With contributions from Robin Manson-Hing.
We have completed our quarterly analysis of Salesforce’s major product lines and have seen some changes on where Salesforce sits in relation to its competition. This analysis does not include MuleSoft’s Anytime Platform or MuleSoft’s impact to Salesforce’s financials.
Market position for Sales Cloud and Marketing Cloud moves lower – We track CRM’s market position every quarter using a market competitiveness model. Over the last quarter, we found Sales Cloud and Marketing Cloud to have moved lower since our last report primarily due to lower interest in their solutions. While the price hike for Sales Cloud two years ago has been fully digested, the end of 2017 Google search interest fell off the last week of December relative to other sales cloud solutions. This is typically a result of aggressive sales quotas and quota-carrying salespeople attempting to make their annual numbers. In addition to this, Microsoft Dynamics 365 Sales module for the first time is beginning to see some traction. This comes despite seeing a material price increase from $65 to $95 per month per initial user last year.
Salesforce Sales Cloud Large Drop at the end of December while Microsoft Dynamics 365 cloud Sales solution climbs
Source: Google
At the same time, Salesforce’s Marketing Cloud has not recovered in the new year despite the continued fall of Hootsuite. Zoho Social continues its torrid growth, taking market share away from both platforms with its free offering. Today Zoho has launched the ability to directly publish to Instagram (for business profile accounts). The trends for Marketing (and Commerce) Cloud are increasingly trending lower.
Marketing Cloud is entrenched as the 4th solution and is likely losing share.
Source: Google
As a result, we are discounting the performance of Sales Cloud and Marketing Cloud by 5% in our model.
Declining subscription gross margin – CRM’s subscription sales gross margin has been declining for 4 consecutive years, (~0.8% every year), and we expect it to continue to move lower in the foreseeable future. Increasing competition from smaller, cheaper solutions (HubSpot, ZenDesk, Shopify, Zoho Social) as well as improving awareness/demand of cloud solutions from Microsoft and Oracle have put limits to how much more CRM can raise prices, given the slowing growth after their last price raise two years ago.
Improving SaaS metrics – Last year, CRM set the goal to improve operating margins. The customer lifetime value added from every $1 spent on sales and marketing and R&D costs have increased in Q4/17 from $0.58 to $0.73 on a trailing 12-month basis.
Sales & Marketing costs – For the first time in 14 quarters, sales and marketing as a percentage of revenue increased Y/Y in fiscal Q4. While Salesforce has not guided to the direction of sales and marketing costs as a percentage of revenue, Sales and Marketing personnel costs are expected to increase as a percentage of revenue while other S&M costs are expected to decrease S&M.
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Subscription and support sales |
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FY 2017 |
FY 2018 |
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Subscription and support sales |
7,756.3 |
9,710.5 |
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Inc. of Subscription and support sales |
2,078.2 |
2,714.3 |
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Avg. Output |
0.73 |
0.79 |
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Churn Rate |
8.5% |
9.8% |
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Same revenue, lower gross margin – Our forecast is generally in line with revenue guidance of $12.625 billion (our forecast is $12.749 billion). We are more conservative about gross margin, given CRM’s competitive position. We forecast CRM’s subscription gross margin to decline from 79.3 % in fiscal Q4 2018 to 77.7% in fiscal Q4 2019.
Forecast
Source: Perspectec
