WEBVTT 1 00:00:07.500 --> 00:00:10.200 Hello and welcome to this vidcast which is devoted to 2 00:00:10.200 --> 00:00:14.400 Salesforce a famous company operating 3 00:00:13.400 --> 00:00:16.100 in a sauce industry. 4 00:00:16.900 --> 00:00:19.400 But also a very interesting illustration of 5 00:00:19.400 --> 00:00:22.900 the complex relationship sometimes between 6 00:00:22.900 --> 00:00:26.600 value growth in governance Salesforce 7 00:00:25.600 --> 00:00:29.300 is created in 1999 when 8 00:00:28.300 --> 00:00:31.900 the internet bubble is at its 9 00:00:31.900 --> 00:00:34.300 maximum. It's created by a former 10 00:00:34.300 --> 00:00:38.000 executive of Oracle Mark benioff with 11 00:00:37.500 --> 00:00:41.200 three friends and partners Larry Ellison, 12 00:00:40.200 --> 00:00:43.300 the founder and CEO of 13 00:00:43.300 --> 00:00:47.300 Oracle is going to invest by himself in Salesforce. 14 00:00:46.300 --> 00:00:49.500 The company is selling a 15 00:00:49.500 --> 00:00:52.100 software as a service in a 16 00:00:52.100 --> 00:00:57.200 business, which is customer relationship management CRM 17 00:00:55.200 --> 00:00:58.900 quite famous. The 18 00:00:58.900 --> 00:01:01.600 early years of 2000 are going to be quite tough 19 00:01:01.600 --> 00:01:04.800 because of the explosion of the internet bubble but 20 00:01:04.800 --> 00:01:07.500 still in 2004 the company gets 21 00:01:07.500 --> 00:01:10.500 listed and a symbol the teacher 22 00:01:10.500 --> 00:01:13.700 is going to be CRM which basically stands 23 00:01:13.700 --> 00:01:16.200 for the business as it is the value in 24 00:01:16.200 --> 00:01:16.700 the cabin. 25 00:01:16.800 --> 00:01:19.900 This is 1.2 billion dollars 20 26 00:01:19.900 --> 00:01:22.700 years later. The market capitalization is 27 00:01:22.700 --> 00:01:25.300 180 billion dollars, 28 00:01:25.300 --> 00:01:26.500 which is outstanding. 29 00:01:27.300 --> 00:01:31.200 Still it's not the maximum value that 30 00:01:30.200 --> 00:01:33.200 the company reached. The value was 31 00:01:33.200 --> 00:01:36.200 reached mid 2022 and the 32 00:01:36.200 --> 00:01:39.400 maximum was 300 billion dollars so we 33 00:01:39.400 --> 00:01:42.700 can observe a drop by 40% in 34 00:01:42.700 --> 00:01:45.800 the value of Salesforce. In the meantime, the 35 00:01:45.800 --> 00:01:49.100 NASDAQ. The reference indicator went 36 00:01:48.100 --> 00:01:51.500 down by only 25% will get 37 00:01:51.500 --> 00:01:54.000 back to this point a little bit later. When you 38 00:01:54.500 --> 00:01:58.100 observe the evolution of the stock price of Salesforce against 39 00:01:57.100 --> 00:02:00.500 versus NASDAQ. It's reference 40 00:02:00.500 --> 00:02:03.600 right what happened you have three period the 41 00:02:03.600 --> 00:02:06.700 first period is from 2004 the listing 42 00:02:06.700 --> 00:02:10.200 to roughly 2018. The 43 00:02:09.200 --> 00:02:12.200 stock price of Salesforce is 44 00:02:12.200 --> 00:02:15.300 growing at the merch higher rate than NASDAQ. 45 00:02:15.900 --> 00:02:18.500 Then Salesforce and NASDAQ are 46 00:02:18.500 --> 00:02:21.400 going to be perfectly correlated from this moment to 47 00:02:21.400 --> 00:02:24.400 about mid 2022 and 48 00:02:24.400 --> 00:02:27.600 then NASDAQ is down since Falls is 49 00:02:27.600 --> 00:02:30.200 down very much down and a little 50 00:02:30.200 --> 00:02:33.600 bit up during these last weeks or months 51 00:02:33.600 --> 00:02:37.200 now traditionally when you look at a company, you're 52 00:02:36.200 --> 00:02:40.500 questioning the relationship between growth performance 53 00:02:39.500 --> 00:02:42.800 and value and value creation. 54 00:02:42.800 --> 00:02:45.900 What about growth? That growth 55 00:02:45.900 --> 00:02:48.300 was absolutely outstanding. This is a fantastic 56 00:02:48.300 --> 00:02:51.400 commercial success is force. The company was 57 00:02:51.400 --> 00:02:54.500 hardly existing in 2000. And today 58 00:02:54.500 --> 00:02:57.700 is a sales figure is more than 30 billion 59 00:02:57.700 --> 00:03:00.500 dollars with a fantastic growth rate. 60 00:03:00.500 --> 00:03:03.600 The growth rate was quite outstanding but 61 00:03:03.600 --> 00:03:06.700 not very significant in the early 2000. 62 00:03:06.700 --> 00:03:09.500 It went down to stabilize at 63 00:03:09.500 --> 00:03:12.800 the level of about 30% per 64 00:03:12.800 --> 00:03:15.200 year in 2010 then 65 00:03:15.900 --> 00:03:19.100 15 goes down to 25% goes 66 00:03:18.100 --> 00:03:21.700 up a little bit goes down to 25 and 67 00:03:21.700 --> 00:03:24.500 the bad news in 2022 is that 68 00:03:24.500 --> 00:03:28.200 the growth rate is only between quotes 20% The 69 00:03:27.200 --> 00:03:30.400 company is selling two kinds 70 00:03:30.400 --> 00:03:33.400 of products and services subscription and 71 00:03:33.400 --> 00:03:36.200 support. This is CRM. And this is 72 00:03:36.200 --> 00:03:39.700 definitely the most important segment. There 73 00:03:39.700 --> 00:03:42.800 is another segment which is about Professional Services and 74 00:03:42.800 --> 00:03:45.500 all the services. So the company 75 00:03:45.500 --> 00:03:48.800 is selling software and service predominantly soft. 76 00:03:48.800 --> 00:03:51.400 This is good news because the profit is generated 77 00:03:51.400 --> 00:03:55.000 by the segment subscription and support with 78 00:03:54.300 --> 00:03:58.000 the gross. Margin of about 80% gross. 