The Good News From Salesforce

In this podcast, Motley Fool senior analyst Tim Beyers discusses:

• Shares of Salesforce popping 12% on better-than-expected fourth-quarter results.
• How Salesforce has more focus but is still a business in transition.
• The doubling of the company's share buyback program.

Motley Fool senior analyst Jason Moser and Motley Fool contributor Matt Frankel discuss the decline of the nice-to-have economy. 

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 02, 2023.

Chris Hill: Looks like another company got the message about how Wall Street likes businesses that actually make a profit. Motley Fool Money starts now. I'm Chris Hill. Joining me today, our man in Colorado, Motley Fool senior analyst, Tim Beyers. Thanks for being here.

Tim Beyers: Thanks for having me. Fully caffeinated, lots of earnings-related things to talk about.

Chris Hill: You know what else is caffeinated? Salesforce shares today up more than 12%, because Salesforce beat expectations across the board. The revenue numbers stands out to me as, and I'm not a shareholder. But I was particularly struck by the revenue number up 14% compared to a year ago. Obviously, Salesforce has been in the news lately, because of layoffs, because of the latest co-CEO to leave. It's been a pretty eventful few months for Salesforce. You're a shareholder, how are you feeling and what stood out in the report?

Tim Beyers: Well, I'm feeling better for a couple of reasons. First, the stock is up materially. That's great. Sometimes we call these things relief rallies, Chris. I think there's some real cognitive relief that, OK, great, the revenue was up materially. I think there is a bit of acknowledgment from management, particularly Marc Benioff, that yes, we have to be better at controlling cost, because they have activist investors breathing down their neck, and so you did see that. For example, in this particular quarter, granted, there's still a lot of cost in the Salesforce business. But I'll just give you a couple of things here. Cost of revenue for the quarter. $2.1 billion in the current quarter, year-ago quarter, $2 billion. This is not the spend freely Salesforce that we are used to seeing.

Total operating expenses for the quarter about $5.9 billion, that was up from $5.5 billion. Yes, material, but not big jumps the way we're used to seeing it. I think the thing that really stood out for me, Chris, this is for the quarter on a year-over-year basis, 984 million diluted shares outstanding versus 986 million, so down 2 million. Now there's a lot of accounting that can go into, I'm not saying that Salesforce is, oh boy, now they're getting some religion and they're buying back stock and actually reducing their share count. There could be some timing in effect here, they did buy back some shares. We have to wait to see how much they're actually going to get religion around that. But I would say, Chris, a little bit of encouraging signs in terms of expense management, as well as a better-than-expected revenue number. Why is the stock up? It does feel like, hey, maybe we're seeing a slightly more disciplined Salesforce. That would be a good thing.

Chris Hill: It would be a good thing. I want to come back to the discipline. But first, since you are talking about the share buybacks, part of the news here is Salesforce doubling their share buyback program that they announced last August, from 10 billion to 20 billion. I'm assuming you put that in the positive category.

Tim Beyers: It should be a positive, let's say that. Let's say it should be a positive because it depends on what Salesforce does with its historical practices around equity compensation for employees. They've historically been incredibly generous for employees that they've acquired through acquisitions and employees that they've hired organically. They tend to be very generous in this area. A $20 billion buyback could do a lot to create accretive value to shareholders, if it's not wiped out by a whole bunch of equity grants to employees. Now I think that buyback plan is large enough that it should be accretive to employees and particularly, if the current path that we're seeing continues.

For example, if just looking at the cash flow statement here. From the current quarter, the overall expense they got the credit on the cash flow statement for stock-based compensation expense, in the latest quarter was $809 million versus $763 million in the year-ago quarter. Again, it's not a huge increase in a lot of stock-based compensation expense. That may have to do as much with how the stock prices come down and so the value of that expense is a lot lower, so it just evens out and they still issued a lot of shares. Lot of things remain to be seen, but it does seem as though $20 billion is going to be put to use on behalf of shareholders. I think it's very easy to take a look at this. Chris, you and I are both sports fans, and you know how as sports fans we take one game and we say, wow, man, what an amazing performance and we project that out. I think the caution here is, let's not take this quarter and project it out and assume everything is amazing for Salesforce. We don't know that yet.

Chris Hill: We don't. You referenced the belief that we might be dealing with a more disciplined Salesforce, a more disciplined CEO, Marc Benioff. One of the bits of information we got that I think is an argument in favor of that is Benioff saying on the conference call that the company disbanded its committee on mergers and acquisitions. Again, I'm not a shareholder, but if I were, I would be happy about that. I look at Salesforce and think, no, you're big enough make the stuff that you've acquired, which on balance I think Salesforce has done a good job with that under Benioff's leadership. But it does seem like a time to, we've seen this from other companies this earning season, to really focus on basics, really stick to your knitting.

