Wall Street cool on Salesforce.com numbers despite 29% YoY growth

Stuart Lauchlan Profile picture for user slauchlan November 19, 2014
Summary:
Salesforce.com's facing the challenge of keeping Wall Street's expectations in check as it issues lower guidance for 2015.

I wish I was in New York City with @KeithBlock --- he's doing an amazing job!

That was Salesforce.com CEO Marc Benioff’s comment as his number two and company president took over the keynote duties as the Salesforce World Tour rolled into New York yesterday.

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Benioff had other things on his mind however as Wall Street reacted cooly to Salesforce.com’s latest numbers, knocking the share price by 4%. The big issue - presenting guidance that fell short of investor expectations.

In reality, while year-on-year growth for the third quarter was slower, revenue of $1.38 billion actually came out ahead of consensus analyst expectations of $1.37 billion.There was also a fall in the net loss from $124.4 million to $38.9 million.

But Wall Street has gotten hooked on big growth numbers from Salesforce.com and isn’t happy when it thinks it’s not going to get them.

So the situation arises that revenue guidance for the 2016 fiscal year of $6.45 billion to $6.5 billion isn’t good enough, especially when those numbers pitch growth of 20-21% rather than percentages in the thirties.

In a conference call after the results were released, Benioff acknowledged that there is a weight of expectation on the company, fuelled of course by its own marketing, but wasn’t about to bend the knee, telling analysts:

You talk to a lot of enterprise software companies, but you aren’t talking to any that are delivering a billion in quarterly revenue that grew 30% and are forecasting $6.5 billion in revenue next year…We delivered improvement and we will improve on it again next year.

It was obvious from Benioff’s earlier prepared remarks, he was clearly anticipating pushback from Wall Street as he pitched:

We’ve never been more confident or excited to give guidance. It’s completely amazing to me.

Here it is: Salesforce, the number one cloud computing company in the world, Salesforce the number one CRM company in the world, giving guidance of $6.5 billion in revenue next year as a top five enterprise software company. It’s a huge threshold moment for cloud computing.

Analytics and other clouds

Away from the numbers, Benioff predictably put a lot of emphasis on Wave, the so-called Analytics Cloud launched at Dreamforce last month which he positioned as the Salesforce product that’s seen the fastest traction:

Major customers like EMC, Verizon, General Electric all signed up in the quarter. Since launching the Analytics Cloud just a month ago, more than 45 partners have joined our analytics cloud ecosystem and the pipeline is just awesome.

We’ve never seen faster traction for a new product or a new cloud. I’m just confident this is going to be our fastest and most exciting new cloud ever.

When we look at sales, it’s obviously a multi-billion dollar market. Marketing is becoming that way. But analytics is already that way. Analytics, business intelligence, is one of the biggest, most exciting markets in the whole industry.

My goal is not just a billion dollars product line…with the analytics cloud. It’s far beyond that. I don’t want to get into specifics of when and how we’re going to be able to do that. Just know that I’m extremely optimistic about what is possible.

All of that of course remains to be seen. For now. the Sales Cloud and Service Cloud are still the biggest contributors to the bottom line on $625 million and $339.6 million revenue for the third quarter. (Those numbers led Benioff to argue that Sales Cloud will soon become the first $3 billion cloud for the company.)

Meanwhile the Marketing Cloud is the lowest contributor on $131.5 million, a year after the completion of the ExactTarget acquisition.

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Benioff said:

Acquisitions are hard. We’ve done a couple dozen acquisitions in the last five years. They’re super high risk. Not all of them are successful. You aren’t able to bring the revenue forward and grow it in all acquisitions. In this case, you see the revenue growing in a significant way, and we have a lot of dreams and hopes for this cloud.

What I’m excited about the Marketing Cloud is the macro view, is that our customers want from us a customer success platform, and you can’t deliver a customer success platform without a strong marketing component. We have that.

As for ExactTarget:

The functional integration has happened, the product integration is underway…we’re very excited about where we’ve gotten.

Whether Wall Street can maintain its excitement is another question, but it won’t be for want of Benioff emphasizing the positives:

If you look at our growth for next year, you might note that we’re going to grow more next year than I think the second largest enterprise cloud company in absolute numbers. That is, we will add another cloud company on just through our organic growth next year, which is kind of amazing.

But perhaps tellingly, he concluded:

I think it’s kind of lost by a lot of people, about what’s really happening right now with Salesforce.

My take

One of the challenges for fast growth companies, especially ones like Salesforce.com that are fuelled in part by big marketing and grand claims, is how to manage expectations. More specifically, how to rein in expectations when the inevitable slowing down of growth takes place.

The positives from the latest numbers far outweigh the perceived negatives: on track for $6 billion plus run rate, still bloated operating costs but down 84% year-on-year, international expansion on track with Europe and Asia-Pac now accounting for 34% of total revenues.

But going forward it will be interesting to see how Salesforce.com presents itself. I’ve already commented on the increased profile of Block. With COO George Hu - who would normally have been the Benioff-understudy for events like the New York gig - taking a leave of absence for up to 6 months, Block is clearly going to be the face of the company in 2015.

Block comes across as far more the pragmatic super sales guy that the marketing ‘ringmaster’ that Benioff has been. The two have some interesting complementary skills, but I suspect Block’s approach may help the company in ensuring that Wall Street is more grounded in its expectations in 2015/6.

 

Disclosure: at time of writing, Salesforce.com is a premier partner of diginomica.

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