79 00:03:57.200 --> 00:04:00.700 Margin is you remember sales Minus cost 80 00:04:00.700 --> 00:04:04.100 of sales cost of manufacturing. It's not about manufacturing. So 81 00:04:03.100 --> 00:04:06.200 it's quite traditional that gross profit 82 00:04:06.200 --> 00:04:09.000 gross. Margin is very high in these kind of business. 83 00:04:10.100 --> 00:04:13.900 As far as Professional Services are concerned. It's hardly 84 00:04:13.900 --> 00:04:16.200 at Breakeven very often a 85 00:04:16.200 --> 00:04:19.300 little bit in a red sometimes positive. But this is 86 00:04:19.300 --> 00:04:22.600 why the gross profit of the company is a little 87 00:04:22.600 --> 00:04:26.200 bit less than subscription and support but it's 88 00:04:25.200 --> 00:04:28.500 not very much boosted by 89 00:04:28.500 --> 00:04:31.400 Professional Services. Now the gross margin 90 00:04:31.400 --> 00:04:34.200 is one point. The rest of the PNA is 91 00:04:34.200 --> 00:04:38.100 absolutely fundamental and we have to look at the indirect costs 92 00:04:37.100 --> 00:04:39.700 operating expenses. 93 00:04:40.500 --> 00:04:43.600 Here we can observe something quite traditional for a 94 00:04:43.600 --> 00:04:46.600 company in this kind of industry sales and 95 00:04:46.600 --> 00:04:49.600 marketing. It was absolutely predominant and 96 00:04:49.600 --> 00:04:53.000 through economies of scale. It goes down little by 97 00:04:52.200 --> 00:04:55.500 little about 20 years ago. It was 98 00:04:55.500 --> 00:04:58.100 almost 60% today. It's a bit more 99 00:04:58.100 --> 00:05:02.400 than 40% There's a trend downward. The 100 00:05:01.400 --> 00:05:04.300 cost of sales is a little 101 00:05:04.300 --> 00:05:07.700 bit higher but not that much we observe the 102 00:05:07.700 --> 00:05:10.800 same economy is a scale for General and admin 103 00:05:10.800 --> 00:05:14.000 a bit less than 20 today a 104 00:05:13.100 --> 00:05:16.400 bit less than 10. So economy is 105 00:05:16.400 --> 00:05:19.600 a scale 10% to revenues. This is quite important and research 106 00:05:19.600 --> 00:05:22.500 and development which is of course in the p&l but in 107 00:05:22.500 --> 00:05:26.100 business economics, it's an investment. It's gradually 108 00:05:25.100 --> 00:05:28.100 increasing from a little bit 109 00:05:28.100 --> 00:05:32.900 less than 10 to a bit more than 15 16% any 110 00:05:31.900 --> 00:05:34.500 stabilize the last 10 years 111 00:05:34.500 --> 00:05:35.000 or so. 112 00:05:36.400 --> 00:05:39.800 What is a consequence of the evolution of these operating 113 00:05:39.800 --> 00:05:43.000 expenses you remember growth absolutely 114 00:05:42.900 --> 00:05:46.600 outstanding up to 2022 the 115 00:05:45.600 --> 00:05:48.500 sales figure reaches more than 116 00:05:48.500 --> 00:05:50.600 30 billion. What about the ebida? 117 00:05:51.200 --> 00:05:55.200 Ebida is a figure which is less subject 118 00:05:54.200 --> 00:05:58.000 to discussions on confrontation than 119 00:05:57.500 --> 00:06:00.200 a bit. Keep that in mind. This is 120 00:06:00.200 --> 00:06:03.400 going to be the next discussion. What about a 121 00:06:03.400 --> 00:06:06.200 bit the company was generating strongly negative a bit 122 00:06:06.200 --> 00:06:09.200 as at the very beginning which is quite normal. You create the 123 00:06:09.200 --> 00:06:12.100 company Etc. Then it's going to turn a bit 124 00:06:12.100 --> 00:06:16.200 that positive quite quickly in 2005. They'd 125 00:06:15.200 --> 00:06:18.400 be there already represents 15% to 126 00:06:18.400 --> 00:06:22.000 revenues and it's going to go up to 20 stabilize at 127 00:06:21.100 --> 00:06:24.300 the level of 20. And if You observe the 128 00:06:24.300 --> 00:06:27.700 last 8 to 10 years gradually the 129 00:06:27.700 --> 00:06:30.700 ability is a growing percentage to 130 00:06:30.700 --> 00:06:34.100 revenues and today. It's about 30% a 131 00:06:33.100 --> 00:06:36.600 bit more quite stable during the last 132 00:06:36.600 --> 00:06:37.100 four years. 