Motley Fool Money - Salesforce Rights The Ship

Episode Date: August 31, 2023

It’s been a turbulent few quarters for Salesforce but a focus on cost cuts is paying off. (00:15) Tim Beyers and Deidre Woollard discuss: - How Salesforce improved its margins. - What role AI plays in Salesforce’s future. - CrowdStrike’s land-and-expand model for growth. (21:12)  Deidre Woollard interviews thredUP CEO James Reinhart on resale as a service and the company’s plans for continued growth. Companies discussed: CRM, CRWD, MSFT, ZS, TDUP Host: Deidre Woollard Guests: Tim Beyers, James Reinhart Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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What? Oh, boy. Fantastic. You guys go hard. Daredevil Born Again, official podcast Tuesdays, and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. responsibility, but it still has AI dreams. Motley Fool Money starts now. Welcome to Motley Full Money. I'm Deidre Willard. I'm here with Motley Fool analyst Tim Byers. We're doing another tech

Thursday with earnings from Salesforce and CrowdStrike to go through. Hi, Tim. How are you? Fully caffeinated, ready to go. Glad to hear it. Well, Tim, I'm kind of an earnings call person. I like to kind of check the vibes. And so I listened to the Salesforce call last night. CEO Mark Benny off. He sounded like a man who had been through a war. He emerged out the other side. He said the phrase couldn't be happier about five times. So that seems pretty good. The company did raise guidance and margins are doing great. Is Salesforce back? He's feeling it, isn't he? Yeah, he is feeling it. I mean, he is. And that's good to see because Salesforce has had some rough moments. And I think you're right to say that they have been through the war and they,

I'll say they're starting to come out the other side. This is the second consecutive quarter. I think we have seen a new Salesforce. And what I mean by a new Salesforce, Diedra, is that it's a sales force that is a bit more focused on cost management, efficiency, efficient growth, generating capital that they believe they can put to work organically. And I know we're going to talk about AI. And so they have some things they're talking about. And, you know, they're doing things as a company that are theirs, not just something that they went out, put a lot, threw a lot of money at, and brought it into the fold and said, now it's ours. We went out and grabbed it instead of building it. And so there's there's a bit of building. And I think that too lend some internal

confidence to the Salesforce story. But let's quickly hit some numbers because there are some good ones. Overall gap operating margin was at 17.2%. I want to highlight just for a second, if we can appreciate Deirdre that that's a gap operating margin, meaning that it's not adjusted to look better. They did give. given an adjusted number. It was over 31%. But I don't think we need that. I think we could just say at 17.2%, yes, could be higher for a software company. There is no doubt, but that's still a very healthy margin for a company that does as much business as Salesforce does. That's an excellent number. And it is going up. And part of the reason it's going up is efficiencies both on the top line.

so we're going to talk about the gross margin, then we're going to talk about the operating margin. At the gross margin line, I thought this was really interesting, Diedra, $883 million, year-over-year increase in revenue. The gross profit, so that is the profit remaining after you pay, just what it costs to deliver the products that Salesforce delivers. Gross profit was up $897 million year-over-year. So the gross margin went up a little bit, meaning that they are doing good work. They are building product and they are building more profitable product. And then in addition, overall operating expenses were down 7.1% year over year, leading to that much bigger operating margin, leading to much bigger earnings.

Again, this is a really interesting efficiency story. this is kind of, I would say, a bit of a renaissance for Salesforce in what they're showing the market is, we told you that we could be as profitable as we want to be when we want to be that profitable. And now they're kind of making good on it. And that's very interesting to see. I think this is part of the whole, you know, I keep coming back to that Zuckerberg, like, year of efficiency thing because we're seeing it really, really all over tech. And, yeah, Salesforce, they were spending a lot of money, buy-in stuff.

They were throwing, you know, kind of throwing everything all over the place. And they really kind of like figure it out, like, okay, we're going to focus on what we have now. And we're going to link it up and we're going to make it stronger and better, which is nice to see. But I want to talk just for a second about buybacks, because I know that's something you always have an opinion on. They've been buying back a lot of shares over the past couple quarters. they did it again, $1.9 billion on shares. What are you thinking about this? I think we give them some credit.

