Activist investor Starboard Value LP, holding a significant stake in **Salesforce**, continues to push for increased profitability at the software giant, even after Salesforce’s recent margin improvements. Despite Salesforce’s impressive 98% stock increase in 2023, largely attributed to its improved adjusted operating margin following Starboard’s and other activist investors’ interventions, Starboard believes there is still substantial room for enhancement. Their renewed focus centers on achieving even greater operating efficiency, particularly concerning sales and marketing, general, and administrative costs – positioning Salesforce to compete more favorably with industry peers, and ultimately, creating substantial shareholder value.
Key Takeaways: Starboard’s Continued Push for Salesforce Profitability
- Despite a significant stock price increase in 2023, Starboard Value believes Salesforce still has considerable potential for improved profitability.
- Starboard advocates for Salesforce to achieve a Rule of 50 by fiscal year 2028, combining revenue growth and profit margin.
- Salesforce’s new Agentforce technology is seen by Starboard as a key revenue growth driver.
- Starboard’s strategy for Salesforce focuses on reducing spending as a percentage of revenue in sales and marketing and general and administrative costs, aligning it with the metrics of competitors like Adobe, Intuit, Microsoft, Oracle, SAP, ServiceNow, and Workday.
- While some activist investors have divested from Salesforce, Starboard maintains its engagement and proposes concrete strategies. Salesforce has acknowledged the constructive nature of Starboard’s involvement.
Starboard’s Continued Pressure on Salesforce
Starboard’s CEO, Jeff Smith, recently stated at the 13D Monitor Active-Passive Investor Summit that, despite recent progress, **Salesforce still has much further to go in improving its margins and achieving industry benchmarks**. He highlighted Salesforce’s progress in approaching the commonly used **Rule of 40** (where revenue growth and profit margin total at least 40%), a metric that gained traction in 2022 as investors focused on profitability amid rising interest rates. Starboard’s 2022 argument, outlining a lower operating margin in comparison to some competitors despite Salesforce’s market dominance in Customer Relationship Management (CRM) software, spurred Salesforce to implement significant changes including substantial job cuts and a more aggressive timeline for margin improvement.
Starboard’s Financial Stake and Salesforce’s Response
Starboard’s significant stake of $432 million in Salesforce (as of June 30th), provided immense leverage. Salesforce’s co-founder and CEO, Marc Benioff, publicly acknowledged the constructive nature of the engagement with activist investors. In fact, Mason Morfit of ValueAct Capital joined Salesforce’s board. By June 2023, most of Salesforce’s activist investors had exited their positions, signaling the impact and the initial success of their pressure.
Starboard’s Vision for Salesforce’s Future
Starboard, in a recent presentation, emphasized the potential for even greater efficiency and profitability at Salesforce. They highlighted the fact that competitors such as Adobe, Intuit, Microsoft, Oracle, SAP, ServiceNow, and Workday consistently demonstrate lower spending as a percentage of revenue in sales & marketing and general & administrative costs. By benchmarking against these companies Salesforce could materially improve efficiency and cost savings. Starboard notably urged Salesforce to commit to reaching the more ambitious Rule of 50 (the sum of revenue growth and adjusted operating margin must equal or exceed 50%) by fiscal year 2028. They provided two scenarios, both emphasizing accelerated revenue growth and significant margin expansion.
The Role of Agentforce
Starboard believes that Salesforce’s newly introduced Agentforce technology, a system designed to automate customer interactions, possesses significant potential to further this revenue growth. This technology, prominently featured at Salesforce’s Dreamforce conference, is positioned as a catalyst for increased efficiency and sales performance. Given Agentforce aims to provide improved automation and potentially a boost in customer interactions across channels, this aligns with Starboard’s focus on increasing profitability through increased sales and superior efficiency at reduced cost.
Salesforce’s Reaction and Market Response
Salesforce’s stock price experienced a slight decline of 1% on the day of Starboard’s presentation. In response to CNBC’s inquiry, a Salesforce spokesperson indicated continued appreciation for communication and dialog with its shareholder base while emphasizing Starboard’s continued role as a constructive shareholder. This suggests a cooperative—though ultimately still pressured—relationship between the company and the investment firm. This cooperative approach, however, does not preclude the ongoing pressure from Starboard to implement further cost-cutting measures and enhance revenue generation to ultimately reach the Rule of 50 benchmark.
Analysis and Conclusion
Starboard Value’s persistent pressure on Salesforce, despite the company’s recent progress, highlights the ongoing tension between rapid growth and sustainable profitability in the software industry. While Salesforce has demonstrated responsiveness to previous activist pressure, Starboard’s ambitious targets—particularly the **Rule of 50**—indicate a continued focus on maximizing shareholder value. The inclusion of specific comparable companies (e.g., Adobe, Intuit, Microsoft, Oracle, SAP, ServiceNow, and Workday) allows for a benchmark and provides a clear path to improvement in terms of achieving operating efficiencies and cost reductions. The role of emerging technology, like Agentforce, adds another layer of complexity, indicating that Salesforce’s success in enhancing profitability will depend on successfully integrating these new technologies alongside optimized cost structures. The continued engagement between Salesforce and Starboard, despite investor exits from some other activist firms, suggests the ongoing importance of these profit-focused strategies in shaping the long-term trajectory of the company.