133 00:06:38.300 --> 00:06:41.000 Now what about ebit ebit is always 134 00:06:41.300 --> 00:06:44.200 a big subject to discussion because the question is do you 135 00:06:44.200 --> 00:06:47.800 use Gap or non-gap figures generally 136 00:06:47.800 --> 00:06:51.400 accepted accounting principle according 137 00:06:50.400 --> 00:06:54.500 to the accounting authorities calculation 138 00:06:53.500 --> 00:06:56.300 of operating expenses should 139 00:06:56.300 --> 00:06:59.400 incorporate amortization of some 140 00:06:59.400 --> 00:07:02.300 acquisition related expenses a chance 141 00:07:02.300 --> 00:07:05.400 technology capitalized R&D expenses and 142 00:07:05.400 --> 00:07:08.900 so on so forth market share and of course, you don't amortize 143 00:07:08.900 --> 00:07:11.100 the Goodwill, sometimes you have to 144 00:07:11.100 --> 00:07:15.100 make an impairment but you don't am all ties. Then non-gap 145 00:07:14.100 --> 00:07:17.600 says there should not be any amountization of 146 00:07:17.600 --> 00:07:20.200 this kind Gap says you have to take 147 00:07:20.200 --> 00:07:23.600 into account as wages and sorry stock 148 00:07:23.600 --> 00:07:26.600 base compensation stock base compensation means 149 00:07:26.600 --> 00:07:30.200 that you're going to pay your people always restricted 150 00:07:29.200 --> 00:07:32.400 stock you need stock options on so and 151 00:07:32.400 --> 00:07:35.900 so forth, which will later on have an impact on delusion today. 152 00:07:35.900 --> 00:07:38.000 It's non-cash, but it is considered as 153 00:07:38.300 --> 00:07:40.100 wages and salaries 154 00:07:40.600 --> 00:07:43.900 a non-gap perspective on stock-based compensation 155 00:07:43.900 --> 00:07:46.600 is that it should not be treated as 156 00:07:46.600 --> 00:07:49.700 an expense, but it should be treated as potential 157 00:07:49.700 --> 00:07:52.400 and speculative dilution. 158 00:07:53.100 --> 00:07:56.700 Now if you look at the financial communication of the company in 159 00:07:56.700 --> 00:07:58.800 its last annual report. 160 00:07:59.500 --> 00:08:03.400 The annual report full year 2023 2023 161 00:08:02.400 --> 00:08:05.200 because the company is closing its account 162 00:08:05.200 --> 00:08:09.500 on the 31st of January. So 2023 163 00:08:08.500 --> 00:08:11.700 is predominantly 2022 but 164 00:08:11.700 --> 00:08:15.500 the company is also proposing some guidance 165 00:08:14.500 --> 00:08:17.800 non-contractual forecasts 166 00:08:17.800 --> 00:08:21.800 for 2024, which is predominantly 2023. 167 00:08:20.800 --> 00:08:23.800 Obviously, they calculation 168 00:08:23.800 --> 00:08:26.800 of the operating margin using the Gap should 169 00:08:26.800 --> 00:08:30.200 lead to a guidance of about 10.8% a 170 00:08:29.200 --> 00:08:32.600 bit less than 11% But if you add a 171 00:08:32.600 --> 00:08:35.900 multization of purchased intangibles again 172 00:08:35.900 --> 00:08:38.100 technology and so on if you 173 00:08:38.100 --> 00:08:42.500 add up stock bass compensation and some restructuring expenses 174 00:08:41.500 --> 00:08:45.100 the non Gap operating 175 00:08:44.100 --> 00:08:47.000 margin as this perceived as 176 00:08:47.500 --> 00:08:51.400 relevant by the company is 27% The difference is 16% 177 00:08:50.400 --> 00:08:53.400 which is absolutely not negligible. 178 00:08:54.200 --> 00:08:57.200 Now when you look at the evolution of the return on sales of 179 00:08:57.200 --> 00:09:01.200 the company a bit current published a 180 00:09:00.200 --> 00:09:03.300 bit versus non-gap a bit and 181 00:09:03.300 --> 00:09:06.400 a bit that we already discussed the Abida, but 182 00:09:06.400 --> 00:09:09.200 the difference between current published a bit 183 00:09:09.200 --> 00:09:12.500 and non-gap a bit is quite significant. If you 184 00:09:12.500 --> 00:09:15.300 look at the current event, it's close to zero sometimes 185 00:09:15.300 --> 00:09:19.400 positive sometimes negative and today 3% The 186 00:09:18.400 --> 00:09:21.600 non Gap a bit is about 187 00:09:21.600 --> 00:09:24.800 20% It's slightly changes the 188 00:09:24.800 --> 00:09:27.400 perspective you might have on the commercial profitability of 189 00:09:27.400 --> 00:09:27.700 the company. 190 00:09:28.800 --> 00:09:31.400 Not you. Remember that return on this 191 00:09:31.400 --> 00:09:34.800 is just a first chapter of the calculation of return capital. 192 00:09:35.500 --> 00:09:38.300 The DuPont and move formula that tells us that there's 193 00:09:38.300 --> 00:09:41.700 a second chapter which is about the productivity Capital intensity 194 00:09:41.700 --> 00:09:44.700 starting with operating cycle and working capital 195 00:09:44.700 --> 00:09:45.200 requirement. 196 00:09:46.300 --> 00:09:49.800 The working capital requirement is traditionally made of inventories plus 197 00:09:49.800 --> 00:09:52.200 receivables minus payables. There is 198 00:09:52.200 --> 00:09:56.300 no inventories in the South business. Obviously, if 199 00:09:55.300 --> 00:09:58.300 you look at accounts receivable and 200 00:09:58.300 --> 00:10:01.000 accounts payable accounts receivable is a bit 201 00:10:01.300 --> 00:10:04.800 more than a chance payable quite stable and there 202 00:10:04.800 --> 00:10:07.600 is a difference between these two which is slightly positive quite 203 00:10:07.600 --> 00:10:10.400 normal stuff, but say something very interesting in terms of 204 00:10:10.400 --> 00:10:13.500 operating liabilities, which is an 205 00:10:13.500 --> 00:10:17.000 odd revenue is deferred revenue and 206 00:10:16.200 --> 00:10:20.100 it comes from the fact that companies are 207 00:10:19.100 --> 00:10:21.200 paying in advance. 