News that activist investor Starboard Value has its eyes on Salesforce landed with a bang this week. But the well-known investing group, fresh off of a bruising fight with Box, has a few other tech companies in its sights.
Starboard is taking to task three tech shops for what it considers to be underperformance: The CRM giant, yes, but also Wix and Splunk. A more varied set of companies is hard to find in the technology market.
Salesforce needs little introduction at its current scale, but Wix and Splunk are different beasts. Wix is a website builder for folks who want a website without dealing too much with coding or design. Splunk, meanwhile, is a legacy software company concentrating on processing log data for things like security issues or events that affect performance.
Obviously, the main draw to the Starboard scrap is Salesforce, but let’s examine the companies one by one to understand why the investor thinks that each one is failing to meet its true potential.
Salesforce in context
Salesforce is best known for CRM, its original core product. Yet it’s much more than that today, offering marketing tooling, service elements and too many other things to name. Over the last several years, Salesforce has used its considerable resources to move into adjacent areas, spending almost $50 billion to acquire Slack ($27.7 billion), Tableau ($15.7 billion), and MuleSoft ($6.5 billion), among others.
What’s Starboard’s beef with Salesforce’s performance? Notably, the investing giant has kind things to say about the CRM king, noting its “leading market position” across a number of sectors, something that we’d agree on.
But when Starboard looks at the company’s long-term plans, it is confused that Salesforce offers up slower growth than certain peers — not a huge surprise, given that it has far greater scale — but without a compensating increase in the pace at which it generates operating margin.
In essence, it is irked that a larger company growing more slowly cannot be more profitable than its smaller, more quickly growing peers.
The core argument that Starboard brings against Salesforce is that its combined growth and profitability should be around 50% — a metric that it determined by looking at other tech companies that could be considered peers. We’d note, however, that this claim is a stricter metric than the traditional “rule of 40” that we see among startups. (In the case of the three public companies, the ratio is more heavily weighted toward profit than growth, mind.)
Regardless, Starboard claims that Salesforce’s growth and profitability (“CY2022E revenue growth + adjusted operating margin” in accountant-speak), is 13% or 14% under what it should be. How might Salesforce fix that gap? By improving its operating margin, Starboard reckons. How does it do that? By cutting costs.
Summarizing the Starboard argument regarding Salesforce, the investing group claims that the CRM company could cut fat and not lose its way when it comes to growth. The investor’s message is simple to boil down: Get lean or at least leaner.
Splunk and Wix
Splunk is the entrenched giant in the log data space, but it’s far from alone, with performance management vendors like AppDynamics (which Cisco acquired in 2018 for $3.7 billion) and New Relic, along with companies like Datadog, Sumo Logic and Dynatrace counted as competitors. More recent entries like Cribl, a startup from former Splunk employees, are going after the core Splunk market by processing data faster and presumably cheaper.
There’s a lot of competitive pressure, and with Splunk’s stock down 50% over the last year, Starboard still sees areas where the company could improve returns.
Wix is a bit different than the two enterprise companies in that it targets a more consumer audience, but its prognosis is similar to the B2B concerns to the point of being an echo. Regarding Splunk, Starboard is pleased with the recently installed new leadership, but it still argued in favor of cost-cutting. Finally, in the case of Wix, the Starboard remedy really boils down to, yet again, cost-cutting.
Cut your damn spend, the investor appears to be shouting. Or, put another way: Tech companies are supposed to shit gold, so why are your operating margins so modest when you have already reached scale?
This complaint actually cuts somewhat deep; during the 2021 boom, we saw tech concerns complain that they could not hire fast enough. Recruiting teams swelled in size, employees were fought over, salaries rose, huge comp packages were discussed — and complained about — over drinks. Hell, startup founders raised vast amounts of money to just cover the damn salaries!
So which of these three companies is not like the others? It seems like Salesforce, with a $50 billion revenue target for 2026, is in much better shape than the other two. And the company is already aiming to reel in spending, per CNBC. Perhaps Starboard sees more potential returns here with a little additional external investor pressure — a little nudge toward even greater savings, leading to better operating margins and perhaps shareholder return.
Starboard is wagering its own capital and reputation that there’s a lot of excess at these tech companies to trim and that cutting that fat won’t impact muscle. In financial terms, they believe operating margins can scale without sacrificing growth.
Whether Starboard is making a good bet here isn’t entirely clear. Will cutting costs in an unpredictable economic environment bring better returns or exacerbate an already tough market? Time will tell.