return to my entrepreneurial roots. Salesforce has never been more relevant to customers, and with its best-in-class management team and the company executing on all cylinders, now is the right time for me to step away.

On the post results analyst call, Salesforce co-CEO and co-founder Marc Benioff made no secret of how upsetting this turn of events has been, describing it later in one media appearance as a “gut punch”:

This has been a feeling of tremendous loss. I'm experiencing that right now. You can probably hear it in my voice. It makes me think of all the great people that we have actually lost in the company over time as well, so many great leaders of our industry, but especially now with Bret. This is just really hard for me, and I'm extremely sad to see him go. I know he has created two great companies. I know he wants to go create a third great company. And you can't keep a wild tiger in a cage. We got to let them be free and let him go. I understand, but I don't like it.

The numbers

For Q3, Salesforce total revenues were up 14% year-on-year to $7.837 billion.

Broken down by cloud:

• Sales Cloud was up 12% year-on-year to $1.7 billion.
• Service Cloud was up 12% to $1.9 billion.
• Platform & Other was up 18% to $1.5 billion.
• Marketing and Commerce Cloud was up 12% to $1.1 billion.
• Data Cloud was up 13% to $1.0 billion.

Broken down by region:

• Americas was up 16% year-on-year to $5.361 billion.
• EMEA was up 10% to $1.745 billion.
• APAC was up 14% to $731 million.

Other stats of note:

• Foreign exchange impact was $300 million, approximately $50 million more than forecast.
• Multi-cloud deals continue to grow - Annual Recurring Revenue (ARR) from customers with five or more Salesforce clouds rose 20% year-on-year.
• Seven of the 13 Salesforce industry vertical clouds saw ARR grow by more than 50% in Q3.

Despite this growth, there has been some slowdown in certain areas, said Chief Operating Officer Brian Millham:

Marketing spend would be one that we see impacted fairly early on, marketing automation. CEOs make quick actions, and that's a quick action. That’s a quick place to sort of pull back, on marketing. We did see less expansion on Sales and Service in the quarter...as our customers started to maybe do a little less hiring. Maybe they paused hiring. We saw less expansion on the Sales Cloud users and Service Cloud users. And certainly, Commerce has been one where we had a great run up over the past couple of years during the pandemic, and we've seen a bit of a slowdown on Commerce.

But despite the current economic turbulence, Millham is upbeat about prospects:

Certainly, the buyer environment has changed out there in the market. It's become more measured. But our platform is still mission-critical to every one of our customers out there, and we're seeing that play out in the demand environment. The pipeline that we're creating is very healthy in the market right now. The interest in our Customer360 platform remains very high.

We've re-positioned our products and our selling teams to sell not just to the CEO, but to the CFO, actually across the entire C-suite. We want to make sure that we're covering off everybody that could potentially say yes or no to a buying process. We're going to focus on what we can control. We have plenty of capacity in the market right now. We have lots of account executives that we've hired over the past couple of years. And we want to make sure that we're doing the things that we can to continue to grow market share across the entire portfolio.

We continue to see multi-cloud expansion…We think we have a huge opportunity to continue to sell to our existing customers, more of the products that are in our portfolio, both inorganic and the acquired companies that we have. And so we still see a big opportunity for us to spend a lot of time with our customers, selling the entire product portfolio. And the size of our selling base…we have still a very big opportunity for us to expand our TAM (Total Addressable Market) and execute on our growth strategies.

He added that the firm’s vertical cloud strategy is a particular plus point:

Travel and hospitality was a strength for us in the quarter. Our manufacturing industry really bounced back this quarter and was very good. Automotive was very strong for us in the quarter, and energy was also quite strong. On the other side, we felt a little bit of pressure on our tech industry right now and great relationships and big customers there, but that's an industry that we did not see acceleration in the quarter. And some of the other industries were sort of flat. Financial Services as an example, was relatively flat in the quarter.

One of the strengths that we did have, though, I will say, is our Industry Clouds. The more investment we make in our Industry Clouds, we're seeing acceleration there, very good growth in the quarter. As we invest in those products, we're seeing great penetration. We're seeing higher close rates. We're also seeing better retention rates, which is obviously very important to us as we think about the customer success of our base. We're able to get deals done faster speaking to customers' language and showing up with products that match up to their requirements very well.

My take

Well, it’s safe to say that none of us saw that one coming! It’s only about six weeks ago since Taylor and Benioff were sharing the spotlight at Dreamforce, goofing around with bunny ears that the former quipped (sorry!) would be a photo that would haunt him throughout his career. At the time, the double act, which was clearly a genuine friendship built on mutual respect, looked set to be a dream team in turbulent macro-economic times. There was absolutely no indication that Taylor might be thinking about moving on.