208 00:10:21.900 --> 00:10:24.700 It represents 200 days 209 00:10:24.700 --> 00:10:27.100 of sales more than six months of sales. 210 00:10:27.900 --> 00:10:30.500 Now if You observe the cash conversion cycle 211 00:10:30.500 --> 00:10:34.000 in days of revenues, it's receivables minus 212 00:10:33.400 --> 00:10:36.400 papers minus an odd 213 00:10:36.400 --> 00:10:40.300 revenues and it is strongly negative by 150 days. 214 00:10:41.300 --> 00:10:45.000 And it is very stable and predictable 215 00:10:44.900 --> 00:10:47.300 very important for the next 216 00:10:47.300 --> 00:10:48.200 discussion we have. 217 00:10:49.200 --> 00:10:52.600 Now as far as it's the noise concerned the second 218 00:10:52.600 --> 00:10:55.700 part of the calculation is about non-charine assets. 219 00:10:56.300 --> 00:11:00.200 Tangible investment capex and intangible Acquisitions 220 00:10:59.200 --> 00:11:03.100 the perspective on Capital intensity 221 00:11:02.100 --> 00:11:05.800 the first very much between tangible and intangible 222 00:11:05.800 --> 00:11:08.200 Capital expenditures about 10 years 223 00:11:08.200 --> 00:11:12.200 ago 2013 represented about 7% 224 00:11:11.200 --> 00:11:16.100 to sales and now it's 2.5% of 225 00:11:15.100 --> 00:11:18.400 revenues. So you understand 226 00:11:18.400 --> 00:11:21.400 it's significantly less. Well, we are not in 227 00:11:21.400 --> 00:11:24.400 a manufacturing company. So the company was first creating 228 00:11:24.400 --> 00:11:27.800 its infrastructure and today is developing 229 00:11:27.800 --> 00:11:30.200 smoothies in fraction. It does 230 00:11:30.200 --> 00:11:33.400 not cost a lot. This is why a door of 231 00:11:33.400 --> 00:11:37.200 property plant and Equipment tangible fixed. 232 00:11:36.200 --> 00:11:40.300 I said generates today 8.5 dollars 233 00:11:39.300 --> 00:11:42.200 in Revenue. So it's 234 00:11:42.200 --> 00:11:45.700 quite light acquisition intangible. That's 235 00:11:45.700 --> 00:11:49.000 a corporate the different story because the company 236 00:11:48.200 --> 00:11:51.300 in the past invested a lot 237 00:11:51.300 --> 00:11:54.900 in Acquisitions external growth 238 00:11:54.900 --> 00:11:55.900 the last 239 00:11:56.300 --> 00:11:59.700 Major Acquisitions made by Salesforce are 240 00:11:59.700 --> 00:12:03.200 Tableau in 2019 for almost 15 241 00:12:02.200 --> 00:12:06.700 billion dollars and recently 2021 242 00:12:05.700 --> 00:12:08.100 slack for a little bit 243 00:12:08.100 --> 00:12:11.700 more than 27 billion. But when 244 00:12:11.700 --> 00:12:14.700 you buy a camp and he like Tableau or slack you 245 00:12:14.700 --> 00:12:17.700 don't buy factories, you don't pay for 246 00:12:17.700 --> 00:12:20.400 the balance it you pay for the technology and 247 00:12:20.400 --> 00:12:22.100 you pay for the Goodwill. 248 00:12:22.700 --> 00:12:26.100 So the good will figure dramatically increased in 249 00:12:25.100 --> 00:12:28.300 the balance sheet of Salesforce and now 250 00:12:28.300 --> 00:12:31.500 a door of Goodwill in the balance. She 251 00:12:31.500 --> 00:12:34.300 generates 0.6 dollars of 252 00:12:34.300 --> 00:12:37.200 Revenue in a p&l. So you understand 253 00:12:37.200 --> 00:12:40.700 that the capital intensity comes from the acquisition as 254 00:12:40.700 --> 00:12:43.200 a consequence the assets turnover of the 255 00:12:43.200 --> 00:12:46.600 company is all more than one you can observe for real 256 00:12:46.600 --> 00:12:49.600 estate companies right significantly less than 257 00:12:49.600 --> 00:12:52.200 one why because of acquisitions 258 00:12:53.200 --> 00:12:57.000 It was a bit more than one up to 2018. And 259 00:12:56.300 --> 00:13:00.600 today it's significantly less than one about 0.6 260 00:12:59.600 --> 00:13:02.700 another rosay. The 261 00:13:02.700 --> 00:13:05.400 return Capital employed is a consequence of return on 262 00:13:05.400 --> 00:13:07.000 sales quite High you remember 263 00:13:07.800 --> 00:13:10.300 If you take non Gap a bit 264 00:13:10.300 --> 00:13:13.600 multiplied by the assets to an over which is very low if 265 00:13:13.600 --> 00:13:17.100 you calculate a kind of published and current Rosé 266 00:13:16.100 --> 00:13:19.100 as a Eternal says it's close to 267 00:13:19.100 --> 00:13:22.300 zero and the assets turnover is very low. The Rosa is 268 00:13:22.300 --> 00:13:25.700 close to zero. If you look at non-gap Roth 269 00:13:25.700 --> 00:13:28.300 a you have a return sales which is 270 00:13:28.300 --> 00:13:31.200 about 20% and an assets don't over 271 00:13:31.200 --> 00:13:35.700 which is about 0.6. So the non-gap process is just hardly greater 272 00:13:35.700 --> 00:13:38.300 than 