Salesforce Inc. (CRM, Financial), the leading customer relationship management software solutions provider in the world, reported strong earnings for the fourth quarter of fiscal 2023 on March 1, attracting wide praise from Wall Street analysts, economists and investors. Shares popped more than 15% the following day with investors getting behind the company in hopes for much higher investment returns in the future with the company pledging to focus more on profitability and operating margins.
The company doubled its share buyback program from $10 billion to $20 billion as well - a move that improved the investor sentiment toward in an era where investors have lost faith in many tech companies.
Although the outlook for Salesforce seems promising, a deeper dive into the company reveals several major risks looming on the horizon.
Balancing margins and growth in a competitive market
Salesforce delivered a remarkable performance in its fiscal fourth quarter, which has been touted by many analysts as a pivotal moment in the company's growth story. The company exceeded Wall Street expectations by a considerable margin, reporting strong revenue and profitability that reflects the strength of its business model amid challenging macroeconomic conditions.
The company reported $31.4 billion in revenue for full fiscal 2023, representing an 18% year-over-year increase or 22% in constant currency, indicating strong underlying growth trends.
Salesforce had strong operating cash flow of $7.1 billion, the highest in the company's history, which is a testament to its operational efficiency and ability to generate cash from its core business operations. This significant increase of 19% reflects the company's focus on driving growth while also maintaining a strong financial position.
The company's impressive performance is a result of its relentless focus on innovation and strategic investments in its platform and product offerings. Salesforce's cloud-based software solutions enable businesses to better manage their customer relationships and drive growth by improving customer engagement and satisfaction. However, despite its strong performance and market leadership position, the company is facing a few risks and challenges.
One major issue is the presence of powerful activist investors who are seeking to exert control over the company. Elliott Management, one of the five activist investors of note, has put forward its own slate of candidates for the board of directors. This move is aimed at gaining enough voting control to impose its agenda, which could have significant consequences for the future of Salesforce.
Salesforce CEO Marc Benioff has stated that he does not mind activist investors circling his company, as long as they are knowledgeable and have the best interests of the company at heart. However, he has been dismissive of Strive Asset Management, which was co-founded by 2024 Republican presidential hopeful and Woke Inc. author Vivek Ramaswamy. In a recent interview, Benioff referred to Ramaswamy as "just a politician." He said that anyone can be an activist, but those who are using activism for their own political agenda are not beneficial to the company.
In recent times, the management structure and the growth strategy of Salesforce have become a major concern for investors. Two co-CEOs left their position in just three years, and activist investors believe that the company's management structure needs to be reviewed.
Additionally, the company's focus on profitability is another challenge it's facing. Salesforce has achieved meaningful growth through acquisitions, but as investors demanded answers about Salesforce's balance of growth and margins, the company is now more focused on increasing profit margins. This new focus will result in the company curbing spending and investment, which could make it harder for Salesforce to address emerging threats such as the evolution of a long-time partner into a competitor.
Veeva Systems Inc. (VEEV, Financial), a company that sells software to life sciences organizations, is one such long-time partner that built its core software on top of Salesforce's app-development platform. However, this relationship will come to an end in 2025, and the company has announced that the contract with Salesforce will not be renewed as it has built CRM software in-house. It would not be surprising if a few other customers decide to follow Veeva to manage the long-term costs associated with hiring a third-party CRM software solutions provider. While Veeva has agreed to pay Salesforce as its customers use Salesforce's platform, the costs have risen as more people have come to rely on Veeva. In exchange for Veeva's payments, Salesforce has agreed not to enter Veeva's specialized, regulated market. This agreement is becoming challenging as Veeva becomes profitable and is a publicly traded software company with a $28 billion market capitalization. The move to ditch Salesforce is seen as positive for Veeva’s customers as it simplifies their landscape. However, it remains to be seen whether other large Salesforce customers will follow Veeva's lead and whether Salesforce will be able to develop technology to address these emerging threats.
Takeaway
Despite Salesforce's strong financial performance and apparent potential for continued growth, the company is not entirely free from risks and challenges. Some of these include concerns over management structure, profitability and emerging competition. With the influence of activist investors and a new focus on short-term profitability, Salesforce may find it difficult to address new threats effectively. Nevertheless, the company continues to hold a significant position in the cloud software development industry, and its actions in the future will be worth observing as it confronts these challenges. Balancing growth with profit margins will be crucial for Salesforce as it navigates these hurdles.
