Salesforce strikes back with strong full year numbers, efficiency focus - and a little bit of help from Oracle's Larry Ellison!

No-one would suggest that Salesforce hasn’t had a bumpy start to 2023, what with a departing co-CEO, a painful round of layoffs, and a group of activist investors seemingly on manouevers.

So there was a lot riding on this week’s earnings announcement, particularly in light of the slowing down of growth rates in recent months, fuelled by extended buying decision cycles. 

That said, the numbers that came out yesterday put a spring back into the share price. Q4 revenue was up 14% year-on-year to $8.4 billion, while net income came in at $357 million. Full year revenue was  $31.4 billion, up 18% year-on-year. Broken down by cloud category, for the full year:

• Sales Cloud was up 14% year-on-year to $6.8 billion. 
• Service Cloud was also up 14% to $7.4 billion. 
• Platform & Other was up 32% to $6.0 billion. 
• Marketing Cloud/Commerce Cloud, up 16% to $4.5 billion.
• Data up 15% to $4.3 billion. 

Changes

The events of the past few months have taken place against a backdrop of accelerated transformation inside of Salesforce, said CEO Marc Benioff on the post-results earnings analyst call: 

Six months ago, in September at our Dreamforce Investor Day, we shared with you our comprehensive transformation plan, the new day for profitable growth. But things have changed. As we entered our fourth quarter, we recognized that we needed to radically accelerate the transformation plan timeframe. We needed to press the hyperspace button and bring the two-year goals forward quickly and exceed them.

Now we immediately put into place an accelerated transformation plan in 4 areas: short-term and long-term restructuring of the company; improving profitability and productivity; prioritizing our core innovations; and a deeper and even stronger relationship with our shareholders, you.

And speed is of the essence, he added:

We've hit that hyperspace button since we last talked to you a quarter ago, and I'm thrilled with the progress we've made. Changes that used to take months are happening in weeks. Changes that used to take weeks are happening in days. And changes that used to take days, are happening in hours.

Profitability and efficiency are now the main priorities, said Benioff, a shift away from the ‘growth, growth, growth’ culture that has prevailed: 

Profitability is truly our number one strategy, and that's my number one strategy. That's what I've been focused on with the management team. That is the number one thing we talk about at the start of every meeting we have in this company, and that is why we were able to deliver that in 90 days.

We've never had an efficiency focus in the company before because we've had 24 incredible years where we've had to just grow, grow, grow. There have been moments where we've had to pull back. '01, '02, bad recession, we had to pull back. '08, '09, we had to pull back and re-assess.

We're kind of looking at this moment as, ‘Hey, we can re-assess’. 

Efficiency 

That fresh emphasis on efficiency was already to be seen in the appointment of Salesforce veteran Brian Millham as Chief Operating Officer last year and his comments around restructuring the sales teams and go-to-market model. That’s paying off, he argued, including a return to the office policy: 

We've learned that we needed to reboot our entire sales enablement process to ensure faster onboarding with reps able to better understand our entire product portfolio and speak the language of our customers in weeks, not months.

During the pandemic, we saw productivity drop among our account executives who were working exclusively from home. I believe when our people are together, they're better learners, collaborators and networkers. It also reinforces our performance culture. That's why our sales, success and service teams are in front of our customers a minimum of 4 days a week.

Getting together in person is accelerating enablement and driving our performance and productivity. I'm confident these changes will drive the outcomes that we are all looking for.

My take

Those are the kind of numbers that Wall Street needed to hear, as the the sharp rise in the share price proved. As Benioff pointed out later, those circling activist investors got richer yesterday. 

That said, that particular situation hasn’t resolved itself. Jesse Cohn, Managing Partner in Elliott Management, which is said to have nominated a slate of candidates to the Salesforce board, posted a statement on Twitter saying that the earnings and related commentary represented “progress towards regaining investor trust”, but added: 

The strength of Salesforce’s business and its movement in the right direction are key reasons we are among the company’s top investors, but much work remains: Salesforce needs a sustainable leadership plan and a board that demonstrates it can provide accountability through proper oversight. 

There were a couple of significant announcements that also emerged yesterday. Firstly, Salesforce’s Merger & Acquisitions Committee has been stood down, certainly for the time being. So, no more big ticket buyouts on the horizon. Secondly - and perhaps most totemic of the new focus on efficiency and profitability - the long-standing goal of hitting a $50 billion run-rate by 2026 has been put on hold in the current economic climate. 

There was also an interesting aside from Benioff who called out his mentor, Larry Ellison, CEO of Oracle, who has, he said, spent a lot of time “giving me the Oracle playbook”: 

He was the first person who texted me after the earnings came out today. I'll tell you, it's good to have friends in the world when things happen, and he's been a great friend, and we're executing that playbook to increase our margins. They obviously have best-of-class margins. 

I’ve long argued that there’s much commonality that you can map between Salesforce’s evolution over the years and that of Oracle at a similar stage in its development. A Salesforce that’s tapping into the Oracle playbook - that’s going to interesting to watch play out in practice. 

This was a good set of numbers for Salesforce and the internal transformation message came across loud and clear. The wider macro-economic climate is inevitably something that remains a factor that’s beyond control and needs to be managed, as Millham pointed out late last year, when he said: 

My philosophy is, lean in on the things that you can control. You are not going to change the economy. You are not going to be the one that goes out and changes currency. Go fix the things that you can in your organization. That’s really been my mindset since I have taken over the organization.

That's clearly what's happening. Then again, as Benioff reminded everyone yesterday in various media interviews, this isn’t his first rodeo when it comes to recessionary pressures: 

Everybody knows the methodology of how CEOs behave in a recession. As soon as the stock market implodes, CEOs hit the brakes So I think that, that's what we saw in '08, '09. I think we really started to see that in the middle of '22, maybe August, September, October, November…We have a recession playbook. We know how to transform the company. Well, you just saw it in the last 90 days where the things we're doing really launched a profitable growth strategy.  

Onwards!