Cloud Stocks: Why Salesforce Buying Vlocity Proves The Growing Importance Of PaaS

Summary

• The big news of the week was Salesforce's announcement to acquire Vlocity for an estimated $1.33 billion.
• Salesforce believes that Vlocity's verticalized offerings will help it double its TAM. In my view, Vlocity's acquisition will help Salesforce deliver on a vertical-focused strategy.
• Salesforce's Q4 revenues grew 35% to $4.85 billion, above analyst projection of $4.75 billion. Adjusted earnings was $0.66 per share compared with $0.70 per share, but significantly ahead of the Street's forecast of $0.56.

Salesforce (NYSE: CRM) is dominating the news this week. Along with an outstanding quarterly result announcement, the company delivered two significant news items. First, Salesforce is acquiring Vlocity for $1.3 Billion. Salesforce also announced that its co-CEO Keith Block was stepping down from his position. Marc Benioff is back to being the sole CEO of the company.

Salesforce's Vlocity Acquisition

The big news of the week was Salesforce's announcement to acquire Vlocity for an estimated $1.33 billion. Last year, I had mentioned how Salesforce could benefit from the acquisition. Vlocity was set up in 2014 by former Siebel and Veeva Systems co-founders and experts Craig Ramsey, David Schmaier, James Ramsey, Mark Armenante, and Young Sohn. Vlocity was focused on the principles that best customer experiences are industry-specific and omni-channel. While Salesforce took care of the omni-channel segment of this requirement, Vlocity focused on catering to the industry-specific segment.

As part of this focus, Vlocity developed vertical-specific solutions that embedded digital, omni-channel processes for customer-centric industries. It built on Salesforce.com's Force platform to build industry-specific solutions for the Communications & Media, Energy & Utilities, Health, Insurance and Financial Services, and Government and Non-profit sectors.

Vlocity has been privately held so far and raised $163 million in four funding rounds from investors including Bessemer Venture Partners, Accenture, Salesforce Ventures, New York Life Investment Management, Sutter Hill Ventures, TDF Ventures, Wildcat Venture Partners, and Kennet Partners. Its last round of funding was held last year, when it raised $60 million at a valuation of over $1 billion. Vlocity does not disclose its financials. Analysts estimate that it was trending at annual revenues of $160-$170 million for the year ending January 2020.

Salesforce believes that Vlocity's verticalized offerings will help it double its TAM. In my view, Vlocity's acquisition will help Salesforce deliver on a vertical-focused strategy. Salesforce has taken steps in that direction earlier when it aligned its senior management and sales strategies towards verticals.

But the acquisition is also a living example of why I am so excited about the PaaS model. Like Vlocity, other platform companies can benefit from opening their cloud-based platforms to developer networks worldwide. Salesforce's PaaS has allowed companies like Vlocity to develop industry-specific solutions. Its AppExchange Marketplace has empowered them to attract customers within these industries and to build sustainable businesses that translate to billion-dollar valuations and exits.

Veeva (VEEV), now a multibillion-dollar public company is a case in point. Vlocity, in many ways, is a perfect acquisition for Salesforce - easy to integrate because it is built on the Salesforce technology, and perfectly aligned business-wise.

Over the past few years, Salesforce has made some big acquisitions in the industry. It acquired Mulesoft in 2018 for an estimated $6.5 billion and followed it up with the $15.7 billion acquisition of Tableau last year. It appears to have started the new year with a promising acquisition, as it hurtles forward to achieve its goal of $20 billion in annual revenues.

Salesforce's Financials

Salesforce's Q4 revenues grew 35% to $4.85 billion, above analyst projection of $4.75 billion. Adjusted earnings was $0.66 per share compared with $0.70 per share, but significantly ahead of the Street's forecast of $0.56.

By segment, Subscription and support revenues grew 35% to $4.56 billion. Professional services and other revenues grew 26% to $288 million.

Sales Cloud revenues grew 17% to $1.23 billion. Revenues from Service Cloud improved 26% to $1.22 billion. Marketing & Commerce Cloud revenues grew 28% to $690 million, and Salesforce Platform and Other revenues improved 74% to $1.43 billion.

Among key metrics, its current remaining performance obligations (CRPO) bookings grew 26% to $15 billion, ahead of the market's forecast of 21% growth to $14.41 billion. CRPO bookings include deferred revenue and order backlog.

Salesforce ended the year with revenues growing 29% to $17.1 billion. Subscription and support revenues for the year grew 29% to $16 billion and Professional services revenues grew 21% to $1.1 billion. Non-GAAP earnings was $0.39 per share.

For the first quarter, Salesforce expects revenues of $4.875-$4.885 billion with adjusted earnings of $0.70-$0.71 per share. The market was looking for revenues of $4.84 billion with an EPS of $0.70 for the first quarter. Salesforce expects to end 2020 with revenues of $21-$21.1 billion and an EPS of $3.16-$3.18. The market was looking for revenues of $20.91 billion for the year with an EPS of $3.10.

The market is still digesting the news of the leadership change at Salesforce. Block was instrumental in delivering the skyrocketing growth that Salesforce has seen in the past, and his exit was a surprise. However, there is no question that the genius behind the company's extraordinary performance is Benioff, the founder.

Its stock is trading at $172.15 with a market capitalization of $158.7 billion. The stock fell 3% in the after-hours trading session in reaction to the announcement. It had touched a record high of $195.72 earlier this month. The stock hit a 52-week low of $137.87 in July last year. Of course, built into the stock price currently is the whole Coronavirus externality, so it would be unfair to attribute the gyrations entirely to business-related announcements.

Photo Credit: nathanmac87/Flickr.com.

Original post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.