Tim Beyers: I fully agree with that. I do agree that it is good news, Chris. This is one of the areas you really going to want to watch, if you are a Salesforce shareholder, so just looking at the balance sheet. If you look at the balance sheet, there's a line on there called goodwill, and it stayed relatively stable year over year, about $48.6 billion presently versus roughly $48 billion last year. Really, no material changes there. But that is a lot of money, and goodwill is the excess that Salesforce has paid. It's like they've made a lot of acquisitions. When they paid a premium over and above the intrinsic value of the company they acquired, that premium goes on the balance sheet as goodwill.

It's like this is value we believe we're going to accrue as it becomes part of Salesforce, and so it's recorded as an asset on the balance sheet. A lot of that, Chris, is due to the acquisition of Slack. Getting their strategy right and actually getting real value, serious value out of that Slack acquisition, which I don't think we've really seen yet. That has to happen, because if it doesn't, there's going to be a quarter or a year, maybe in the next two years where they have to test this every year, and finally, they have to throw up their hands and admit like, "Yeah, you know what? We overpaid for this thing." Then it's a big write-off and the stock gets absolutely crushed.

They really do need to do this, so they avoid the specter of a big goodwill write-off on Slack. Last point on this, it is something they said they were always going to do. They wanted to make Slack, this portal into the rest of Salesforce. You go into Slack, and then you'd issue commands and start conversations, and open up a Salesforce app right from within Slack. You do all of this work together as a group and a Slack channel using a Salesforce product like Quip, or something like that. That is still the vision for this, so they do need to focus on that. Chris, there is absolutely no doubt.

Chris Hill: Let's close on the stock which is with the rise today, basically where it was three years ago at the start of the pandemic. Prior to that, you look at the chart of Salesforce and it's a pretty steady up and to the right. It's been a roller coaster since then.

Tim Beyers: Yeah.

Chris Hill: Do you look at the underlying business of Salesforce with everything we've just talked about, do you look at it and say, this is a stronger business than it was three years ago this time. With the stock basically being at the same point, is it a more challenged business? Is it weaker? Where, is the underlying business relative to the stock?

Tim Beyers: What a great question. I think it's in transition. I don't think you can say it's stronger and I don't think you can say it's weaker. I will say I think it's more focused and that is a very good sign. A more-focused sales force can do a lot of good for shareholders. It can improve. It's interface, it can improve, improve the integration, and its apps. This company has a lot of capital. If all of that capital that it generates is now focused internally on improving the business, on improving Slack, on making integrations tighter on improving the user experience. Look out, they can be very dangerous in their core markets. That is a good thing a focus Salesforce is potentially a dangerous Salesforce. But I don't think yet, you can say it's either stronger or weaker. I just think you can say it's in transition, Chris.

Chris Hill: Tim Beyers, always great talking to you. Thanks for being here.

Tim Beyers: Thanks, Chris. 

Chris Hill: Just as more companies like Salesforce are sticking to the basics, so are consumers. Jason Moser and Matt Frankel share some thoughts on the decline of the nice-to-have economy. 

Jason Moser: Hey Matt, it's great to catch up with you again. There was an article by Christopher Mims here several weeks back in the Wall Street Journal that talks about the decline of the nice-to-have economy and I thought it was a good and timely piece given where things stand today. The pandemic long in the rearview mirror, things are starting to normalize and at the same time with all of that, we're seeing challenges in the broader economy as it pertains to the consumer. I mean, at the end of December we saw full 64 percent of Americans were living paycheck to paycheck. Inflation of course, is still an issue and Matt, just frankly, the consumers running out of money. Let's, open up with this topic first and foremost. How would you describe the nice-to-have economy?

Matt Frankel: You hit the nail on the head with they're running out of money thing. The nice-to-have economy, it's always a thing. Everyone always wants to buy things they want, not just things they need and that's especially true in periods of economic prosperity. But the past couple of years, 2020 and 2021 in particular has been unusual in the sense that consumers had a ton of disposable income, more so than in a typical economic peak. Due to a combination of factors. There were all the stimulus measures that were taken. There was postponed payments like we're still not our student loans. I don't know about you, but that gives me an extra few hundred dollars a month of spending money on.

Jason Moser: Thankfully, Matt, I don't want to have any student loan bills coming up, but given your financial advisor said, we may need to chat after taping because I have one child going to college in the fall and another one going a year later. We're still trying to put all of those pieces together.

