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The Impressive Numbers Driving Salesforce.com's "New Model"

By Clay Bruning – Oct 8, 2021 at 10:15AM

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The tech juggernaut isn't done growing its revenue and operating margins.

Salesforce.com (CRM -1.66%) might have consistently doubled its revenue every three years or so since 2010, but the tech giant is not done with improving its already impressive revenue and operating margin performance, according to figures detailed in its recent investor day presentation.

In this episode of "Beat & Raise" on Motley Fool Liverecorded on Sept. 27, Fool.com contributor Clay Bruning dives into the numbers and explains why he expects Salesforce to continue to meet its ambitious targets.

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Clay Bruning: Yeah. The next thing they talked about was their new model. You might think like, are they changing their entire business model, the way they sell or the way they offer their products? It's really just about how they sell and how they're improving their operating leverage. We can dive into the next slide here and we can talk about revenue. Just incredible, incredible when you look at the past 10 or so years of revenue growth. I think every three or so years since 2010, they've doubled their revenues. Just incredible. Now, they are on the aim to do that over, I think the next four years. They announced a $50 billion sales target by the end of calendar year 2025, last year, so about four years and they're hoping to double from 25 to 50 billion revenues. From some of the previous slides, from reading through a lot of these transcripts, I have no doubt, I have complete faith in Benioff and the rest of the team to execute and hit that 50 billion in sales. I wouldn't be surprised if a year or two from now they're talking about closer to 55 billion in sales with a lot of these synergies that Slack will bring along. They actually raised their fiscal year guidance for this current year and then they initiated guidance for 2023. Which I believe they expect to be about 31 billion for their first $30 billion fiscal year as expected next year. They talked about how they hope they only have to be in the $30 billion range for a couple of years until they get into the 40 billion range. They're always thinking about the future and again, another theme that the CFO Amy Weaver was talking about is, growth is still the No. 1 priority for this company, which is just incredible for a company selling almost $26.5 billion a year. Then another theme, and they've got a lot of questions about this was, OK, so the new model isn't just about revenues and they have plenty of ways to do that. We talked about the Slack synergies, the digital HQ, the Service Cloud, etc. But they also have the ability, thanks to some COVID headwinds, some disciplined spending from management to improve their operating leverage. They increased their operating margin guidance to [inaudible] and I think three out of the last five quarters they hit that. It's worth noting this is a non-GAAP metric. I think this past quarter they had an operating basis of 5 percent. Then when they add backs and most notably, their stock compensation to their employees, which is pretty substantial on a year-on-year. They know that they do that for retention to have the best employees coming to the team and keeping those employees loyal and sticking with Salesforce. But their non-GAAP operating income, they're hoping to get to 20 percent this year and next year, I believe. That's with about 1.5 to 2 percent detraction from the Slack acquisition. They noted there are three main drivers to this improvement. We talked about their accelerating revenue on [inaudible] space. They've had very good execution from the sales team, and I will just read one more quote from, I think it was the COO, "Base of all selling will be virtual, it will be through video. You know why? It's easier to get a hold of the customers. You can pull together meetings much more quickly. You can bring people from around the world, so you can bring the best people into your customer calls." I just thought this was really interesting. They talked about how they're getting some of those C-level executives more frequently and faster than they ever have, thanks to this virtual first world. Then the second area that they talked about was the improved outlook was this new world. They're not going to go back to the same level of sales travel that they had before. They've been so successful in the virtual first sale goal and I think they will only get better as they roll out more features for Slack and specifically Slack Connect, which just as a reminder, is essentially their way of communicating with external organization. If I'm a Salesforce member, I can ping someone at Intuit who is one of their customers and say, "Hey, how's everything going? We have this new sustainability offer and we think you might be interested in" and start that sales cycle, a conversation directly. Then they also talked about how in-office travel or excuse me, the office every day or for that matter, every week probably been some I guess there is that they'll probably continue a look to streamline their real estate footprint. I believe they were working on their real estate print back last March and in the summer of last year, that will help them improve their operating, leverage from the last couples years of staying in offices, etc. Then you pair that with travel and entertainment for customers. I imagine that's helping them reduce that cost pretty substantially. Then the last one was just more disciplined spending. They talked a lot about how they have over the last five,10 years, they've really revamped their entire management team. They've just been more disciplined in their spend and that has helped them essentially make more money for every dollar of sales that they've had. Really encouraging and when you think about how Salesforce is still almost a growth over everything company, and they are generating $26 billion in sales with a 20 percent margin, who knows how profitable this company can be? One of, in Benioff's segment at the tail end of the video, he even talked about 20 percent isn't the long-term goal, 30 percent isn't even necessarily a long-term goal, we hope to get the 40-50 percent. Just an incredible company in terms of sales execution and I expect their operating leverage to really shine in the next five to 10 years as well.

Clay Bruning owns shares of Salesforce.com. The Motley Fool owns shares of and recommends Intuit and Salesforce.com. The Motley Fool has a disclosure policy.

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