Salesforce dropped its guidance for the year by $1 billion during its first quarter earnings, and is now projecting 17% revenue growth this year as it deals with the consequences of the coronavirus crisis. However, analysts point out that that growth rate is only slightly lower than what it’s predicted in the past. They predict that while Salesforce may close fewer new deals this year, the value it can provide existing customers will help it grow.
Since Salesforce doesn’t expect its business to significantly slow-down overall, even at a time when many of its customers are struggling to stay afloat, analysts predict that the highest demand and revenue growth will come from products that help businesses retain their existing customers. In particular, they highlight customer service tool Service Cloud will see high demand and revenue growth.
“Every company today needs to be able to go out and execute, and serve its customers,” Credit Suisse analyst Brad Zelnick told Business Insider. “We think Salesforce’s value proposition remains a very high priority [for companies], whether we’re in the midst of a pandemic — as we are today — or coming out of it.”
Although achieving 17% sales growth in 2020 would be roughly in-line with what Salesforce has predicted in the past, it’s not as aggressive as the company originally hoped. Before it’s guidance plunge, Salesforce had expected rosier 23% growth for the year.
And while lowering its full year revenue outlook by about ~5%, makes Salesforce slightly more conservative than cloud peers like Workday and ServiceNow (which only reduced their guidance by 2%), analysts attribute that added caution to its experience as a public company during the 2008 Great Recession.
The entire industry is seeing a slow-down in new deals, and Salesforce isn’t immune, even if its subscription-based model is inherently more stable than past ways of doing business.
Salesforce products that focus on customer retention will be the ones that help it through this crisis
Analysts say that while Salesforce is likely anticipating the decrease in new deals, its likely relying on products that could help its existing customers with customer service, ecommerce, marketing, and reopening safely to help it hit its 20% growth goal this year. That means its Service Cloud, Marketing Cloud and Commerce Cloud product areas, since those tools all help organizations stay connected to customers, which is critically important as they try to stay afloat through the economic crisis.
In its first quarter results, Service Cloud revenue surpassed revenue of the original flagship Sales Cloud for the first time in the company’s history. Although it was not a huge leap — only surpassing by $7 million — it indicates that organizations in the current climate are more focused on serving existing customers rather than trying to gain new ones.
“Companies are going to have all their focus on keeping the customers they’ve got and keeping them happy and spending money,” Dan Elman, an analyst Nucleus Research, told Business Insider.
Zelnick echoed those thoughts: This is year is “the year of the customer, rather than the year of the prospect,” he said.
Salesforce’s Service Cloud and Commerce Cloud “are likely better positioned to weather the storm,” William Blair analyst Arjun Bhatia also wrote in a note to clients after earnings.
Commerce Cloud helps companies develop ecommerce tools to digitize their business, something many retail stores and restaurants are doing to keep their businesses afloat. Salesforce even released four new easy-to-use tools for Commerce Cloud specifically designed to help businesses with this.
As companies look to survive the pandemic, the kinds of tools Service Cloud and Commerce Cloud can offer “are going to be really important for all customers” Rebecca Wettemann, an analyst at Valoir, said.
Additionally, analysts expect there to be increased demand for Marketing Cloud, as companies start to recover and need to ramp up new business again. During the crisis many companies have changed their marketing messages to ones of reassurance versus explicitly selling things — all those “we’re here for you” ads you’ve likely seen — but that will have to change once things start recovering, said Dan Newman, an analyst at Futurum Research.
“In order to rebuild the census pipeline, you’re gonna have to see a wave of investment into the marketing stack,” Newman said. “And so as the economy starts to return, I do expect there will be some significant investment made in marketing efforts.
He believes Salesforce will be one the beneficiaries, and an uptick in Marketing Cloud revenues would be an indication of businesses restarting, he said.
Salesforce’s new Work.com tools to help businesses and public agencies reopen safely may not be bringing in much revenue right now, but that they’re likely to bring in new customers down the line. That kind of product builds stronger customer relationships, Zelnick said.
Wettemann agrees, noting that Salesforce was able to quickly repackage and rethink what it was offering to be useful to its customers right now, and that that move will help them long-term.
“I think there’s still a lot of potential there, including in other areas of the portfolio like Tableau and even MuleSoft for them to deliver new solutions to the markets that are compelling right now,” Wettemann said.
JPMorgan analyst Mark Murphy may have put it the most optimistically in a note to clients on Friday:
“While Salesforce could see some choppy bookings quarters ahead,” he wrote, “Coming out the other side of the pandemic and economic slowdown, we believe Salesforce remains uniquely well-positioned to grow as a focal-point of acceleration in digital transformation activity.”
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