Salesforce Has a Co-CEO...Again

Strong results in the third quarter (Q3) are overshadowed by Salesforce's (CRM 1.65%) guidance for Q4, but maybe the company's second attempt at a Co-CEO structure will improve the picture for shareholders. Shares of Box (BOX 0.11%)pop 12% as the cloud storage company continues its revenue growth. Allbirds (BIRD 10.42%) falls as revenue growth for the apparel company is outweighed by increasing losses. In this episode of Market Foolery, Motley Fool analyst Maria Gallagher, with host Chris Hill, analyzes those stories. Also, we kick off our annual drive to expand the universe of holiday music.

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This video was recorded on Dec. 1, 2021.

Chris Hill: It's Wednesday, December 1st, which means it's time to start the holiday music, but not yet. That'll come at the end of the show. Welcome to Market Foolery. I'm Chris Hill. Joining me from the financial capital of the United States of America, Maria Gallagher. Good to you see you.

Maria Gallagher: Nice to see you too.

Chris Hill: Once again, we have a trio of third-quarter earnings. We will talk apparel, we will talk Cloud. We're going to start with software. Salesforce, making headlines in more ways than one. Profits and revenue were higher than expected, but shares of Salesforce down little more than 6 percent this morning, because guidance for the fourth quarter was not what Wall Street wanted to see. Also, President and Chief Operating Officer, Bret Taylor has been promoted to Co-CEO and Vice Chairman of the Board of Directors. We will get to that decision in a minute. First in terms of the results and the guidance, what stands out to you?

Maria Gallagher: Like you said, the results were pretty strong, their revenue was 6.86 billion up about 27 percent, which is in line with estimates. They are on track to reach 50 billion in revenue by 2026. They're expecting revenue up for the full-year of about 26.39-26.4 billion, which is up about 24 percent. But something important I think to look at when you're setting companies like Salesforce is understanding how their acquisitions are performing. One of their recent acquisitions, MuleSoft, which is a Cloud application builder has encountered problems scaling up which weighed on the revenue, which they talked about a little bit this quarter. Slack, on the other hand, which they acquired earlier this year for 27.7 billion, actually outperformed expectations which just good to see. Slack Connect, which allowed intercompany messages between customers, saw a 176 percent growth, and so they're saying it's going to be a couple of more quarters before Slack's fully integrated. But so that is important to look at, not just those top line numbers, but understanding how their acquisitions are doing. It was good to see about Slack and I will be interested to see how MuleSoft performs in the next couple of quarters as well.

Chris Hill: Obviously, if you're a shareholder, anytime there is an acquisition, you want to follow what the company is saying, what are their own expectations for how long this is going to take to integrate that sort of thing. You want them all to work. My hunch is if you're a Salesforce shareholder and you were going to be told one of these is working out better than the other, you'd be happy that the answer was, it's Slack that was, because that was even for a company the size of Salesforce, that was a big acquisition they made. There were people skeptical, [LAUGHTER] among other things. There were people who just thought it was a bad idea, but there were plenty of people who were like, I think I understand this, but that's a decent chunk of money.

Maria Gallagher: It is definitely the one that you want to see performing well, it's the one that people are going to be paying a lot of attention to, it's one of their biggest name acquisitions that they've done. It's good to see how strong it's doing. I think it will be interesting to see how it gets integrated and how that increases their revenue in different ways, because obviously they are trying to compete more with Microsoft and have those abilities of a full business software company. We think it's going to be really interesting to see how it continues to compete.

Chris Hill: Now, I don't know what your reaction was to the news about a Co-CEO. First of all, what a week for Bret Taylor. On Monday, he's named Chairman of the Board of Twitter, and now he is Co-CEO of Salesforce. It's a good week to be Bret Taylor. I don't know about you, but my first thought was, didn't Salesforce do this once before? Didn't Marc Benioff try this with Keith Block and it ended with Keith Block leaving the company because the Co-CEO thing wasn't working out? I don't know. Maybe second time is a charm. Certainly there are second marriages that work out better than first marriages, but I don't know, Maria. I'm still waiting to see the really shining example of the Co-CEO thing working out well for everybody involved.

Maria Gallagher: It's interesting because Keith Block pretty recently stepped down, he stepped down in 2020. It's not like we've really learned from the past where we've had enough time to really think about it and try again. It's pretty recent in terms of now having a new Co-CEO. I agree with you. I think a lot of people are thinking, again, didn't we just do this? It will be interesting to see maybe second time will be of the charm.

