Salesforce came out fighting on all fronts against activist investors this week. The results from its fourth quarter and full-year results beat expectations. It announced plans for a $20 billion share repurchase scheme. Finally, in the analyst call, the leadership team announced changes to its engagement with investors and an acceleration of decision-making as it looked to appease the activists.
The activists, including Elliott Management, Starboard Value, Third Point, ValueAct Capital and Inclusive Capital, called for better profit margins and free cash flow. Salesforce delivered earnings of $1.68 per share and $8.38 billion in revenue in Q4. These were above analysts’ expectations of $1.37 and sales of $8 billion. They were far greater than the $0.84 EPS on revenues of $7.33 billion a year ago. The share price rose 15.79% after hours, closing at $193.78.
Marc Benioff, Chair and CEO of Salesforce, announced, “For the full year, we delivered $31.4 billion in revenue, up 18% year-over-year, or 22% in constant currency, one of the best performances of any enterprise software company our size. We closed FY23 with operating cash flow reaching $7.1 billion, up 19% year-over-year, the highest cash flow in our company’s history, and one of the highest cash flows of any enterprise software company our size.”
The company also issued guidance for FY24, aiming for revenues of $34.5-$34.7 billion with a GAAP operating margin of 10.8% and EPS in the range of $2.59-$2.61. It expects operating cash flow growth of 15-16%.
Communication, communication communication
Communication is one of the most common mantras I hear when talking to CEOs. It is not a solution to everything, but it is an enabler for many things. Benioff has realised that he has not been effectively communicating with investors recently, and has paid the price.
During the analyst call, he announced several changes he has made recently to start addressing the recent pressure. The pressure began with Elliot Management Corp making a multi-billion dollar investment in the firm. At the time, Jesse Cohn, managing partner at Elliott, told Reuters, “We look forward to working constructively with Salesforce to realize the value befitting a company of its stature.”
Benioff was also clear about his actions to improve Salesforce and address the concerns investors such as Elliot highlighted.
- He brought Mike Spencer, head of IR, onto the leadership team
- In January, it announced job cuts. Although Benioff later admitted it was perhaps not in the best way
- It is consolidating its real estate footprint
- Salesforce is working with Bain in several areas. It has brought its sales teams back to the office and in front of customers after seeing a performance drop of around 10% whilst they were remote working. It intends to reinvigorate the performance culture within the organisation
- It is now scrutinizing every dollar of investment and driving operational excellence and automation across the business
- The engineering teams are now focused on integrating acquisitions faster and prioritising core innovations
- It has expanded its M&A committee forming a business transformation committee.
Importantly Benioff also noted to the analysts, “We also dramatically stepped up our communication feedback loop with our investment community, and I hope you all are feeling that.” Source Motley Fool.
Has it worked
This is not going to be a quick fix. Elliot Management issued a press release indicating that it would continue to work with Salesforce on the transformation that will allow the company to reach its potential. The statement was on behalf of Managing Partner Jesse Cohn and Senior Portfolio Manager Jason Genrich:
“Elliott has been in close, substantive dialogue with Salesforce leading up to today’s earnings statement. Salesforce’s set of announcements today represents progress towards regaining investor trust. The acceleration of margin targets, commitment to responsible capital-return priorities, creation of a business transformation committee and disbanding of the M&A committee are necessary steps forward. These steps are consistent with our recommendations, and we believe they will help restore value at Salesforce.”
“The strength of Salesforce’s business and its movement in the right direction are key reasons we are among the company’s top investors, but much work remains: Salesforce needs a sustainable leadership plan and a board that demonstrates it can provide accountability through proper oversight. To fully earn back the confidence and support of investors, Salesforce leadership must now deliver on its promises. Elliott intends to continue working with Salesforce as we evaluate the level of engagement necessary to achieve the best outcome for the company.”
Benioff also announced the appointment of three new non-executive directors. Mason Morfit, CEO at ValueAct Capital, Arnold Donald, who stepped down as CEO from Carnival Corporation; and Sachin Mehra, the CFO of Mastercard. This should help address the improvements to the board that Elliot announced, especially the addition of Morfit, one of the activist investors.
Enterprise Times: What does this mean
Fresh faces and a new transformation see Benioff stepping back in and reasserting himself as the sole CEO. Benioff noted, “We’ve hit that hyperspace button since we last talked to you a quarter ago, and I’m thrilled with the progress we’ve made. Changes that used to take months happened in weeks. Changes that used to take weeks are happening in days. And changes that used to take days are happening in hours.” Source Motley Fool.
Will the changes work? So far, Benioff seems to be making a difference. He has admitted his mistakes over the last few months, and the company looks to be surging again.
What hasn’t been addressed yet is the sustainable leadership plan. What happens to Salesforce after Benioff? This may still be some time away, especially after the departure of Bret Taylor. Taylor preferred entrepreneurialism rather than enterprise leadership. It is a tricky problem Benioff needs to address. It also places Salesforce in the same position as Workday.
With the departure of Chano Fernandez, Aneel Bhusri, co-CEO of Workday, appointed an experienced Co-CEO to help lead in the short term. But both leaders share the same problem, who will follow after them?