10% of course a return 273 00:13:38.300 --> 00:13:41.700 on capital non-gap is correlated with 274 00:13:41.700 --> 00:13:44.700 the market to book you. Remember the market to book is relative 275 00:13:44.700 --> 00:13:47.900 value creation you divide the Enterprise Value market 276 00:13:47.900 --> 00:13:50.300 cap plus that by the capital 277 00:13:50.300 --> 00:13:53.500 employed and then if it's more than one observe that 278 00:13:53.500 --> 00:13:56.600 there is a relative value creation as value 279 00:13:56.600 --> 00:13:59.400 is supposedly coming from performance Rosie and 280 00:13:59.400 --> 00:14:02.900 Market to book our correlated for most companies including 281 00:14:02.900 --> 00:14:05.600 Salesforce, but that's not enough. 282 00:14:05.600 --> 00:14:07.700 There's another corre. 283 00:14:07.800 --> 00:14:09.500 Which is very interesting to observe. 284 00:14:10.100 --> 00:14:13.600 What the market to book should be if the 285 00:14:13.600 --> 00:14:16.400 company was not growing at all, which is obviously not 286 00:14:16.400 --> 00:14:19.400 the case of Salesforce and then the formula I 287 00:14:19.400 --> 00:14:22.500 simply after tax return Capital divided by weighted average 288 00:14:22.500 --> 00:14:26.200 cost of capital and you compare that with the actual Market 289 00:14:25.200 --> 00:14:28.300 to book in which you have not 290 00:14:28.300 --> 00:14:31.200 only the performance but the anticipated growth for the 291 00:14:31.200 --> 00:14:31.600 company. 292 00:14:32.400 --> 00:14:35.300 Which can observe is that the Gap was quite High between 293 00:14:35.300 --> 00:14:38.500 the actual Market to book and the zero growth 294 00:14:38.500 --> 00:14:41.300 Market to book about 10 years ago, and the Gap 295 00:14:41.300 --> 00:14:42.000 is narrowing. 296 00:14:42.500 --> 00:14:45.900 And that's quite consistent with what we were observing. The 297 00:14:45.900 --> 00:14:49.300 growth rate of Salesforce is 298 00:14:49.300 --> 00:14:52.500 reducing even though it is still quite high. 299 00:14:52.500 --> 00:14:56.300 So it's quite normal that in the mind of investors the 300 00:14:55.300 --> 00:14:58.700 actual with gross Market 301 00:14:58.700 --> 00:15:01.200 to book is getting closer even though 302 00:15:01.200 --> 00:15:04.200 it is quite far from the market to book 303 00:15:04.200 --> 00:15:07.400 without any growth so so far a consistent 304 00:15:07.400 --> 00:15:10.600 picture and no big surprise now, there's 305 00:15:10.600 --> 00:15:13.400 something which is quite interesting When You observe the stock 306 00:15:13.400 --> 00:15:16.400 price and the phenomenal value of a company what is 307 00:15:16.400 --> 00:15:19.100 in the mind of investors when the stock price is 308 00:15:19.100 --> 00:15:22.300 down does it means that it's about less growth? Oh it's 309 00:15:22.300 --> 00:15:25.400 about less performance. Now, I propose you 310 00:15:25.400 --> 00:15:28.600 to evaluate and calculate the fundamental value 311 00:15:28.600 --> 00:15:29.800 of sales force. 312 00:15:30.700 --> 00:15:33.400 You remember that the discounted free cash 313 00:15:33.400 --> 00:15:36.400 flow method calculates free cash flows during two 314 00:15:36.400 --> 00:15:39.700 periods fast grows and then stabilize grows 315 00:15:39.700 --> 00:15:42.200 long-term growth and we discount 316 00:15:42.200 --> 00:15:45.600 this free cash flows at the weighted average cost of capital the whack 317 00:15:45.600 --> 00:15:48.700 for the company's quite easy to calculate there is 318 00:15:48.700 --> 00:15:51.400 no debt in the balance sheet or almost know that the bouncy 319 00:15:51.400 --> 00:15:54.900 then the walk is the same as a cost effect Equity cost effect 320 00:15:54.900 --> 00:15:57.500 Equity long-term Government Bond rate. No big 321 00:15:57.500 --> 00:16:00.900 deal plus a marketer is premium of 6% for 322 00:16:00.900 --> 00:16:03.100 the United States multiplied by the beta on 323 00:16:03.100 --> 00:16:06.900 the beta will see that later is quite stable predictable at 324 00:16:06.900 --> 00:16:09.700 the level of one. Although walk 325 00:16:09.700 --> 00:16:12.100 is quite easy to count. It's about eight percent. 326 00:16:13.100 --> 00:16:15.700 Now we need to calculate the free cash flow. 327 00:16:16.400 --> 00:16:19.200 What about the free cash flow it be the 328 00:16:19.200 --> 00:16:23.100 minus Capital expenditures minus increasing working 329 00:16:22.100 --> 00:16:25.400 capital requirement minus taxes. 330 00:16:26.200 --> 00:16:29.200 What is very interesting is as a working capture requirement 331 00:16:29.200 --> 00:16:32.200 is strongly negative and increase in the 332 00:16:32.200 --> 00:16:35.600 revenues of the company is driving the working capital 333 00:16:35.600 --> 00:16:38.500 requirement more negative. And what 334 00:16:38.500 --> 00:16:41.300 is very interesting and I will demonstrate that with the 335 00:16:41.300 --> 00:16:44.300 calculation a few minutes eat that they're working 336 00:16:44.300 --> 00:16:47.800 capital requirements increase negative as for 337 00:16:47.800 --> 00:16:50.200 the capital expenditure so very much. What is 338 00:16:50.200 --> 00:16:53.900 that stake is a level of Abida. I 339 00:16:53.900 --> 00:16:56.300 suggest two sets of assumptions. 