Chris Hill: Benioff is, I think, about 10 years older than Bret Taylor. If I'm being charitable, and I think Benioff has spoken a little bit to this, basically saying it's an opportunity for him to take a little bit more time off. This could be a prelude to, in 2-3 years down the line, Benioff says, "All right, I'm stepping down as Co-CEO, and the company is now in the hands of someone with experience in the corner office." I don't know. I was going back and forth with Andy Cross yesterday a little bit about this because I raised that question to him, "Has this ever really worked well?" The one example he gave me was Atlassian, which Atlassian has had co-founders and Co-CEOs for years. To me that's a little different because they started the business together. Again, feel free to email [email protected], if you've got a great example of an existing CEO saying, "I'm bringing on a Co-CEO," and that working out well. With all of my skepticism around that aside, when you look at shares of Salesforce, down 6 percent today, down 10 percent in the last two days, one last thought I had about Salesforce was, I'm not a shareholder, maybe this is a buying opportunity. l don't know. I guess my question is, how good an entry point that Salesforce look at this price, if you're looking to hold this thing for 5-10 years?

Maria Gallagher: It's a great question. I think a lot of times with moves like this, you think to yourself, are these spicing moves? Are these mission-critical changes in revenue that are concerning? Or are people just reacting to short-term news? I think a lot of times, especially with Salesforce right now, this is nothing that I saw was super concerning. Everything was really trending in the right direction. They have obviously had incredible performance over the past five, 10 years. Marc Benioff has proven time and again to be a really good CEO. I think if you liked it a couple of days ago, you should like it now. I think a lot of people like it, including myself. I also I'm not a shareholder, but a lot of times a company like Salesforce, if someone said to me, why aren't you a shareholder? I don't think I'd have really good response. I would just say, I don't know. Maybe I should be.

Chris Hill: Well, now that we're talking about it on this show, we'll have to wait for the internal trading restrictions at our company to blow over and then maybe we can buy a few shares. Let's move on to what appears to be a strong third quarter for Box. Profits and revenue both higher-than-expected for the Cloud storage company. Shares of Box up 12 percent today.

Maria Gallagher: I talked to Tim Beyers a little bit this morning about these results from Box, and in his words he's described this as a breath of fresh air from the company. It was their third consecutive quarter of accelerating growth. It's up to 14 percent, which is not crazy high, but it's still 14 percent. Their revenue was 224 million. Their billings grew about 25 percent. They have a net retention rate of 109 percent, which is up from 103 percent a year ago. Those are all things trending in the right direction. They've had a bunch of new products. They're working on deeper integrations with Office, Salesforce, Slack, and Zoom. They've had momentum in their suites products. They are really expanding their wins and they're really excited about them. They're guiding for 15 percent revenue growth, which is for the next quarter and 13 percent for the year, which is an acceleration from the growth of 11 percent last year. I think that Tim described it well, it's just a breath of fresh air. It's not incredible, but it's better than it's been in the past and it's trending in the right direction for Box.

Chris Hill: He follows it more closely than I do, but I get his point. This is one of those companies that, at various points in the last few years, has seemingly had a lot of promise. It's still just a four billion dollar company even with the move up today. It seems like it's in that category of businesses that, particularly for shareholders, when they see results like this, they look at it and think, OK, as you mentioned, third quarter in a row of accelerating growth. I'm sure shareholders are like, "Great. Let's get a couple more. Let's get on a little bit of a hot streak going here," because this is just been an up and down stock for a few years now.

Maria Gallagher: It's pretty volatile. I think that shareholders are really hoping that this catches momentum and that they see growth accelerating. I think that net retention rate accelerating and growing is a really good sign and hopefully some of these new wins with customers and their expansion with customers will be good for them moving forward. Like you said, I think a lot of shareholders are saying, "Okay, we've got a couple, let's get a couple more. Let's keep it going."

Chris Hill: Allbirds is out with its first report as a public company. This is the company best known for its footwear. Revenue was up 33 percent in the quarter, but the loss was nearly double what it was a year ago, and shares of Allbirds down 8 percent this morning and down nearly 40 percent from where it's finished on opening day.

