Salesforce, Focus and The Pursuit of Opportunities in AdTech and MarTech
Salesforce was always a company I enjoyed covering as a sell-side analyst when I worked at Pivotal Research, in part because it was fascinating to learn more about pure software businesses than I might have by solely covering companies dependent upon advertising or media-related activities.
It was also fascinating because I could see the benefits that were following from the focus the company had on marketing-related or adjacent products. It seemed like their strategies were much clearer than those expressed by most other companies I followed. They were also a clear play on what I was able to see starting around 2006 while I worked at Interpublic. At the time it seemed like there would inevitably be a blurring of the lines between ad tech and marketing tech, and there was a great promise that marketers might realize if they could better tie their own first-party data and customer relationships to the data that could be activated across a wide range of media and marketing channels.
To my mind, the purchases of Radian6, Buddy Media Exact Target, Krux and Datorama between 2011 and 2018 were clear illustrations of this focus, even if the value creation from those transactions wasn’t always as clear. On my read, if the company kept focusing on marketing technology-related products and solving for the technology problems that marketers and their colleagues in sales had, meaningful growth would have persisted on a like-for-like marketer basis. And indeed, the company did grow, from a mere $3 billion in revenue and $561 million in cashflow less capex in fiscal 2013 (ending in January of that year) to $31 billion in revenue and $6.3 billion in cashflow less capex in fiscal 2023.
About $28 billion of cash and nearly 400 million new shares were deployed over the past decade in support of this outcome, although most of the capital used was only put to work over the last few years. The company’s biggest transactions occurred since 2018 and involved Mulesoft, Tableau and Slack, which were massive in comparison to the rest of the company, at least in terms of their valuations rather than their revenues. They were also, for lack of a better characterization, much more general in focus as software businesses and not specifically sales and marketing-related software.
Prior to 2018 Salesforce was to my mind a great example of a company squarely focused on the things it did uniquely well and which applied those capabilities to bigger opportunities than those it initially pursued. Specifically I saw a cloud-based software product focus (Salesforce was one of the pioneers of cloud-based software delivery) paired with a sales & marketing customer focus, which was relatively unique many years ago, as it was arguably only matched by Adobe. To the extent that Mulesoft, Tableau and Slack were expensive acquisitions that reflected less focus than the company demonstrated previously, concerns among investors about growth and profitability became more widespread, especially in context of the overall market correction of the past year. This, in turn, led to the arrival of a significant number of activist investors among Salesforce’s shareholders, which surely brought about a new kind of investor pressure to the company.
However, much more than most, Salesforce was always incredibly responsive to shareholders: among the approximately twenty companies I covered prior to 2019, I perceived co-founder Marc Benioff as the CEO who was most respectful of the role of public market investors as primary enablers of a company’s growth. I saw this on numerous occasions, especially as the sole analyst who covered both Salesforce and Twitter in 2016 when Benioff seriously pursued and then ultimately rejected an acquisition of Twitter primarily because his company’s investors were never sold on the idea.
In what appears to be a solid illustration of this responsiveness, the company is now taking action around the company’s financial profile. Salesforce’s new guidance issued on Wednesday calls for significantly higher near-term profit margins – now with a 27% adjusted operating income margin for the fiscal year ending in January 2024, well above a prior 25%+ adjusted operating income margin target for the year ending January 2026 – paired with revenue growth of 10% in constant currency terms for the current year. This growth implicitly suggests a reduction in top-line expectations, as prior guidance called for a 17% compounded annual growth rate over the next three years.
Overall, this change represents a meaningful shift of trajectory for the company, as near-term profits could always have been improved if there was less of a focus on growth and a greater tolerance for slower revenue expansion. The company simply chose not to make these profit improvements because of its focus on growth. To the extent that Salesforce is communicating it is now a relatively mature software company and that it implicitly concurs with investors that it is at the size where the pursuit of incremental growth is a preferred strategy, the company will surely settle into an appropriate valuation and find a shareholder base who values the company for what it intends to become.
Relative to securities analysts whose day jobs are focused on software stocks, I’m certainly less well-qualified in opining on the drivers of valuation and the appropriate levers to pull to maximize a stock price for such companies, let alone assessing the degree to which the real super-power for a software business might lie in its product development or product integration capabilities (which would help justify many of the choices Salesforce has made in recent years) or some of the unique pressures driving spending on software in general.
On the other hand, it’s hard not to reflect back on the focus I saw in the company many years ago and imagine an alternative universe where a company positioned as Salesforce was back in 2018 remained much more focused on marketing technology and – perhaps – focused on the still unrealized potential of integrating marketing tech with ad tech. This is not to say that financial outcomes would have been meaningfully different necessarily, but perhaps such an approach could have provided greater clarity to investors around Salesforce’s long-term ambitions relative to what was conveyed by its more general focus on the “fourth industrial revolution”, epitomized by Mulesoft, Tableau and Slack.
Of course, Salesforce could still choose to refocus on marketing software to the exclusion of other kinds of products, building out other sub-verticals it doesn’t already compete in or acquiring other complimentary businesses that fit more cleanly on a marketing tech Lumascape. Alternately, if they choose not to do so, it will leave opportunities for some other companies to make these investments instead, which will eventually help get marketers to the same place I expected they would get way back in 2006.