When Salesforce announced during its most recent earnings call that it wouldn’t be providing a revenue forecast for next year, it was a bit of a shock, especially coming from the most successful SaaS company in the world.
With revenue of over $7.8 billion for the quarter and a goal of reaching $50 billion by its fiscal 2026, the company hasn’t exactly been doing poorly. Still, when you combine the lack of a forecast with the recent executive exodus, it begins to paint a picture of unusual instability at the CRM giant.
First, let’s look at that forecast — or the lack of one. It seems the economy has become so uncertain that Salesforce opted out of a forecast for its fiscal 2024 altogether (the three months ending October 31, 2022, comprised the third quarter of the company’s fiscal 2023). We use the word unprecedented these days an awful lot, but it’s pretty darn unusual for a company like Salesforce to tell investors they’re punting on a forecast, and it’s the first time the CRM giant has ever done it.
Here’s what Salesforce CFO Amy Weaver told investors during the earnings call:
Before I close, I’d like to share a few thoughts on Fiscal Year ‘24. As discussed, we are experiencing a very unpredictable macro environment, as our customers are working to ensure their businesses are also healthy for the long term. Compounding that dynamic is an unprecedented foreign currency market. Therefore, at this time, we believe it would be premature to provide revenue guidance for the next fiscal year.
That would be enough to make anyone who has followed this company raise their eyebrows. But consider that Salesforce simultaneously dropped the bombshell that co-CEO Bret Taylor plans to step down.
The reason for that exit, ostensibly, was that Taylor was tired of life inside the big corporation and wanted to return to his roots as a company builder — to get back to basics, in other words. But that might not have been the whole story. The Wall Street Journal reported tension between the two leaders and that the resignation might not have come as far out of left field as we were led to believe. (You can pull your jaw off the floor; this is not the first time a company has tried to spin bad news as neutral.)
There were other shoes left to drop. The smaller of the two clogs was Mark Nelson, CEO at Tableau, announcing he was leaving. (Salesforce bought Tableau back in 2019). The more dramatic news item quickly followed: Slack co-founder and CEO Stewart Butterfield told his flock that he wanted to spend less time running a business and more time gardening and taking care of his child.
Slack quickly announced that Lidiane Jones, who had been GM of Salesforce’s Commerce Cloud, Marketing Cloud and Experience Cloud (yes, that’s a lot of clouds), would replace Butterfield.
Let’s not forget that even prior to all of this, Salesforce had to deal with activist investor Starboard Value breathing down its neck, never a comfortable position. (The company stressed its cost-cutting efforts in its latest quarterly call, it’s worth noting.)
On paper, that feels like a lot of disturbing news in a short time. But what does it mean to the underlying financial stability of the company? As part of our year-end roundup at TechCrunch+, we decided to take a peek under the hood and see what’s happening. Is this a short-term glitch in a bad year for all SaaS companies or a series of moves that could be indicative of something more worrisome at Salesforce?
Inside the numbers
We have three goals: First, to look at Salesforce’s recent quarterly performance to see what we can infer about its health. Second, to wonder whether other companies are reporting similar results and forecasts. And, third, to ask if there is a lesson here for us technology watchers, especially regarding startups.
In the third quarter of its fiscal 2023, Salesforce reported 14% growth (19% in constant currency terms) to revenue of $7.84 billion. Against $2.1 billion in revenue costs, the CRM company generated gross profits of $5.7 billion (73% gross margins), operating income of $460 million and net income of $210 million in the three-month period. Compared to the year-ago quarter, Salesforce’s operating income was up sharply from $38 million, while its net income dipped from a year-ago result of $468 million.
Apart from what appears to be a rapid deceleration in revenue expansion, the company is hardly in dire straits. Salesforce had nearly $12 billion in cash and equivalents on hand at the end of its most recent quarter and remaining performance obligations worth $40.0 billion.
