For the recently reported quarter, Salesforce (NYSE: CRM) crossed a milestone of $20 billion in annual revenues. But the market has been abuzz with the news of its $27.7 billion acquisition of Slack.
Salesforce’s revenues for the third quarter grew 20% to $5.42 billion, above analyst estimates of $5.25 billion. Adjusted earnings of $1.15 per share was also better than the market’s forecast of $0.75 per share.
By segment, Subscription and support revenues grew 20% to $5.09 billion, Professional services and other revenues grew 22% to $330 million.
Among key metrics, remaining performance obligation grew 17% over the year to $30.3 billion. Current remaining performance obligation grew 20% to $15.3 billion.
For the fourth quarter, Salesforce forecast revenues of $5.665-$5.675 billion and an EPS of $0.73-$0.74 versus analyst estimates of revenue of $5.51 billion and an EPS of $0.85. Salesforce expects to end the current fiscal with revenues of $21.1-$21.11 billion and an EPS of $4.62-$4.63. The market was looking for revenues of $20.77 billion with an EPS of $3.73.
Salesforce’s Product Growth
Salesforce recently announced several product enhancements. It released its new product called Digital 360 that combines new innovations from the Salesforce Customer 360 platform for customer engagement. The service comes with features such as Customer 360 Audiences, Commerce Cloud Payments, and Experience Cloud. Customer 360 Audiences is a customer data platform built for marketers to unify segments and activate all of the customer data. Commerce Cloud Payments is a payment solution powered by Stripe and Experience Cloud helps accelerate the creation of CRM-powered digital experiences.
The biggest news though was concerning its plans to acquire San Francisco-based Slack for a whopping $27.7 billion. The acquisition ends Slack’s foray into the public market. Slack, founded in 2010, had listed last year at a valuation of $19.5 billion. But continued losses had hurt its valuation. By the beginning of 2020, Slack’s valuation had slipped by nearly 40%.
Slack’s products allow users to collaborate with each other. The global lockdown conditions have helped drive its growth in the recent quarters. Its revenues grew 49% to $216 million for the second quarter that ended in July. It recently reported 39% growth in revenues to $234.5 million for the third quarter that ended in October.
Both companies believe that the acquisition will complement each other. Slack will be deeply integrated into every Salesforce Cloud and will help transform the way people communicate, collaborate, and take action on customer information across Salesforce. It will take information from its other business apps and systems to help organizations become more productive and make smarter and faster decisions, while creating connected customer experiences. The acquisition, in turn, will allow Slack to expand its presence, not only among Salesforce customers but also for all companies that are undergoing digital transformation.
In the recent past, Slack has seen stiff competition from Microsoft Teams. Microsoft has bundled Teams with its Office product in a bid to expand its usage within the enterprise. Earlier this year, Slack had filed a complaint with the European Commission against this bundling as it makes it difficult for Slack to make big inroads into the market. Now, along with Salesforce’s might, Slack may find it easier to compete with Microsoft.
Salesforce already has its own work collaboration product called Chatter, which has failed to attract much interest. Contrast that with Slack’s offering where one of its biggest achievements has been its ability to consumerize the workplace. Back in 2001, Douglas Neal and John Taylor had coined the term consumerization of IT to highlight an emerging trend that individuals were fueling the next wave of IT adoption. Organizations need to build solutions that mimic those used by the end consumers in their daily lives, to drive adoption of usage within their workplaces.
Slack has been quite successful at that. It boasts of social media usability techniques of Facebook like no other collaboration tool. The platform thrives on social interactions and allows users to share memes, company updates, and tag each other, very similar to Twitter or Facebook. These techniques have helped it become a popular tool. This ease of use helps drive higher adoption rates, thus ensuring that the product makes inroads into an enterprise.
But analysts aren’t entirely convinced. While they believe that Slack Connect could become a contributor for high growth for Salesforce, they expect the competition from Microsoft to remain a big challenge. Slack has been wooed by several tech giants in the past. It had received acquisition offers from Google, Amazon, and even Microsoft but had managed to still stay independent.
Slack’s PaaS Potential
Salesforce is very savvy in its PaaS strategy. I have long believed that Slack should also implement a PaaS strategy and bring a large community of developers onto its platform, and have them enhance its functionality. In this, Atlassian is a very good case study for them to look at.
Slack has over 2,200 apps and integrations across several verticals on its platform. Developers use its platform to automate workflows and customize Slack apps. Several startups use the Slack platform to drive user engagement and adoption. A CB Insights report counts 115 private venture backed startups that offer integrations with the Slack platform across categories like Analytics, Team Culture, Sales, Finance, and Security.
A strong developer ecosystem, education, app marketplace, accelerator, and venture-fund are the components of a compelling PaaS strategy, and Salesforce knows this better than any other company out there.
I would like to see Slack realize its PaaS potential under Salesforce.
Meanwhile, Salesforce’s stock is trading at $220.78 with a market capitalization of $202.09 billion. It had touched a record high of $284.50 in August. The stock fell to a 52-week low of $115.29 in March due to the global crisis.
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