Salesforce is dealing with five powerful investors active in management. One way to get these companies off your back is to perform well, which drives up stock prices. Salesforce checked that box with a stellar quarterly report this week, beating expectations by a wide margin.
That might buy the embattled company some time, and it was certainly better than a bad report. But is it enough to keep these investors at bay?
On the same day the company was due to report earnings, one of those managers, Elliott Management, indicated it would submit its own list of board candidates, a move aimed at gaining enough voting control to impose its agenda.
With successful quarterly revenue of $8.380 billion, Salesforce now faces scrutiny over how it could lay off 10% of its workforce amid such excellent performance (and news reports paid actor Matthew McConaughey $ 10 millones to act as consultant). None of this is a great look for Salesforce, especially as a company that markets itself as a responsible capitalist company.
The executive team finds itself caught between critics with conflicting agendas, all while trying to run a company. It's unlikely anyone will warm to CEO Marc Benioff and his team as they try to navigate this challenge, but it's their reality for now.
Can this week's promising report fend off activist investor hawks, who are targeting the company and pressuring it to cut costs further? And can Salesforce manage to maintain the growth trend, especially with minor growth guide for the next fiscal year and an uncertain economy?
One thing is clear: it probably won't be easy any time soon.
Under pressure
We don't know what investor managers are thinking as they look to increase the value of their investments, but Elliott Management, which invested billions of dollars in Salesforce, issued a declaration after the benefits came out indicating he was pleased, which is no small feat.
Elliott, who said he had been in substantive discussions with Salesforce before the report, said he saw a lot to like. “Today's set of Salesforce announcements represents progress toward regaining investor confidence. Acceleration of margin targets, commitment to responsible capital return priorities, creation of a business transformation committee, and dissolution of the M&A committee are necessary steps," Elliott said in a statement. "These steps are consistent with our recommendations and we believe they will help restore value to Salesforce."
It is worth noting, then, that in an interview with Kara Swisher in Upfront Summit on Thursday, Benioff indicated that he hasn't really talked much with Elliott. “I'm sure they're a good firm, but I haven't had that much experience with them so I really don't know,” he told Swisher. Negotiations may happen between the attorneys for the two entities, rather than directly with the CEO.
At the same time, he recognized that it was important to improve communication with shareholders to help them better understand the moves the company is making.
“We have to improve our relations with our shareholders. It's incredibly important right now because of what happened last year; we have to be much more diligent in the way we communicate with them, much clearer, much more specific,” Benioff said.
One of the key criticisms from activist investors is the money spent on mergers and acquisitions and whether the company should get rid of some of those purchases. The dissolution of the M&A committee is perhaps an acknowledgment of investors' disdain for the money spent on acquisitions over the years.
But in his interview with Swisher, Benioff defended several of the high-profile acquisitions the company has made, noting that it took ExactTarget, which Salesforce bought for $2.5 billion in 2013, from around $300 million in revenue to $3 billion under the owned by Salesforce. MuleSoft, which Salesforce bought in 2018 for $6500 billion, went from a couple hundred million to a couple billion in revenue, and Tableau, which the company acquired for $15,700 billion in 2019, went from less than $1000 billion in revenue. to a couple billion. billion, all according to Benioff. Slack, which Salesforce bought in 2021 for $27.700 billion, is a multibillion-dollar product, he said.
“I think these are gems, and I think the key is that we've been able to weave them together, some at different rates than others. But our long-term vision is very clear: we are building a platform that allows our customers to connect with their customers in a whole new way,” he said.
Can Salesforce keep it all going?
Despite the positive aspects of the report, the company has faced declining growth, moving from 26% in fiscal year 2022 to 18% in fiscal year 2023 and a growth projection of only 10% for fiscal year 2024, a drop that can be attributed, at least in part. to a faltering economy.
Perhaps that's why Forrester analyst Liz Herbert wondered if Salesforce can continue to build on the recent report, or if it's an aberration. She pointed out that a quarter is not a trend and that there are some problems.
“While they continue to be leaders in CRM, we see some roadblocks,” he said. First, our data suggests that CRM purchases have already shifted significantly to SaaS and that SaaS CRM growth has slowed due to market saturation in recent years. Second, we typically see some categories they play in take a hit in tough economic times, particularly features that clearly don't generate revenue, like marketing.
“Third, there are many customers who do not fully use what they pay for and therefore seek more favorable offers or threaten to change providers. Fourth, because Salesforce is the dominant giant in the market, they are heavily attacked by the competition.”
However, he said it's not all bad news and that Salesforce is taking steps that should win the favor of managing investors. “On the bright side, the moves they are making to increase profits are powerful and a significant game changer for them. That should align well with what managers typically go after,” she said. "[The call with analysts after the earnings report came out] also focused more on core products and specifically mentioned altering the M&A approach and overall company focus, which are moves that make sense with the various pressures on them.
Patrick Gadson, a partner at law firm Vinson & Elkins who is in charge of shareholder management and M&A, said shareholders tend to play the long game, so a quarter may not be enough to alleviate the pressure completely.
“If any of the various managers the company is dealing with really see this good news as the start of a sustainable trend, then they might be willing to scale things back a bit. But every investor the company is dealing with says they're focused on the "long term," so if they think today was an aberration and not a trend catalyst, they're probably not going anywhere." Gadson said.
But he said the positive report could give Salesforce some leverage in the negotiations. “The solid earnings should definitely increase the company's leverage in any deal it has with any of the investors,” he said.
While Salesforce may have bought itself some time with a good quarter, some strategic changes and a share buyback announcement, it probably didn't end the fight with managers, which could continue for months to come.
