Salesforce Finishes FY20 on a Stellar Note and Increases FY21 Revenue Guidance

Salesforce announced another quarter of impressive growth as well as the full-year 2020 results that exceeded expectations.

Salesforce also announced Keith Block’s departure from his co-CEO role, Gavin Patterson’s appointment to president and CEO of Salesforce International, and the acquisition of Vlocity, a Salesforce Ventures funded company comprised of an industry-specific platform built on the native Salesforce platform.

Departure of Keith Block

Keith Block is stepping down as co-CEO to pursue other personal interests, with no reason provided for his departure. Mr. Block will remain as an advisor to the CEO. Since joining the firm in 2013, Mr. Block was the face of CRM to the customer. Many attribute Salesforce’s success in selling to the large enterprise segment to him in large part. Marc Benioff will remain as Chairman and sole CEO of the company. Salesforce has a strong management bench, so this departure, while a surprise, is likely not a material headwind to future performance.

4Q20, FY20, and FY21 Performance Summary

Q4 revenue increased around 35% in total and 22% when excluding the impacts of the Tableau acquisition and the Salesforce.org reorganization as a result of growing subscription revenue. Gross margins on the subscription business rose to around 85%, which is a record high.

  • Sales Cloud growth accelerated during the quarter. From a low water mark growth rate of 11.2% in Q1, sales accelerated to 16.7% in Q4, which is the fastest rate of growth since 3Q18.
  • Service Cloud growth also improved to 26.5%, compared to 22.1% in 4Q19.
  • Marketing Cloud sustained reliable growth rates of 28% year over year (YoY) as well.
  • Salesforce Platform revenues grew 74% YoY to $1.4 billion for the quarter.

Of note is Salesforce’s attrition rate, which hit a historic low of 9%. The company continues to diversify its revenue stream across multiple Salesforce clouds and a diverse mix of enterprise revenue streams.

Full-year performance for FY20 saw total revenues reach the $17.1 billion mark, exceeding the forecast of $16.9 billion by around $200 million and growing by 29%. This is massive growth on an extensive base for Salesforce. Salesforce also holds a remaining performance obligation (RPO) of $30.8 billion, up 20% YoY. This represents the booked revenues for future years from existing contracts.

Here is a snapshot of Salesforce's skyrocketing revenue growth:

Source: Info-Tech Research Group

The fiscal year 2021 revenue guidance was raised as well during this earnings announcement. High-end revenue expectations are now $21.1 billion, up from $20.90 billion. If that were not enough, FY22 guidance was also raised to $25.20 billion, up from $25.04 billion. These numbers were then characterized as conservative with more upside possible based on the Vlocity acquisition and continued Tableau integration.

CRM Market Position

As we stated earlier this year, “Salesforce continues to hold the number one position in overall CRM market share and claims to have increased that market share by more than the next fifteen competitors combined in 2018… There is Salesforce in CRM – and everyone else is vying for second place.”

Guess what? Nothing has changed except that Salesforce continues to increase their lead on the competition in the CRM space:

Source: Salesforce IR Presentation – February 2020

Tableau and MuleSoft Provide Outsized Contribution

We previously covered the Tableau acquisition here and here and the MuleSoft acquisition here. Now keep in mind that these acquisitions were of companies that are arguably number one in their respective market segments. More importantly, these are companies that don't discount their products to a large degree, which is a departure from the typical Salesforce sales cycle.

This indicates a subtle but critical shift in Salesforce’s go-to market strategy as Salesforce will seek to monetize these products at list price, for the most part, boosting gross margins and overall revenues at an outsized pace to organic growth.

Bolstering our thesis are this quarter’s results from each of these acquired companies. First up is Tableau, which delivered $671 million in revenues for FY20, exceeding the $650 million target by around 3%. Next is MuleSoft, which exceeded its initial guidance by a whopping $116 million, delivering $415 million in revenue contribution vs. the previously forecasted $315 million, an increase of around 24%.

Clearly, the convenience factor of bundling these powerful applications around data visualization and data integration atop the existing CRM platform is compelling to the Salesforce customer base. It shows that Salesforce will command a premium price for these assets. I predict that Salesforce will increase prices on these products to a premium level and then backstop a nominal discount percentage (around 20-40%) to show back perceived savings.

Vlocity Acquisition

We’ll keep this section short as I address the Vlocity acquisition in more detail in an adjacent note. The primary focus of the Vlocity acquisition is to turbocharge Salesforce’s efforts to ramp up industry-specific product offerings, compete with other mainstream offerings focused on industry verticals, and dissuade CIOs from starting down the path of custom application development. Vlocity is a Salesforce Ventures company with over $100 million in revenues. It received a premium valuation multiple with the $1.33 billion price tag paid by Salesforce. Of note, Mr. Benioff did state that there are no further significant acquisitions being contemplated in the short term.

Source: Vlocity

Customer 360 Update

Of course, Marc Benioff reiterated the importance of Customer 360 during the earnings call. Mr. Benioff called out the capabilities that Tableau brings to the table by “…turning Customer 360 data into actionable insights that are available to every user, helping them move from data to decisions.” The marketing pitch summed up the Salesforce evolution quite well:

“We've evolved into a system of engagement and then a system of intelligence, and now we're pursuing a system that is a single source of truth.”

Well, the reality is that Salesforce is delivering on much of that in a bold way. They have committed north of $25 billion in acquisitions over the past few years, and the investments have been in quality assets.

Some notable customer wins for the Customer 360 platform include:

  • Volkswagen: Targeting personalized experiences to their dealers, employees, and customers.
  • 3M: With goals to “…increase productivity, drive business growth and enhance the customer experience.”
  • Cerner: Health Cloud and Customer 360

Recommendations

  • Do you need a premium CRM solution? We pose this question because Salesforce is going to get progressively more expensive. With billions invested in recent acquisitions as well as organic R&D, the price of poker is going up. CIOs will need to influence their C-suite peers to select an appropriate solution, not the shiny object.
  • Consider CRM the new ERP. Enterprises that require an industry-vertical-focused solution will now have to consider Salesforce a player for their front- and middle-office needs. As customer experience comes to the forefront for most businesses, reconsider Salesforce and Vlocity for your unique needs.
  • Plan for the long term. Most of Salesforce’s customers sign up for a typical three-year term and neglect negotiating critical protections into their agreements. Drive a five-year deal with renewal caps and price protections to secure your investment in the long run. Think in decades, not years.

Bottom Line

The Salesforce train continues barreling ahead, gaining market share, expanding into adjacent market segments horizontally, and rapidly building out significant depth vertically via industry-specific offerings. For the enterprise customer seeking a platform caliber offering, Salesforce is standing head-and-shoulders above the competition.


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