Maria Gallagher: Allbirds is a tricky one. Their revenue was up 33 percent. Their revenue in the US was up 42 percent. Their international revenue was up 10 percent. They opened four stores which ended the quarter with 31 locations. That's part of the reason that loss widened. They're expanding more into physical retail. They're saying that there's a strong response to their new product innovation including performance apparel line, which I think is an interesting route to go. I think it's expected, but also very competitive. You have Nike with about 39-40 percent of that industry, Adidas with about 20 percent, and then up incomers in the performance area are people will talk more about Hoka are on. People aren't really talking that much, in my experience, about this performance apparel lines so I think that that's going to be a little bit tricky for them to gain a lot of traction in. I do really admire the company. They have this uniqueness surrounding their brand and their integration of ESG with inception, which I think helps it standout, but I think that really helps it stand out in terms of leisure wear. I do think that it will be interesting to see how successful they are in that growth because they need that growth in different areas to keep accelerating.

Chris Hill: The expanding into the apparel, that makes sense. They appear to be doing it in a smart way. They're just methodically rolling out a few products here and there. That's smart. One of the challenges, I think, for this business is the balance of e-commerce and the store traffic. They really started out as an online brand. There's a way to do that well. Unfortunately, in the same way they are being methodical in how they rollout their apparel, they are being methodical in how they rollout their stores. Four stores is not a lot to rollout at any one period of time. I love their products. These are the most comfortable shoes I've ever owned in my life. I've bought several pairs of Allbirds, I love them. But I've made that mistake before as an investor. Particularly in this space with Under Armour, with saying, to my way of thinking, the toughest thing to get right is the product and having a product that truly stands out. The mistake I made with Under Armour was, well, they got the toughest thing right, I'm sure they can figure out the rest. 

That really hasn't worked out for me as a shareholder. I'm not going to make that mistake with Allbirds, even though I love the product itself and they are a new public company. You mentioned the ESG. As you said, this is a big part of their brand. I think the phrase ESG appears in their S-1 filing nearly 100 times which leads me to this. The fact that they make good products, they've really leaned into ESG. Those things combined to make me think, this is not a big company and I could see someone making an offer to buy them in the next two to three years, before they really get their feet under them, no pun intended, as a public company. I don't know. It's one more reason I'm not going to buy shares of Allbirds because it's not going to surprise me, if someone looks at the products they make and the branding, and the brand halo that comes with the ESG for this company and says, "Yes, we will buy them for a billion dollars more than whatever their current market cap is."

Maria Gallagher: Yeah. I think that's really interesting and it's so hard, especially with consumer retail. I think investors and consumers are so fickle in their attention. The hot shoes. I think Rothy's a couple of years ago where the shoes everybody had and then I feel like Allbirds has stolen a little bit of their thunder in terms of that sustainable angle of you're getting recycled shoes or shoes made from better material. I do think that that's hard, but I agree. I think that there would be really interesting acquisition target for some bigger companies that are trying to maybe rebrand, try and talk about leaning more into that sustainability which a lot of these brands are doing. I think that especially if they are expanding into their physical retail. When you integrate ESG and sustainability with your core mission, people are going to be a lot more critical of it and so expanding into fiscal retail, that's going to be an interesting thing to see how that impacts their overall environmental footprint.

What are those costs and benefits that they're doing and how transparent are they with them? I will give them credit that if you go onto their website, they have a sustainability section right on their branding website. It's really comprehensive, it's really interesting. It's backed by a lot of data, which I think is one of my favorite things to see. You see sometimes a lot of times with these brands, they have a lot of buzz terms, but not a lot of specific data about their company. I really think Allbirds deserves a lot of credit for how transparent they've been thus far. I'll be interested to see how they grow or I wouldn't be surprised either if they become an acquisition target because I think they have the brand loyalty. They have the goods that people like. They are before, they're off to the races, pun intended, and I think that might be something we see.

Chris Hill: Before we wrap up, as I mentioned, it's December 1st and if you're relatively new to this show, what we have done starting in 2015, and by we I mean me and Dan Boyd, the man behind the glass. By me and Dan Boyd, I mean it's mostly Dan Boyd because his knowledge of music is vastly superior to mine. We've had a mission in the month of December to celebrate holiday music that never makes it to the radio. All these hundreds of radio stations flipped to the holiday format and they just keep playing the same songs and they're fine. But there are many other great songs out there that we want to celebrate. That's what we do in the month of December. Also I want to wish a happy birthday today to Mikey, one of our listeners. I believe he is in Sweden. The reason I believe that is, he sent me a holiday song that's in Swedish. I don't know if we're going to get that up. We'll see. But thank you Mike, thank you for listening, and happy birthday.

Maria Gallagher: Happy birthday.

Chris Hill: Maria Gallagher, always great talking to you. Thanks so much for being here.

Maria Gallagher: Thanks for having me.

Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. Don't buy yourself stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. This show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, see you tomorrow.