340 00:16:57.400 --> 00:16:57.800 first 341 00:16:58.700 --> 00:17:01.700 we keep growth at the level of 20% you 342 00:17:01.700 --> 00:17:05.000 remember it was 20 20 22 25 to 343 00:17:04.500 --> 00:17:07.600 30% before a bit. We 344 00:17:07.600 --> 00:17:10.500 dramatically reduce a bit dark from 31 to 345 00:17:10.500 --> 00:17:10.900 10% 346 00:17:11.600 --> 00:17:14.300 Then we ask they spreadsheet to 347 00:17:14.300 --> 00:17:18.300 make the calculation and we get the fundamental value which is 230 dollars 348 00:17:18.300 --> 00:17:21.300 which is significantly more than the current stock price 349 00:17:21.300 --> 00:17:24.200 of the company, which when I recalled is 350 00:17:24.200 --> 00:17:28.000 viscous is when Heron 79 dollars the market 351 00:17:27.200 --> 00:17:30.500 is even more pessimistic set on 352 00:17:30.500 --> 00:17:33.400 set of assumptions for the valuation. Now, I keep the bit 353 00:17:33.400 --> 00:17:36.400 at the level of 30% which is its current figure 354 00:17:36.400 --> 00:17:39.100 and I reduce growth no more 355 00:17:39.100 --> 00:17:42.800 20% 10% for the next 10 years and then maturity 356 00:17:42.800 --> 00:17:45.900 and then the fundamental value spreadsheet said, 357 00:17:45.900 --> 00:17:48.500 he's 238 quite close to 358 00:17:48.500 --> 00:17:51.400 the former figure when the current stock price is 359 00:17:51.400 --> 00:17:54.200 one hand on 79 again. So you understand that the 360 00:17:54.200 --> 00:17:59.000 market is very much dramatically downgrading 361 00:17:57.100 --> 00:18:00.500 Salesforce. Now 362 00:18:00.500 --> 00:18:03.500 what happened very recently there were 363 00:18:03.500 --> 00:18:04.700 three activities 364 00:18:05.500 --> 00:18:08.400 Three activities in the same boat, which is 365 00:18:08.400 --> 00:18:11.300 quite remarkable and it is an honor 366 00:18:11.300 --> 00:18:14.800 to welcome Elliot management starboard capital and 367 00:18:14.800 --> 00:18:17.700 value actor. And what does essays 368 00:18:17.700 --> 00:18:19.900 these guys? It says that the margins can be improved. 369 00:18:21.400 --> 00:18:24.700 Yes, but when you observe the evolution, you understand that there's 370 00:18:24.700 --> 00:18:27.500 an improvement in the margin you're after 371 00:18:27.500 --> 00:18:30.300 your might be can be accelerated. Okay, it's a 372 00:18:30.300 --> 00:18:31.400 price is on the value. 373 00:18:32.100 --> 00:18:35.700 That's quite sure and the company should 374 00:18:35.700 --> 00:18:38.900 distribute its cash instead of making risky 375 00:18:38.900 --> 00:18:41.800 Acquisitions, which are paid far beyond 376 00:18:41.800 --> 00:18:45.000 their phenomen told value. That's a 377 00:18:44.300 --> 00:18:47.900 quite interesting point because the company's 378 00:18:47.900 --> 00:18:50.500 generating plenty of free cash flow. Now the 379 00:18:50.500 --> 00:18:53.800 question is when you generate a very positive free 380 00:18:53.800 --> 00:18:56.800 cash flow. What do you do with the cash? Do you distribute the 381 00:18:56.800 --> 00:18:59.500 cash dividend and or share 382 00:18:59.500 --> 00:19:02.700 buyback or do you invest this cash in developing the 383 00:19:02.700 --> 00:19:05.900 future Etc of the company? Let's have 384 00:19:05.900 --> 00:19:08.400 a look at the features of the free 385 00:19:08.400 --> 00:19:11.700 cash flow. You remember a bit da 30% plus working 386 00:19:11.700 --> 00:19:14.500 capital requirement minus 30% 387 00:19:14.500 --> 00:19:17.300 of revenues and it's quite stable and 388 00:19:17.300 --> 00:19:18.000 predictable. 389 00:19:18.800 --> 00:19:21.600 Then a revenue growth makes their working 390 00:19:21.600 --> 00:19:24.600 capital requirement turn even more negative and 391 00:19:24.600 --> 00:19:25.600 you generate cash. 392 00:19:26.300 --> 00:19:30.200 Interestingly from 2017 to 2022 393 00:19:29.200 --> 00:19:33.400 the negative working 394 00:19:32.400 --> 00:19:36.100 capital requirement generated 6 395 00:19:35.100 --> 00:19:38.300 billion dollars of cash. It went down 396 00:19:38.300 --> 00:19:41.300 from minus 4 to minus 10 397 00:19:41.300 --> 00:19:44.700 in the meantime, the accumulated Capital expenditures where 398 00:19:44.700 --> 00:19:47.300 4 billion so you understand that the 399 00:19:47.300 --> 00:19:50.800 operating cycle is generating 6 billion when your 400 00:19:50.800 --> 00:19:53.600 property plant and Equipment are consuming 401 00:19:53.600 --> 00:19:56.900 for that's quite good for the free cash flow and 402 00:19:56.900 --> 00:19:58.100 that's quite predictable. 