Taylor was the second co-CEO that Salesforce has had - Keith Block held the same post for around 18 months. Since his departure, Benioff had returned to being the sole CEO, a situation he previously described as “very lonely”. Asked whether there would be a direct replacement for Taylor, no commitment was made, with Benioff instead pointing to the wider executive leadership team (ELT) around him:

We have a lot of fantastic people in the company, and Bret's management team, what we call the ELT here at Salesforce, includes some incredible people who have been with us in some cases for decades. And they're some of our most capable and incredible people…I couldn't be more proud of Bret and everything he has done in the last seven years. But while we have a huge light on Bret, I think it would be unfair to not also put a huge light on these other managers and leaders in the company who have done such a great job.

He added of Taylor:

Until he walks out the door, don't worry, I'm going to be trying to keep recruiting him back and I am a good salesman…The deal is not over until it's over, but we do have to tell you that he has decided to leave. But I tell people all the time, we lose deals all the time. And for me, I never lose. I keep going back until I win.

But assuming that Taylor is indeed out the door on the 31st January, what happens next? Salesforce is no more immune to knock-on impacts from the current macro-economic climate than anyone else. The firm has recently made a number of layoffs, for example. For her part, CFO Amy Weaver said in her guidance to the market:

We are experiencing a very unpredictable macro-environment as our customers are looking to ensure their businesses are also healthy for the long term. Compounding that dynamic is an unprecedented foreign currency market. 

Benioff argues that Salesforce, now into its third decade, has experience of dealing with the impact of external crises:

This is not our first financial crisis. I'm seeing a lot of buying behavior that really reflects a lot of what we've seen during other crises, whether it's 2008, 2009 or even 2001. Obviously, the current economic situation is nowhere near as severe as what happened beginning in 2008, but there are some patterns that we've seen repeat themselves. In early 2008, we saw customers who were reluctant to expand distribution capacity, they weren't adding service people, they froze their hiring, they initiated headcount reductions.

I think that maybe when things start to get a little tough or when the stock market shifts, that's when CEOs say, ‘Hold on, should we be expanding distribution capacity right now? Should we be expanding service capacity? What do we stop? Let's stop our advertising, let's stop our marketing spend’, things that they can immediately take actions on. Well, you couple that with foreign exchange headwinds that have become an issue and everyone was shifting their focus to finding efficiencies, reducing their costs, increasing productivity, and again, we're feeling all of this once again.

That’s led to Salesforce dusting down what Benioff called “our own playbook” for dealing with such situations:

We really wrote it all down. We talked about what was happening, [what] we knew would happen again. And we had to dust off some of those plans and numbers from 12, 13 years ago, from 22 years ago, and we've turned [to] that playbook in gaining market share and focusing on operational discipline and operational excellence, especially in the face of economic headwinds.

The challenging economic environment is not a short term thing, he added:

We're not assuming that this economy gets any better anytime soon. We're just reporting what we see with our customers, the kind of changes they make when they start to feel these headwinds. We're following our playbook to make sure we’re well-positioned to gain market share, to increase our profitability, to focus on our operating margin, to focus on the growth of our revenue and be able to continue to invest, especially when the economy recovers.

As Taylor departs, the role of Millham as Chief Operating Officer will be one to watch. Millham is a 23 year Salesforce veteran - CRM is in his DNA and he knows the company inside out. He’s already clearly started to make some changes since picking up the COO role in August after previously heading up the Customer Success Group. For example, he’s pulling the sales teams back into the office:

I really believe that being together drives more learning, better collaboration, better networking and better enablement…I really like people coming back in the office. I like that connection that we have to one another. I think it’s part of our culture and how we operate. I've asked my team recently to spend more time in the office.

But importantly I've also asked them to spend more time in front of our customers. It's a big differentiation for us, when we're out talking to our customers and driving the success that they expect from us. And so I want to drive higher productivity and the performance culture and one of the ways I want to do that [is] to ensure that we're spending more time together, whether that's in the office or out in front of our customers.

While yesterday’s results were inevitably overshadowed by the news of Taylor’s departure, it’s important not to let them go unrecognized, as many investors on Wall Street seemed ready to do. We’ll see how that playbook does play out in 2023, but as of now, Salesforce remains on a solid growth track. Maybe it’ll end up being a slightly slower-than-planned growth track, but the direction of travel remains the same.

All that said, Taylor will be a massive loss to Salesforce, having done so much so well to shape the product direction in recent years. If he’s got an idea for another start-up, then it’ll be exciting to see what comes next.

Onwards!