While investors are currently loving Marc Benioff’s fixation on profits, it is increasingly difficult to square the Salesforce CEO’s emphatic declarations of an imminent AI-triggered boom in tech spending with his own company’s projections of 10% growth throughout for at least the next 8 months.
Benioff has established an extraordinary 24-year record of outsized achievement at Salesforce, and while my head’s still spinning from his decision six months ago to forsake 20% growth for higher margins and bigger profits, the guy is and always will be a legendary innovator and disruptor.
I just don’t think the scale of his disruptions will be anything like what it’s been in the past because, as Benioff repeatedly stated during Salesforce’s FY24 Q1 earnings call late last month, his new fixation is no longer on ambitious growth by redefining how businesses run, but rather on ambitious profits.
Hey, in lots of ways, that’s just fine and dandy. And who can quibble with a market cap of about $207 billion, just shy of its all-time high? We all have to live in the world as it is, and the pressure brought on Benioff by outside investors forced him to make the big switch from growth icon to profit master. So for those investors, good for them.
But if we’ve learned anything about the Cloud Wars, it is that the spoils ultimately go to the growth-grabbers, not the nickel-counters. And some comments made by Benioff in Salesforce’s recent Q1 earnings call are making me wonder how Benioff’s demotion of growth as a priority will change the very nature of the company he’s made into a global phenomenon over the past quarter century.
At the core, here’s the paradox cited in the headline above:
- On the one hand, Benioff spoke on the earnings call about a massive and explosive boom in tech spending that the era of AI is about to kick off; but
- On the other hand, he repeatedly de-emphasized growth in his remarks and hammered home his maniacal focus on profits, margins, and cost-cutting.
So if this AI-triggered boom in tech spending is about to hit, but Salesforce is forecasting revenue growth for at least the next 8 months of just 10%, how is the company going to compete with high-growth competitors like Oracle, SAP, Microsoft, and ServiceNow?
Plus, if this impending boom will become a new source of revenue for Salesforce, but its growth rate will be only 10%, then what the heck is going on with its existing businesses?
Benioff: Tech Spending Is About to Boom Thanks to AI
- “It’s going to be a new spending cycle as well, which is going to spark a massive new tech buying cycle.”
- “We are about to enter an unbelievable supercycle for tech, and everyone can see that. This is an incredible opportunity for not only Salesforce, but our entire industry.”
- Generative AI is “definitely not just the technology of this lifetime, but maybe any lifetime. It’s an incredible technology. And every company is going to have to transform because every company is going to have to become more productive, more automated, more intelligent through this technology to be competitive with other companies.”
- “And like every other sales call I’ve made in the last quarter, there’s only one thing that customers want to talk about, and that’s artificial intelligence, and specifically, generative AI.”
- “For Salesforce, that also means an opportunity to transform ourselves — and for the tech industry, it represents a new supercycle, where every company will have to transform to be AI-first.”
- “The coming wave of generative AI will be more revolutionary than any technology innovation that’s come before in our lifetime — or perhaps even any lifetime.”
- “Every CEO realizes they have to invest in AI aggressively to remain competitive, and Salesforce is going to be their trusted partner to get them to do just that.”
- “Every CEO I’ve spoken with sees AI as a revolution, beginning and ending with the customer. And every CIO I’ve spoken with wants more productivity, more automation, and more intelligence through using AI.”
- “This AI revolution is just getting started, which is why we’ve invested $250 million in our new AI Venture Fund to fuel start-ups developing for our trusted generative AI vision.”
- President and COO Brian Millham echoed Benioff’s vision of a massive AI windfall: “As Marc just talked about, this new AI wave is going to create a huge opportunity for us.”
- Millham then made a comment that we have to look at it in two ways: first, he possibly got a little over-exuberant and overstated the case by a longshot; or, Salesforce is understating the looming boom market. “Every CEO in the world is talking to us about generative AI right now.” I choose to think that Millham meant to say that every CEO we speak with from all across the world wants to talk about generative AI.” But then again, maybe he really did mean that every dang CEO in the world is talking the GenAI talk with Salesforce…
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Benioff: Our Top Priority Is Boosting Profits, Not Growth
Here’s Benioff on the earnings call:
- “We continue to scrutinize every dollar of investment, every resource, and every spend.”
- “As I said on our last call, improving profitability is our highest priority.”
- “While the economy is not in our control, our margins are, and that’s why we’re raising our margin target for the full fiscal year.”
- But on the revenue side, there was no parallel boost in guidance: “We’re maintaining our FY24 revenue guidance of approximately $34.5 billion to $34.7 billion, which is more than 10% projected growth year over year.”
- President Millham offered this perspective on why growth rates have hit all-time lows for Salesforce: “But we’re still operating in an uncertain macro environment. Customers continue to scrutinize every deal, and we see elongated deal cycles and deal compression, particularly in our more transactional revenue streams like SMB, Create and Close, and Self-Serve. Also, in Q1 our Professional Services business started to see less demand for multiyear transformations, and in some cases had to delay projects because customers are now focused on quick wins and fast time-to-value.”
- For Q2 ending July 31, president and CFO Amy Weaver reiterated that the growth target is as close to single digits as you can get–and that extends out to current RPO as well. “On revenue, we expect $8.51 billion to $8.53 billion, growth of approximately 10% in both nominal and constant currency. CRPO growth for Q2 is expected to be approximately 10% year over year in nominal and constant currency.”
Final Thought
I realize that Benioff is transforming his vision for his company, and is transforming the company itself. From the comments above, that is perfectly clear.
What I don’t get, though, is Salesforce’s complete lack of comment about what this “unbelievable supercycle for tech” will mean for the company.
Maybe that’s because Benioff is viewing it not so much as a chance to accelerate growth beyond 10% but rather to boost profits.
And therein lies Marc Benioff’s paradox: because while all of Saleforce’s competitors, would-be competitors, and future competitors will surely be looking to snatch up big chunks of that “supercycle” market share, perhaps Salesforce will simply try to figure out how to use the phenomenon as a way to boost profits.
That is, after all, precisely what Benioff said is Saleforce’s “highest priority.”