Matt Frankel: You figured the average student loan payments in the 300-400 dollar ballpark, that gives you the average person who with student loans like 4,000 dollar of extra money.

Jason Moser: It's a lot.

Matt Frankel: Then combine that with the lack of ability to go out and spend money on experiences and things like that. In 2020 and 2021, people had a lot of money to spend on stuff they didn't need. It's the best way to describe it.

Jason Moser: Yeah. You know what it made me think of? Immediately and your kids are a little bit younger than mine, so this may be even fresher in your mind. But as they're going through school at that young age and they're learning about wants versus needs. That's something that we deal with all throughout our lives. I mean, we're dealing with that want versus need and having to balance that. It's nice to be able to get those things that you want to make sure to take care of those needs first. It really does feel like this nice-to-have economy. That's a lot of those wants.

Matt Frankel: It is, and I mean, I'm just as guilty as anybody like, I couldn't spend money if I wanted to during '20 and 2021. What do we do? We put a pool in our backyard. I'm just as guilty as anybody. But it is really important to differentiate wants versus needs. The fact that needs have got to so much more expensive in 2022 and so far in 2023. The fact that our needs have got to so much more expensive, it's not just the people run out of money. But when needs get more expensive, it gets tougher to spend money on the wants.

Jason Moser: Yeah, it really feels like we saw an exceptional number of companies pop up over the last several years here that play into this trend. What are some of the, companies or the markets that really stand out to you as far as the, these nice-to-haves?

Matt Frankel: I already told you about my pool.

Jason Moser: Sounds like a need.

Matt Frankel: No, just another one in my house right now. Peloton. Peloton was a big one. They're definitely something that you don't need. There are exercise bikes that are about 1/10 of the price of a Peloton.

Jason Moser: Yeah.

Matt Frankel: But it's a great product. It was really nice-to-have and especially after our gym shutdown during COVID, we could really justify the cost. We got a Peloton in our house and we actually saved money of our monthly exercise expenses because we had our Peloton. So exercise equipment is one. There's a personal styling boxes. You remember Stitch Fix's a big example. My wife, she couldn't go shopping for her scrubs. She's an ICU Nurse. She couldn't really go shopping in person so companies like Figs became a big staple. I type mentioned it on the show one time, I was doing a show and three Figs packages arrived while I was on the show.

Jason Moser: Wow.

Matt Frankel: I would say even like companies that specialize in discretionary retail, like say, Best Buy, to a lesser degree because they do sell things that people need like a washer and a dryer and things like that. But they do sell a lot of things that people were buying in large quantities. One because they were working from home and two just because they had a lot of extra money?

Jason Moser: Yeah. Well, I mean, I'm glad you brought up Best Buy because it also you look at like a Best Buy and then you compare that a retail operation to something like a Target or a Walmart. Target and Walmart are certainly full of a lot of those wants. They're also businesses that are really capitalizing on the grocery market. We could argue that groceries certainly are a need. Now, it's interesting that this articles talking, speaking of groceries, I mean, it feels like one of the bigger victims here as of late, pertains to groceries. It's all of these meal-kit companies and we've seen so many of these pop-up. Like, I understand the convenience. Everybody needs to eat, that's the beauty of food from that perspective in investing in a well-run restaurant operation, for example. But it does seem like we saw a lot of the meal-kit type businesses really harping on that convenience factor. They're starting to suffer a little bit more now though, aren't they?

Matt Frankel: Yeah and it's not just the meal kits, it's the food delivery services as well like DoorDash and Uber Eats. People didn't realize as much with the pandemic shutdowns, how inflated prices get when restaurants list their stuff on DoorDash, to offset their own fees. That's something that is really starting to suffer too. The meal kits in my opinion, were just a bad business model from the start. We've used them before. The customer acquisition cost is through the roof. Peloton for all its faults, its churn is like one percent a month.

Meal kits it's like 20 times that and they have to offer things like half-price off your next three orders just to get people to stay and that's not sustainable. Those companies are losing money left and right, which was fine when money was free and investors were willing to speculate on companies like that, just growth at all costs, if you will. But now that, money is not free anymore, now that interest rates do exist, you're starting to see investors not tolerate money-losing businesses. There's not a way really for them to gain the customers that they need without losing money.

Jason Moser: Yeah and just a side note there. You said the word sustainable and that just made me think what these meal-kit companies as convenient as it may be for some, and I'll be clear, I do most of the cooking here at home and I never would consider subscribing in one of those meal-kits, partly because I just know how to cook and I like being able to do it as I like to do it. But the waste that comes along with those meal-kit companies, that's something that you have to keep in mind. We saw as the e-commerce has exploded over the last decade, one of the big concerns has always been packaging and the waste that comes along with that. How can we do this so it's a bit more sustainable and less impactful on the planet there. For all of the work, I'm sure that the meal-kit companies have done in that regard. When you're talking about sending food that requires a lot of different moving parts, keeping things cool, keeping things dry. There is just a tremendous amount of waste that really comes in with that.