403 00:19:59.300 --> 00:20:02.900 So the company's generating recurring revenues why 404 00:20:02.900 --> 00:20:05.400 because the customers are paying on 405 00:20:05.400 --> 00:20:09.800 a regular basis something which they need console more 406 00:20:08.800 --> 00:20:11.700 or less relatively controlled. So 407 00:20:11.700 --> 00:20:15.100 the free cash look can be considered as significant. 408 00:20:14.100 --> 00:20:18.200 This is for sure and predictable now 409 00:20:17.200 --> 00:20:20.300 when it is the case, it means that 410 00:20:20.300 --> 00:20:23.600 you have a strong debt capacity and all 411 00:20:23.600 --> 00:20:26.900 you have the ability and the capacity to pair significant 412 00:20:26.900 --> 00:20:29.300 and recurrent dividend to your shareholders and 413 00:20:29.300 --> 00:20:32.500 or to return cash to shareholders through share 414 00:20:32.500 --> 00:20:35.700 by back. There's an interesting theory about 415 00:20:35.700 --> 00:20:38.600 the relationship between managers and 416 00:20:38.600 --> 00:20:42.300 share orders and it is the agencies Theory 417 00:20:41.300 --> 00:20:44.500 the agency theory says, you 418 00:20:44.500 --> 00:20:47.900 know what the managers have their own interest they 419 00:20:47.900 --> 00:20:50.300 shareholders they want to maximize their value in 420 00:20:50.300 --> 00:20:54.100 the long term and it's very difficult to get a perfect alignment between 421 00:20:53.100 --> 00:20:56.600 the interests of the managers and the interests 422 00:20:56.600 --> 00:20:57.300 of the shareholders. 423 00:20:58.200 --> 00:21:01.500 Now what might happen in a company when the free cash 424 00:21:01.500 --> 00:21:04.200 flow is extremely positive. What do you 425 00:21:04.200 --> 00:21:05.100 do with the free cash flow? 426 00:21:05.900 --> 00:21:08.300 Some free cash flow might be 427 00:21:08.300 --> 00:21:12.200 invested by the managers for their own benefits for 428 00:21:11.200 --> 00:21:15.800 example their ego their reputation their 429 00:21:14.800 --> 00:21:16.300 hubris. 430 00:21:16.800 --> 00:21:19.500 But it might be also free cash 431 00:21:19.500 --> 00:21:22.700 flow invested in negative Net Present Value investment. 432 00:21:24.200 --> 00:21:27.700 S there's an interesting case which I was privileged 433 00:21:27.700 --> 00:21:30.700 enough to observe in the past even product a 434 00:21:30.700 --> 00:21:33.600 company in cosmetics business, which was standing alone. 435 00:21:33.600 --> 00:21:36.500 Then was acquired by servers and will sold 436 00:21:36.500 --> 00:21:39.500 to Natural which is a campaign in a Cosmetics industry 437 00:21:39.500 --> 00:21:42.600 base in Brazil. The company was generating 438 00:21:42.600 --> 00:21:45.800 depending on the years return capital of 60 439 00:21:45.800 --> 00:21:48.700 70 90 100 percent. So 440 00:21:48.700 --> 00:21:51.400 you imagine the strongly positive free 441 00:21:51.400 --> 00:21:53.100 cash flows generated by the company. 442 00:21:54.200 --> 00:21:57.300 And then you are the executive committee and you visit the board. 443 00:21:57.300 --> 00:22:00.000 And you say we generated plenty of free cash flows, but we have 444 00:22:00.700 --> 00:22:03.500 absolutely no idea about how to use a Monet. 445 00:22:03.500 --> 00:22:06.100 The board is going to say, okay guys your pair do 446 00:22:06.100 --> 00:22:10.100 have ideas then what you do you bring ideas and the 447 00:22:09.100 --> 00:22:13.600 managers of even products demonstrated 448 00:22:12.600 --> 00:22:15.300 convincible that they had 449 00:22:15.300 --> 00:22:18.700 to diversify in medical residences for 450 00:22:18.700 --> 00:22:20.000 elderly people. 451 00:22:21.300 --> 00:22:23.700 Which is a little bit far from The Core Business. 452 00:22:24.500 --> 00:22:26.900 What happened? It was a disaster. 453 00:22:27.600 --> 00:22:30.400 As a consequent the board fired the 454 00:22:30.400 --> 00:22:33.800 managers and the company went back to its Core Business which 455 00:22:33.800 --> 00:22:36.200 was generating huge free cash flows. And 456 00:22:36.200 --> 00:22:39.200 then they said we are not going to invest this free cash flows in 457 00:22:39.200 --> 00:22:43.500 any additional and curious diversification. We 458 00:22:43.500 --> 00:22:46.800 are going to bring back the Monet to the shareholders. They 459 00:22:46.800 --> 00:22:50.100 started paying huge division massively buying 460 00:22:49.100 --> 00:22:51.000 bags or shares. 461 00:22:51.800 --> 00:22:54.800 So why Nancy company is putting 462 00:22:54.800 --> 00:22:57.600 some debt in balance sheet. Then you have to allocate part 463 00:22:57.600 --> 00:23:00.600 of the free cash flow to pairs of Finance expense and to 464 00:23:00.600 --> 00:23:03.500 repair that when the shareholders are voting in 465 00:23:03.500 --> 00:23:06.200 favor or significant dividend payments and 466 00:23:06.200 --> 00:23:09.300 share BuyBacks. You have to allocate the free 467 00:23:09.300 --> 00:23:12.300 cash flow to pay the dividend to buy bags of 468 00:23:12.300 --> 00:23:15.600 shares then the free cashew which is in the hands of the managers to 469 00:23:15.600 --> 00:23:19.100 do what they like is significantly reduced 470 00:23:18.100 --> 00:23:21.400 introducing that in the balance sheet 471 00:23:21.400 --> 00:23:24.600 introducing dividend policy and shares buy back is a 472 00:23:24.600 --> 00:23:26.300 way to control managers. 