The most significant concern with Salesforce’s numbers is growth deceleration, from 22% in the preceding quarter and 27% in the year-ago period, unadjusted for currency fluctuations, which it expects to slow to 8% to 10% in the current period. Put more simply, Salesforce had to deal with currency-related growth speed bumps in the quarter. At the same time, customers are holding back on new purchases or spending more with existing technology vendors.
While they probably can’t cut existing expenditures — that’s the beauty of subscription SaaS revenue — they can forgo new purchases and upsells, which could help account for the lower revenue projections, beyond currency issues everyone is dealing with.
Why does the lack of guidance for next year matter? Because it implies that Salesforce needed more time to understand its market. For a SaaS company, that’s a bit of a surprise; subscription software companies are known for revenue stability and forecastable growth rates. For Salesforce — with all the historical data it has under its belt — to need more time to project was perhaps unsettling to investors.
The company’s share price closed on November 30, ahead of earnings, at $160.25 per share. It closed at $128.27 Friday, implying that investors are less certain that Salesforce is accreting new future cash flows. (Even worse, its per-share price peaked at over $300 in November 2021, and it has since had to deal with aforementioned activist investors, probably as a result.)
Our first goal was to understand Salesforce’s health. It’s perfectly fine, even if it’s enduring the growth crunch that all SaaS companies are dealing with right now.
Other companies and the dollar problem
Now, are other modern software companies seeing their growth rate moderate? Yes. A good example is Box, which we’ve covered extensively in recent quarters, but also the broader cloud market. Per Bessemer data, the median growth rate for a public cloud company accelerated from 2020 lows of 26% to 27% to a peak of around 34% to 35% in the early 2022 calendar year. Since that May-ish zenith, median growth has dipped to 26% in recent weeks.
Salesforce is not alone, then, in seeing growth slow. In fact, our working perspective is that the more revenues from other countries a U.S. software company has, the more likely it is suffering from currency-related growth issues. For example, in Salesforce’s most recent quarter, it reported $1.75 billion worth of revenue, up 10% in normal terms. That would’ve been 23% if the value of the dollar hadn’t jumped in recent quarters. That growth deficit is brutal.
This brings us to our third question: Is there a lesson to be had from the Salesforce quarter, its falling value and the fact that it told investors that it won’t provide a fiscal 2024 forecast until the end of its current quarter? There is, and it’s actually good news.
Yes, Salesforce’s growth is slowing in constant currency terms. Yes, other companies are enduring a similar problem (Microsoft posted 11% growth in its most recent quarter, or 16% in constant currency terms, for example), but there’s a positive trend in the offing that could help all such impacted companies: The dollar is losing some of its steam.
Tracking the U.S. Dollar Index throughout 2022, we can see a strengthening of the U.S. currency compared to other major currencies from the January-February period through October. Since then, the dollar has lost material ground compared to other currencies. This could imply that the third quarter (calendar) might wind up being the worst quarter for tech companies that sell overseas, at least from a growth perspective when we consider the impact of the changing value of currencies.
The weakening dollar helps explain Salesforce’s choice to delay its guidance; if the dollar was weakening, and your growth rate was accelerating, wouldn’t you also want a bit more time to track the change and work it into your projections? After all, investors are hardly chill at the moment — why spook them?
Currency reversions won’t save the domestic economy, of course. If Salesforce sees its U.S. growth rate decline, any gain from more favorable forex conditions abroad won’t be able to close that gap, we reckon. This means that while Salesforce’s — and other tech companies’ — growth rates may be under less pressure, the larger question on the horizon remains unresolved.
The cloud still hangs over tech, then, but with some potentially good macro movements underway to help clear near-term currency-related pressures. For startups, the moment makes it difficult to know where to invest, be it domestically, where the dollar’s changing value doesn’t matter much, or abroad, to possibly de-risk a U.S. recession. Getting that bet right could set the tone for all of next year.
We’ll be watching.