It's one of those partial credit things because they do issue a lot of equity to their employees. Now, to be fair, if you look at the cash flow statement, what you're going to see is that they are still issuing quite a lot of stock-based compensation. However, it is lower year over year than it used to be. And that's nice to see. So let me just get my numbers and talk about this. So overall stock-based compensation expense was $724 million for the three months ended, July 31, 2021, 2023. That is down from $851 million in the year prior period. So if you just kind of subtract that out, let's say $750 million out of $1.9 billion,

you're left with about $1.15 billion worth of actual buybacks. So it's like you really have to put it in context. It's not really $1.9 billion that they're spending to buyback shares when they're issuing so much in shares. But they're issuing less than they used to. And so that buyback amount does have an effect. And diluted share, both basic and diluted shares were down year over year. So the basic shares outstanding were down to $975 million from $997 million, and your diluted shares were down to $986 million from just over a billion shares,

which is, I mean, again, that is a meaningful drawdown in the shares outstanding. So they're delivering some value back to shareholders, but we shouldn't say it's $1.9 billion. That is not true. It's still offset by what they give to employees, and they give a lot. And I am largely okay with that, Diedra, because that has been one of the values of Salesforce. When they recruit you in, they really want you to get on board.

They want to give you a lot of equity. You get invested in the company, and they try to get the most out of you because of that. So you kind of know, if you're a Salesforce shareholder, you really should know that going in, that they are going to give a lot of equity for their employees. And what they expect out of their employees is that they are going to overperform and deliver at a fairly big level. That has been the expectation. And they've done that in the past.

And so now they're still issuing that equity, but they're also buying back enough that they can still draw down the outstanding share count above and beyond what they issue two employees, which is new. And they've done it for a couple of quarters now. So nice to see. Well, we've talked about the sort of ways that Salesforce has been becoming more responsible, but it's still Mark Benyoff. He's still, you know, he's still eyes to the sky. And you teased it earlier, we got to talk AI.

He's so super, super bullish. You know, but it kind of makes sense to me. You and I, we're both former PR people. Yes. And we have both lived and died by using a database in a CRM. And talking about AI in a CRM, to me, make. a lot of sense, you know, in terms of how it can, you know, just really make things a lot less complicated. I know that they have their Dream Forest Conference coming up. The Food Fighters are playing.

Dave Matthews is going to be there. It's a whole thing. But do you think that, so we're going to hear more about that then. But do you, what do you feel about the Salesforce AI component, especially with kind of slack in the mix and all the workflows that they're talking about? Well, it can be useful. AI is only as useful as the data that it is bound to. So if you point AI at a very specific problem with a very specific data set, I think you can get value out of that. And one of the probably the most interesting use case for AI is this idea of co-piloting. And this is where I think the Salesforce AI initiatives, such as they are,

I'm going to call them nascent right now. you really got to show me. You got to prove it to me that there is a lot of stuff happening and the Salesforce customers are using this en masse. I don't believe that that's happening yet. And that is fine. It's still early okay. But as a co-piloting mechanism, I think it can be highly useful. So let's use the example that you gave here because we were both in PR and marketing. And so if you are putting in, let's say, as a co-pilot, you are trying to build a list of qualified prospects who have very detailed requirements that we know about them, you know, inside the Salesforce environment, like very specific attributes. Or I want to tag a bunch of, you know, like, let's say

there are, I want to build a list that is within, I'm going to ask, the AI to say, I need you to build a list for me of qualified prospects that have quip within 30 miles of Durham, North Carolina. I'm just making stuff up here. That's the kind of co-piloting search that an AI should be able to, it should be able to automate that. And then what you take is you build that and that becomes an automated list. It's a, it's a data subset. And then maybe I can combine that with other things that are useful to me as a salesperson. But what I don't want to be, if I want to improve sales efficiency, I don't want to be the one that's doing data gathering. I want my AI to be doing data gathering, you know, doing other types of work to automate my

targeting work so that I can just be productive as a salesperson and go out and close deals. That's what I want. So as a co-piloting mechanism, I think AI can be very useful there, Deidre. Yeah, yeah, absolutely. Well, I want to leave time to talk Crowdstrike. So let's switch gears. Good quarter for them. Crowdstrike, that's cybersecurity. They saw revenue grow by 37%. they made they they they trumpeted the gap profitability for the second quarter in a row so tim i've been taught by wise fools like you to kind of think about profitability not as like the most important things sometimes so i know they're focused on profitability do we want that they also need to kind of grow do we want them to be focused on profitability or growth or i'm i know both but

what do you think you have crowds strike now well you want them to be focused on growth I think they are doing a very good job of growing at a profitable pace. And I think they've done, you can see how they have started to dominate this market by virtue of what they've done to really marginalize their number one competitor in this space, which is Sentinel One. And Sentinel One has essentially put itself up for sale because they've not really done a good job out-competing crowd strike. Crowdstrike instead has really come in and I would say put a very large footprint into this. I mean, they've really sort of put their foot down and asserted themselves

