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03 December 2020

Salesforce: Strong earnings pick up the Slack

Salesforce once again released a strong set of earnings, sufficiently beating analysts’ estimates on both the top and bottom line, but reported a deceleration in revenue and a weak outlook in the short term.

Shares in the cloud-based company fell by c.4% in extended trading hours, as investors did not respond well to increased levels of company and wider market uncertainty. This may come as a shock based on its earnings, but issues arose with other operating and internal activities occurring within the company. The company announced that it intends to acquire the communications software company Slack for an enterprise value of US$27.7bn, which will be settled in a combination of stock and cash. This will be the biggest acquisition in Salesforce’s history. Many analysts have alluded to the fact that this acquisition may simply be too large for Salesforce to easily integrate and generate cost and revenue synergies from, however, the firm’s track record of blockbuster merger and acquisitions deals will provide at least some comfort for investors.

Q3 2020 has been eventful for the company, to say the least. In addition to the announced acquisition of Slack, the company’s Chief Financial Officer (CFO) is retiring and the company still plans to expand aggressively. Current CFO Mark Hawkins has been at the company while beating market returns over the past few years, therefore concerning investors further. However, his position will be left in the more than capable hands of Amy Weaver, Salesforce’s President and Chief Legal Officer of seven years.

Looking deeper into the earnings, the company’s revenue grew by 20% in the quarter, which displays a slowing rate when compared with the previous quarter’s growth of 29%. In Q3 2020, Salesforce’s core sales product, which is used to track current and potential customers, generated US$1.3bn in revenue, showing 12% growth year-on-year. Its Service Cloud, used for the provision of customer service, generated revenues which were up 21% year-on-year. Salesforce’s previous acquisitions have proved to be accretive to value, with the division containing Tableau data visualisation software generating US$1.6bn, showing a 24% gain year-on-year.

What does the future hold for the company? If the acquisition of Slack can be accretive of value for Salesforce over the following quarters, it could put the company in competition with the likes of Microsoft in terms in internal work communications and workforce productivity optimisation. This could be a hard market to crack, especially with Microsoft bundling products and adding in Teams at a close to zero price if it feels threatened by competition. The company is remaining creative in expanding its range of services for its customers. Salesforce is looking to optimise the use of AI, to enhance the service even more to become beneficial in the virtual working environment.

Overall, the company maintains a positive long-term outlook with its revenue guidance for the fiscal year 2022 being stronger than expected, while suggesting a 20.08% annualised growth compared to the fiscal year 2021 guidance. The company expects US$25.5bn in revenue next year, which includes a US$600m contribution from Slack, assuming the acquisition is finalised in the second quarter. This does not seem unreasonable for a rapidly growing enterprise services company, with large, successful customers such as Zoom and T-Mobile to name just a few, as it continues to optimise connections between companies, its employees and its customers, to ensure smooth sales pipelines and strongly integrated communication platforms.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Salesforce: Strong earnings pick up the Slack
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