Salesforce Earnings Report Lets SaaS Industry Take a Breath
Salesforce yesterday reported strong sales and profits in an earnings report that exceeded analyst expectations. Revenue at the company grew 24% to $7.41 billion in the quarter, which was slightly above analysts’ average estimate of $7.38 billion. “Salesforce has become even more strategic and relevant to our customers as we are providing them with the agility and resilience they need to drive growth and efficiency in these uncertain economic times.” said Bret Taylor, Co-CEO of Salesforce in a press release.
Startup Party Times Are Over
Strong Salesforce earnings is welcome news because the headlines at TechCrunch and other industry news sites are pretty grim lately. Several notable startups are now in trouble due to changes in the global economy. Or the mask is off companies who pretended to run a business on funny metrics. Reports note that several companies are now firing workers or making other adjustments.
And SaaS and software company stock prices are down from a peak back in November 2021. Take poor HashiCorp for example. This cloud-native devops company had the misfortune to have its IPO on December 9, 2021. The price of its stock was $91.50 per share on January 3, 2022. Today, it has lost 63% of its value, down to $34.28. But HashiCorp is still a $6 billion public company, although management has a huge compensation and morale problem on its hands.
Overall public equity market performance has really taken a beating. Yesterday Salesforce’s stock had lost 35% of value since January 3. This was worse than the software and SaaS industry average of 30%. This industry average is worse than the tech-heavy NASDAQ index which has fallen 25% in 2022.
Troubles in the public capital markets translates into a slowdown in venture capital and private equity. It seems like fund managers are still looking for early, seed-stage deals, but are pulling back on valuations and checks for Series B and higher deals. We have seen this happening in the Salesforce ecosystem, with AutoRABIT being the lone Salesforce devops investment announced so far 2022.
Worries About Stagflation
The markets are also nervous because the United States Treasury and Federal Reserve are ready to act against inflation by raising interest rates and restricting the money supply. This could tamp down on overall economic growth, which some worry could create an inflationary and interest rate spiral.
Some economists worry that the United States is on course for something called “Stagflation.” I was a college student in the late 1970’s and I recall how high interest rates, a GDP slowdown, and inflation frightened my parents and my friend’s parents. I personally remember being acutely aware of how the economy was going to impact my ability to buy a car or get a job out of college. It also had powerful political impacts. Stagflation got Jimmy Carter kicked out of office and made Ronald Regan President of the United States in 1980.
How Salesforce Performed Against Headwinds
Worries about stock prices and stagflation get factual confirmation every day. Therefore, the market was nervous about Salesforce’s earnirngs report. Analysts feared that a poor report or a cut in outlook would crash the stock. And, with Salesforce being a component of the Dow Industrials index, it could take the whole market down with it.
Based on the sentiment expressed, it seems like Salesforce is gaining favor as a way for its customers to fight inflation and meet other efficiency pressures. And there is no doubt that several big companies are relying on Salesforce for critical transformation projects.
Big companies are doubling down on digital transformation to become more efficient. Salesforce co-founder Marc Benioff said on the call, “we are going to focus on customer productivity and how to lower their costs.” Brett Taylor, co-CEO of Salesforce, also focused attention on Sales Cloud as a source of growth since it offers a platform for further expansion.
Impact for Trailblazer and ISV Community
First, a strong Salesforce earnings report is good news for the entire Salesforce community. This indicates that Trailblazer job growth should continue to be strong. And opportunities for consultants and system integrators should continue to be numerous. It is also good news for all Salesforce ISVs whose fortunes are directly tied to continued Salesforce growth.
The customer details contained in the analyst call were good news for Salesforce devops companies. This is because these stories illustrate Salesforce is engaging with bigger companies with more complicated development needs. Some Salesforce platform owners only choose to invest in devops when faced with building a critical system. With more critical systems being build, companies will need more devops.
The strength in critical system delivery translated to an unusually strong posture by Salesforce executives on the analyst call. “The demand model is very strong. We continue to weather these storms through the strength of our business model,” said Mr. Benioff. When financial analysts had a chance to ask questions, they challenged the growth assumptions being offered. In question after question, executives batted down concerns by reiterating customer wins and new business opportunities.
What About Other SaaS Companies?
Salesforce’s success doesn’t translate to good news for every other SaaS stock. A remaining question is how does Salesforce strength impact the Salesforce ecosystem and SaaS companies in general?
Take Snowflake for example. This company offers data analysis capabilities for large companies, sometimes called data-warehouse-as-a-service. Snowflake had its IPO in 2014. The stock took off with good growth and became a market darling. The problem now is that after the latest Snowflake earnings report investors aren’t so sure the company can ever make a profit. It turns out Snowflake’s software offerings aren’t sticky enough, unlike those from Salesforce.
One may estimate the economic resilience of a SaaS company by seeing how well it compares to the attributes that keep Salesforce on top. The leading attribute is simply longevity and company stability. At 22 years old, Salesforce has extraordinarily deep customer relationships, rivaled only by Oracle and SAP. Once a company becomes dependent on Salesforce, it becomes very hard to switch out.
So, enterprise software makers must battle today’s economic headwinds based on how well their apps digitize business processes and how deeply embedded they become in an enterprise.
Outlook: Sunny with Winds and a for Chance of Storms
After the Salesforce earnings report the outlook for the ecosystem is bright with a note of caution about overall economic headwinds. Job seekers, consultants, and system integrators should continue to find Salesforce customers who need help designing, building, and running their orgs. Salesforce ISVs selling to an increasing number of Salesforce platform owners should continue to see a steadily growing market.
The markets rewarded the Salesforce earning report with a 9.9% price jump today, but the rest of the SaaS and software industry performance was decidedly mixed, with little to no apparent impact. Yesterday’s report was good news just for the Salesforce ecosystem. Less sticky SaaS companies may still be in trouble.