in this market and they are hoovering up share at a blistering pace. And because of that, they are scaling quite well. And to your point, they are generating profits and they don't have to overinvest in order to generate more share. I mean, they are increasing their investments here. There's no doubt about that. But so it's, you know, for example, let's just take a quick example here. On sales and marketing, that was 283 million in the most recent quarter. That's up from about 200. 25 million year over year. So they're able to increase their spend to increase their share and still generate some profits coming all the way through here, which is kind of nice to see. Now, I will say this on an operating basis, and this is important, they did get a loss. So let's be

clear about this. They were profitable. But in terms of their core operating, that was about a $15.4 million loss, DEDRA versus a $48.3 million loss in the year prior. Where this gets profitable is wait for it, $36.6 million in interest income because interest rates are through the roof. So it's, look, none of this is bad. I'm not saying it's bad. I'm saying that CrowdStrike is getting better.

They are reducing their operating losses. They are continuing to invest. They are doing the right thing to hoover up market share here. But the profits, let's not call them artificial, but they're getting some steroids here. I mean, look, that's what it is. There's nothing really wrong with that. they have a fat balance sheet and they're getting some benefits from that. So, you know, on a core

operating basis, they are still running a loss. But it is right to say that they are getting more efficient. They're growing well. They're hoovering up share. And I think that's what they should be doing. I love it when you break it down like that because it always helps me see beyond the headlines of what profitability really is. Let's talk about their module. because this is land and expand, right? So one of the things that they do is they get you in with a few different things, and then they add on different modules. And one of the things they talked about a lot in the press release is how many customers

are getting more modules. So like they talked about the 63% have more than five modules. So with CrowdStrike, it's land and expand, right? Do they have to keep landing more or expanding more and just putting more and more modules on more and more customers as things evolve? Well, they have to do both. But I think what's more important is the landing part. You want a long tail of customers because it's okay to have just a boatload of customers.

And then the vast majority of them have like one or two modules. But then over time, as they get more embedded or they're growing as an enterprise and CrowdStrike is in there, then it's a very natural experience for them to, add the second module, the third module, the fourth module, and you don't have to resell that customer. At that point, that's a very profitable customer that grows with you. So the land is way more important, but the expand part is almost as important in this one sense. At the largest level, the companies that are really going to drive cash flow for CrowdStrike are those big companies that have really embedded CrowdStrike, and they're having six, seven, eight plus modules, and they have made essentially CrowdStrike.

They're outsourced, you know, Chief Information Security Office, or like the entire security operation is essentially outsourced to CrowdStrike. Those customers, they're going to be a big driver of cash flow for the company. But to like feed the flywheel, Deidro, to answer your question, The land is more important, but the expand is very close behind because the land feeds the flywheel, but when the flywheel spins and the large customers are really generating a lot of interest, a lot of spend, that's what feeds the cash flow. Yeah, absolutely.

Well, you've mentioned that they're really kind of hoovering up market share. You talked a little bit about Sentinel One. Are there any other competitors out there with CrowdStrike that, or is it just dominating the competition now? No, no. I mean, look, there are big names that are in security. Like, Microsoft is one that we should be paying a lot of attention to because Microsoft has huge interests in insecurity. And they're not the only ones. You know, Datadog is a company that is very interested in providing more.

more security. But CrowdStrike is partnered up with Z-scaler. I think that is a very profitable partnership. They operated different parts of the security spectrum. And I think that helps both of them. I think it gives both of them some interesting tailwinds. So it's not like they just own this space. What's happening is that in the part of the space, they really started at protecting devices, your iPhone, your computer, right? And then they've expanded beyond that, and they've done it very, very well. And then they have a partnership with Z-scaler, and that is very profitable for both of them. So at scale, there aren't that many companies that are really fighting at the same level CrowdStrike is, but Microsoft is certainly one of

them. And it's not going to be, it's not like CrowdStrike is going to get this space to itself. But the point competitors, like Sentinel One, it said, hey, no, look, we can do endpoint security just as well. And we can give you a lot of the same capabilities that are native to CrowdStrike. And we can just do it better because we're doing AI. That has fallen completely flat. And CrowdStrike has given itself a lot of runway to grow by beating its primary competitors in NPR. point security. And so they've really scaled up quite well. But I will say this, it would be better if CrowdStrike was being more specific in their earnings announcements about how they are scaling and gaining that traction. Because they used to be really specific in the earnings release,

