What Does Salesforce Mean for Cloud?

The quarterly earnings couldn’t get much better for Salesforce (NYSE: CRM). Last week, the customer resource management (CRM) software-as-a-service (SaaS) vendor blew past analyst predictions to announce quarterly revenues of $5.15 billion, a 29% gain year-over-year and the first time the vendor showed over $5 billion in one quarter. Q2 GAAP EPS was $2.85, and non-GAAP EPS was $1.44. A deal with AT&T (NYSE: T), announced in February, seems set to turn golden. And Salesforce’s large-scale funding and equity partnership with unicorn Snowflake seems poised to profit as well, given that the virtual data warehousing startup filed for IPO this week.

In addition, at the end of then month, Salesforce will be added to the elite Dow Jones Industrial Average. All this news has contributed to Salesforce shares vaulting more than 30% since earnings.

AT&T a Significant Contribution to Growth

So what does this all mean -- and what does it mean for the cloud?

Salesforce execs attributed this quarter’s outperformance to a handful of factors, including better-than-expected new business, consistent spending by existing customers, and the rewards from meeting business obligations from the sales deal with AT&T. According to CEO Marc Benioff, that arrangement has so far materialized in deployment for 35,000 users in the carrier’s stores across North America. And so far, it looks as though things could improve substantially as AT&T focuses on 5G rollouts and its own virtualized edge technologies.

Salesforce’s focus on CRM clearly played a role in landing the AT&T contract. “We're tightly focused. We're not all over the field like a lot of our competitors,” said CEO Benioff on the earnings call with analysts. “A lot of our competitors are everywhere. They're in every market. Some of them are in enterprise and consumer. They're not just in CRM….They’re in ERP. They're public cloud.”

But that focus could also prove challenging as Salesforce faces more competition from the leading cloud “titans,” including AWS, Google, and Microsoft Azure, as those suppliers move farther into Salesforce’s range of influence.

After Tableau Deal, Salesforce Slows M&A

Salesforce’s acquisitions over the last couple of years seem to be panning out. Tableau contributed 41 points to a 66% growth in Q2 cloud platform sales. Saleforce also has raised its full-year revenue guidance to $20.7 billion to $20.8 billion, thanks in part to $100 million of revenue from Vlocity, the vertical Salesforce integration startup Salesforce acquired in February 2020.

But M&A is a costly strategy, even for a smart company like Salesforce. Perhaps thankfully, execs have put aside any further purchases for now. “[W]we’re not in a good M&A environment. I just don't see it. Maybe things could change. Of course, things always are changing…. But I think this isn't part of our plan right now,” said CEO Benioff on the earnings call.

Snowflake’s IPO and Salesforce

Salesforce could stand to gain from any IPO by its protege company, Snowflake. Benioff and company already have proven they know how to manage the timing of selloffs, given the recent way Salesforce cashed out a massive haul of shares in Zoom, in which it had a stake.

Much depends on how Snowflake performs in the market. It’s not yet profitable, though its financial losses seem to be headed in the right direction. Still, a lot can happen on the way to the public markets.

Salesforce execs made clear they know it’s too soon to be overly optimistic. While raising guidance for next quarter to a range from $5.24 billion to $5.25 billion, they hedged their enthusiasm. “While our performance in Q2 leaves us optimistic about the future, it is important to note that we remain mindful of how the pandemic may continue to impact our customers and our community,” said CFO Mark Hawkins on the earnings call. And with six months left in the fiscal year, that’s probably a wise outlook.