Salesforce Q1 FY2018 — A Strong Quarter + Raised Expectations = High Costs for Future Expansion

Salesforce boasted very strong numbers for the start of their fiscal year 2018.  The real story here is not the numbers themselves — we all knew Salesforce was performing exceptionally well even before the release. It’s the insights gleaned from the numbers that highlight great implications for not only prospective, but also existing Salesforce customers. This is especially true for current customers that have yet to move beyond the Sales Cloud.

  • Revenue for the quarter rose to nearly $2.4 billion – up 25%
  • Deferred revenue increased to over $5.04 billion – up 26%
  • Significant growth occurred across major product segments:
    • Sales Cloud up 14%
    • Service Cloud up 21%
    • Platform up 32%
    • Commerce Cloud (excluding Demandware) up 32%
  • Full-year top line revenue guidance raised to $10.3 billion – an over $100 million increase

As one might expect, strong numbers only increase the aggressiveness of future projections. Salesforce doubled their revenue over the past three years and in-turn set the same goal to double once again (notice the top line revenue guidance increase). Now that they’ve hit the $10 billion mark, Salesforce has their eye on $20 billion in revenue.

It’s All About Market Share

Salesforce is continuing to expand its market share with current solutions, forging its way into the public sector and B2C-centric businesses. During the earnings call, several members of the executive team gave examples of new products and how they were using them to not only break into new market segments but also to expand their relationship with current customers. For example, COO Keith Block noted how the acquisition of Krux and Demandware became their new Commerce Cloud solution. These moves allowed Salesforce to customize the orientation of their product set and use the new solution to help break into the B2C industry.

Salesforce CEO Marc Benioff also emphasized the company’s focus on expanding into new industries while also continuing their dominance in industries where they already have market share. Even with 9 out of the top 10 global wealth management firms as customers already, financial services remains at the forefront of their focus. Salesforce is continually expanding its platform of solutions through strategic acquisitions, partnerships, and product development:

  • The acquisition of SteelBrick allowed Salesforce to extend Sales Cloud with CPQ (Configure Price Quote) functionality
  • The acquisition of Demandware later became the Commerce Cloud – this is enhancing Salesforce’s ability to effectively engage new market segments such as B2C-centric businesses
  • Salesforce rolled out a new Australian data center that began as a strategic partnership with AWS (Amazon Web Services) in May of last year
  • The company launched the new AppExchange Partner Program, which highlights a $100 million commitment to new AI (Artificial Intelligence) solutions
  • Einstein AI is now built into all of Salesforce’s capabilities, which will have huge implications down the line as AI continues to improve and become more innovative

Their new AI product — Einstein Guidance — is not yet publicly available but the solution is already an unbiased member of Benioff’s executive team. Einstein Guidance will analyze things ranging from company financial performance to the performance of specific individuals on the executive team.

The Cost of High Growth to Customers and Prospects

There are substantial costs to this type of product expansion.

Salesforce’s aim is to initially penetrate with a solution such as Sales Cloud and then use the initial success to push new or enhanced solutions to the customer, like the new AI capabilities.

As Salesforce continues to launch new products and gain more market share, it puts pressure on existing customers to spend more to remain a strategic partner. Block spoke specifically to the expansion of services with current customers and even named the strategy “exceeding growth.” “Now that the walls between sales, service, and marketing are coming down, [Salesforce can] provide a 360-degree view of the customer with service and marketing.”

Look for Salesforce to offer additional value to their customers in the form of new capabilities and an upcharge.

Benioff stressed the importance of their penetration strategy, citing the new CPQ capability as a result of their SteelBrick acquisition. With this and similar product expansions, Salesforce is able to rebrand their own Sales Cloud and offer additional value to their customers in the form of new capabilities and an upcharge.

This tactic is illustrated perfectly by the companies with the largest Salesforce footprint (affectionately dubbed “the top 10 club”). These organizations are spending over 2.5 times today with Salesforce than they were 4 years ago.

Expect Salesforce to push back even harder on additional upfront discounting, as well as downstream price protections because of the new structure and be cognizant of the significant price rise come renewal time.

Mark Hawkins, CFO and EVP of Salesforce, gave some additional insight into their sales process including some major changes looking forward. “Regarding commissions, [Salesforce] anticipates capitalizing more of its selling-related cost up front, which will lead to amortization of the costs over the consumer life rather than the contract term.” This will most likely have a direct impact on how their sales representatives will interact with customers.

Assume Salesforce will push new solutions and enhanced versions of current solutions aggressively.

Expect Salesforce to do this by trying to get in front of business leads (Sales, Marketing, etc.) and/or the CEO. It is important to elevate the discussion above the sales rep and interact directly with those who can see the larger strategic picture and can look past the commission on the current deal.

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