Diedra, about like, hey, here's how many customers have six plus modules. Here's the number. that has seven plus. Here's the number that is eight plus. And that used to be in the supplemental information. It used to be in the press release. Now you have to go and listen to the call to get that. That's a, maybe it's a minor quibble, Diedra. But man, do not miss the earnings call because this kind of got this data that we were used to seeing in the published documents. It's gone. It's not in there anymore, you have to go listen to the earnings call to get that detail. There's good detail, but it was, I have to admit, that was kind of a cold cup of coffee when I read the crowd strike earnings release and I didn't see the key metrics I'm used to seeing. Yeah, good, good reminder to

always look at all of the materials when you're looking at a company's results. Absolutely. Awesome. Thanks for your time today, Tim. Thanks, Deidra. secondhand sales are booming. I talk to James Reinhart, CEO of Threadup, about how his company is taking on the world of clothing resale. I feel like you've got the classic founder story. So you founded the company after having this experience of taking clothes to a local consignment shop. They didn't want them.

You got turned down. You thought there must be a better way. So tell us about the better way. Yeah. So, I mean, you know, the idea was we all have clothes in our closets that we don't wear. You know, the ways that we get rid of them have never been. something where people are like, you know what, it's been, it's such a great consumer experience, getting rid of the clothes I'm no longer wearing, right? We just end up giving them away. And so the

insight was to reinvent, you know, how people got rid of the things they were no longer wearing and then build what we thought would be a modern, you know, modern thrift store, right? So if you think back 15 years ago, you had eBay, you had Craigslist, that was really it. The iPhone had just been invented. You know, people were staying in Airbnb's and Spotify. And so you had all these consumer experiences that were evolving, we thought Thrift, you know, had a whole new, new act to play out, and we wanted to figure that out for customers. Interesting. Well, I don't start by interviews with Google, but I did Google Threadup. And one of the questions that came up was, what is unique about ThreadUp? So I was curious. How would you answer that question?

I think the defining uniqueness for us is that historically in resale or secondhand, you either had to go to a dingy, you know, thrift store, right, a good-bill store with racks and racks that smelled like used clothing, or you had to do everything yourself, you know, on eBay. You had to take a photo and describe the item and deal with customer service and ship the item. I think what's unique about us is we take all of the work out of the process for you as a seller. So you fill all your clothes in a clean-out kit and send it to us. We take care of the photography, the itemization, the pricing, customer service holding. So we are fully soup to nuts on the seller side. And then for buyers,

you know, unlike a traditional thrift store experience or an eBay experience, it's this very elegant, nice buying experience where it's equivalent to shopping on any, you know, e-commerce site or shopping in Nordstrom, right, where it's great product photos and descriptions and it's easy to navigate. And so I think the discrete, you know, difference for us is really removing all the friction from buyers and sellers. And that's proved to be successful. Well, you've got that two-sided marketplace, right? I mean, you talked about eBay and about others. I mean, certainly with Airbnb and everything. So with two-sided marketplaces, the challenge is always balancing things out. How do you do that when you've got the buyers who want to buy and things sellers are going to get rid of? They're not always the same. So how does that work? Yeah, I mean, at the end of the day, two-sided marketplaces, generally speaking, are always supply constrained. And so if you think about what constrains Airbnb's growth, right?

It's people listing their homes or open table was an example we used for a long time, where what constrained open tables growth was getting new restaurants on the platform. So generally speaking, supply is the name of the game. And so we've always started there, which is how do we make sure that we're creating an elegant, easy, valuable, supply experience. And so we start there, Deutra, right, which is how do we make it so easy for us to get supply? And once we have sort of the quantity of supply that we want, we then start sculpting that supply a little bit. And so on the margin, we are trying to make sure that our sellers are sending us things that are in season, that are in style, right, that are in great shape, that would meet the bid, you know, of a buyer. And so then we work from there to the buyer population where we're trying

to figure out what's on trend, what's in season, what would delight our buyers at a given price point. So it's a constant iterative cycle, but the defining feature is really the seller piece. Well, you publish a resale report every year on ThreadUp, and I think it's a great resource for understanding just how big things are. In the report, you noted resale grew five times as much as broader retail clothing. We see a lot of Gen Z. It's a big thing for them. What else is growing resale right now. I mean, Gen Z is definitely a driver, but I would say it's really across age spectrum and demographics. I think, you know, you're seeing, you know, people who really over the last 10 to 15 years have grown up with, you know, climate and sustainability on the

mind. And I think that has made people change behaviors across a number of areas, right? So I think you're seeing the growth of electric cars. You're seeing the growth of solar. You're seeing the mobile penetration continues. I think all of those are, you know, indicators of, you know, a more technology forward consumer and a consumer who cares more about the planet. And so when you think about where resale sits, it's technology enabled because everything needs to be done through your smartphone or in our distribution centers is all tech enabled. And it needs to be a consumer mind shift that's happening where shopping sustainably, shopping thrift makes a lot of sense. And I think that second piece of how the consumer is evolving is the most important because,