Matt Frankel: For sure. I mean, one thing that meal kits do have going for them because we've used them a couple of times is they cut down on food waste, they send you the exact amount of groceries you need, which is really hard to do, especially for like two adults. It's tough to buy just enough produce for two adults without having a lot of waste. But you're right, the waste is a big issue, people are really starting to realize that now. People were willing to tolerate it a little bit more during the earlier days of the pandemic, it's still going on, but when there wasn't much of a choice. The waste is definitely something that's on consumers minds and getting them back into the grocery store.

Jason Moser: What strikes me about this trend is this doesn't really seem like a one-off. It seems like something that pops up when, like you were saying before, consumers have more money to spend, then when that money starts running out, we see these things start to pull back a little bit. It strikes me, this is something that's a bit more cyclical in nature.

Matt Frankel: Discretionary spending is very cyclical. We saw a surge in discretionary spending in the 2005-2007 time frame before the financial crisis happened, for example. But the 2020 and 2021 period had that unusual combination of factors, the stimulus, the postponed payments, the inability to go out and spend money, that really just made it an unusually high level of discretionary spending. Now combine that with the willingness of investors to pump all their money into these profitless businesses, essentially subsidizing people's discretionary spending. It was just like a perfect storm for the nice-to-have economy.

Jason Moser: Yeah. I tell you, one of these things that you see is you use these nice-to-haves as time goes on, as they become a little bit more. You find out ways to justify this being a must-have. Whether it's the convenience factor or whether it's something else entirely, you do start to find ways to justify these being need-to-have. I think it's also important for investors to remember too, just on that cyclical nature of consumer discretionary. These are the times probably where you want to start looking at the opportunities in consumer discretionary when we're seeing more pain, when we're seeing these valuations depress. Because it's not something that will last forever. It's certainly not to say that all of these will come back like meal plan companies, for example, I'm not sure that's necessarily the market that I'm looking to invest in. But perhaps fitness, perhaps specialty retail, something like that. These are probably the times to look at some of these nice-to-haves. It makes me wonder for you, what is a nice-to-have that has become a must for you over the past few years.

Matt Frankel: I would say my pool, but it's not like I could give that back even [laughs] if I wanted to.

Jason Moser: You're stuck with that one.

Matt Frankel: Something that I could get rid of, I would say my streaming services. At the start of the pandemic, I had Netflix, that was it. Now I have Netflix, I have HBO Max, I've Disney+. My kids would never let me get rid of Disney+ though. In the early days of the pandemic, it was nice to have, now I consider that an essential. For my wife, it would be the Peloton because it's that subscription model that sucks you in. Now that you've already spent thousands of dollars on your equipment, it seems silly to cancel your monthly subscription and just let it sit there.

Jason Moser: Yeah.

Matt Frankel: I guess that would be an essential too.

Jason Moser: Yeah. I mean, the health benefits too of exercise.

Matt Frankel: Absolutely. I like going to the gym, but then again, I work from home all day so I like getting out. She works in a hospital all day so she likes coming home and working out.

Jason Moser: Very understandable. Well, let's wrap this up real quick just with an idea here. In looking at these companies that start out as maybe nice-to-haves and then flip to that essential. Some good examples there. What are some characteristics or what does it take for a company to get from nice-to-have to essential? Is it something that relies on external forces, macroeconomic conditions, whatever it may be, or are there things that company itself can control to take that, to make that leap from being a nice-to-have to now listen, we are an essential part of your life and you need us?

Matt Frankel: Well, I would say one, a network effect. It wasn't that long ago when a smartphone was considered a nice-to-have luxury. You think of Apple. Everyone thinks that Apple is not an optional product. A recession hits, they don't sell any fewer iPhones, not significantly. The network effect of those products definitely helps. The same thing as with streaming. Streaming is a superior product and at a superior price point to the alternative, which is the obstacle that companies like Peloton need to overcome. Because yes, Peloton is absolutely a superior product to the $300 exercise bikes, but it's not at a similar price point. People have a really tough time viewing something as a must-have that costs 10 times as much as the alternative and that's why the streaming services, I think, are so successful because their cost is comparable to the alternatives and it's in many ways a better product.

Jason Moser: Well, we'll end it there. Matt, thanks so much for making the time for us today.

Matt Frankel: Of course. Always good to be here.

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, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.