you know, more than ever now, I think consumers are indicating sustainability and resale, you know, as a preference. It's sort of interesting because we want to do better. We want to save the planet, but we also don't necessarily want to stop our consumption. And I think that that is part of it as well. One of the things I find really fascinating about what ThreadUp does is you've sort of pioneered this idea of resale as a service. I've been told you trademarked it, which is pretty cool. So this is brands and retailers trying to deliver resale experiences to their customers. This seems just like a huge opportunity. How big could it be? Yeah, I mean, resale as a service. So that's, just to be clear, that's, you know, us using our technology and operations to power this for brands. So we work with

Jay Crewe and Kate Spade and Madewell and Athleta, you know, really big brands. And look, I think it's going to be a big part of the future because I think brands are starting to appreciate that this is where the consumer is moving. And, you know, great brands, what they do really, really well is reinvent themselves on behalf of, you know, the next generation of consumers. And so I think if you're running a brand these days, you have to pay attention to resale. I think what will be interesting to watch over the next three to five years is that just how consumers start to navigate a world where, where they can shop resale across, all these unique brands, right? And so we think a lot of thread up around, you know, how does that

fragmentation, you know, impact us? Where do we sit in that ecosystem? But I'm very bullish on resale becoming sort of a primary channel for brands over time. I know you've been testing out, charging a fee for your clean-out bags. Those are the bags that people fill up with everything and send off the thread-up. So I think it seems like a smart strategy to me because it'll you know, it's sort of like online dating, right? When it's, when it's free, you don't get the best quality. Yes, yes, yes. So why did you make that pivot? And how is it working out so far? Yeah, your instincts are great. That's exactly it. It's when things are free, you really do have this moral hazard of people wanting to just send you everything and being

really indiscriminate about it. And so by charging a fee that we take out of your payout, right? So we don't charge you up front. We process all your goods, sell your goods, and then we take a fee, it provides just a little bit of friction for sellers. And it has been, by all measures, really a home run, because not only are we getting better sellers in the door, they're actually sending us more items. So if you think about it, if you're going to spend $10 or $12 bucks sending a bag of clothes to thread up,

if you're going to spend $12, you might as well fill it to the brim. And so you get more items in the bag. And then there's a psychology where once you're paying for something, you're just like a little bit more discerning. And so people are checking for quality. Maybe they're doing an incremental wash. They're doing things that are improving the number of items we can accept out of the bag. And so, yeah, it's one of those things Deirdre, where as the founder, I'm like, man, why didn't we do this like five years ago?

And, and, you know, there's all sorts of reasons why. But, but yeah, it's been a real winner. Well, Threatup's been kind of on this journey of cost cutting, dealing with a bit of challenging macroeconomic environment for the last couple of quarters. So you're moving closer to break-even. I'm glad to hear that. What metric should investors in the company, and I am one, pay attention to his signs of success? Yeah, I mean, I think on our last earnings call, we talked about the double-digit growth that we've been seeing, you know, all year. We're guiding, you know, north of 20% growth in Q3, in Q4. And importantly, with 1,000 bips of margin.

of EBITDA expansion. And so, you know, I've been talking to investors as part of the earnings process, you know, I challenge them to find another company out there that's growing at that rate, you know, with that type of margin expansion. So we feel very good about how the business is being operated. We've been very public about breaking even in Q4,

feel very good about, you know, that path. But it's just a waypoint, right? At the end of the day, you know, businesses have to generate free cash flow over time and, you know, we're committed to that. So I give the team a lot of credit. I think we are operating as well as anybody out there, you know, in the broader ecosystem for consumers and let's keep doing what we're doing. So last question for you, thread up in five years.

Do you think will resale as a service be a large part of the business? Will it still be the clean-out bags to direct a consumer? What do you see and what do you hope for? Yeah, I think our consumer business will be much bigger than it is today. You know, we've, you know, over the last 10 years, you know, we've been doubling the business every few years. So, you know, I feel like the business will be significantly bigger from a consumer perspective. And then I think we will ultimately be powering RAS for more and more brands. And I think the way I've often spoken about it is think about Threatup as really the resale

infrastructure on the internet. It's the piping that I think resale is going to run on. And I think that's going to be an exciting place to watch. Fantastic. Thank you so much for your time today. Thank you. As always, people in the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy ourselves stocks based solely on what you hear. I'm Deidra Willard. Thanks for listening. We'll see you tomorrow.