473 00:23:27.200 --> 00:23:30.600 Now Salesforce for the first time in its life decided to 474 00:23:30.600 --> 00:23:33.900 buy back some of it shares in 2022 for 475 00:23:33.900 --> 00:23:36.600 only four billion dollars, which 476 00:23:36.600 --> 00:23:39.500 is quite far from the free cash flow. Now when 477 00:23:39.500 --> 00:23:42.300 you go back to the last two big Acquisitions of 478 00:23:42.300 --> 00:23:42.800 the company 479 00:23:43.500 --> 00:23:46.800 Table data analytics. Okay, 480 00:23:46.800 --> 00:23:49.300 when you are selling softwares about 481 00:23:49.300 --> 00:23:52.800 understanding your customers data analytics 482 00:23:52.800 --> 00:23:55.300 is obviously very consistent with the 483 00:23:55.300 --> 00:23:56.200 business of the company. 484 00:23:57.100 --> 00:24:00.200 Now the price which was paid is 20 times the revenues. 485 00:24:00.800 --> 00:24:03.500 Unfortunately, it's a metric which is quite common 486 00:24:03.500 --> 00:24:06.800 30 times the losses between quotes. 487 00:24:06.800 --> 00:24:09.500 Of course, you don't buy a company fights losses you 488 00:24:09.500 --> 00:24:12.100 buy as a company fights profit, but either way it works 489 00:24:12.100 --> 00:24:15.800 now the company's not profitable but it's a good complement. What 490 00:24:15.800 --> 00:24:18.600 about slack slack is about messaging. 491 00:24:19.200 --> 00:24:23.100 The company paid $27 billion revenues generated 492 00:24:22.100 --> 00:24:25.200 by slack 0.6 billion 493 00:24:25.200 --> 00:24:29.000 dollars and losses of more than one billion 494 00:24:28.500 --> 00:24:31.200 dollars. Do you understand? That's a very 495 00:24:31.200 --> 00:24:32.000 high price. 496 00:24:32.600 --> 00:24:35.700 The rationity which was provided is we want 497 00:24:35.700 --> 00:24:38.100 to get into the cloud business. We want to 498 00:24:38.100 --> 00:24:42.400 confront against Microsoft Azure Google 499 00:24:41.400 --> 00:24:44.700 Google Cloud product Etc. 500 00:24:44.700 --> 00:24:47.300 This is why we need slack some of 501 00:24:47.300 --> 00:24:51.200 the people that had Salesforce try to buy LinkedIn in 502 00:24:50.200 --> 00:24:54.300 2016 and Microsoft both 503 00:24:53.300 --> 00:24:56.600 LinkedIn, so it was an opportunity 504 00:24:56.600 --> 00:24:59.900 loss Microsoft had 26 505 00:24:59.900 --> 00:25:03.000 billion dollars for LinkedIn in 2016 506 00:25:02.200 --> 00:25:05.800 and to this is force is paying 27 507 00:25:05.800 --> 00:25:08.200 billion dollars for slack. It's 508 00:25:08.200 --> 00:25:11.300 quite the same maybe the motivation of 509 00:25:11.300 --> 00:25:15.100 the acquisitional slack walls not repeating the 510 00:25:14.100 --> 00:25:17.200 loss the opportunity loss of 511 00:25:17.200 --> 00:25:20.200 LinkedIn the second time and maybe it was 512 00:25:20.200 --> 00:25:24.600 a priority in the decision making process against 513 00:25:23.600 --> 00:25:26.200 the obsession of 514 00:25:26.200 --> 00:25:29.200 a positive that present value. This is just 515 00:25:29.200 --> 00:25:32.100 an opinion and an assumption now. 516 00:25:32.600 --> 00:25:35.500 The departure of the two CEOs of 517 00:25:35.500 --> 00:25:38.600 Tableau and slack that's not 518 00:25:38.600 --> 00:25:41.500 really a positive signal. There are some 519 00:25:41.500 --> 00:25:44.500 rumors about the integration which is quite difficult. 520 00:25:44.500 --> 00:25:48.700 The cultures of these three companies are absolutely fundamentally 521 00:25:47.700 --> 00:25:50.800 different maybe integration 522 00:25:50.800 --> 00:25:52.000 is a little bit difficult. 523 00:25:53.200 --> 00:25:56.400 It does not mean that Salesforce not a good investor. The 524 00:25:56.400 --> 00:25:59.400 company has a real talent as an investor, but 525 00:25:59.400 --> 00:26:02.500 as a venture capitalist, there's a 526 00:26:02.500 --> 00:26:05.400 very interesting concept that since Falls which is what their names 527 00:26:05.400 --> 00:26:08.300 Strategic investment. In fact Salesforce is 528 00:26:08.300 --> 00:26:12.000 a VC investor rather in late 529 00:26:11.100 --> 00:26:14.800 stage. They started making quite significant investment in 530 00:26:14.800 --> 00:26:17.700 2009 and they 531 00:26:17.700 --> 00:26:20.600 realize their sales in 2016 and 532 00:26:20.600 --> 00:26:23.400 it was quite successful. They invested 533 00:26:23.400 --> 00:26:27.300 in Zoom which we use on a regular basis herb 534 00:26:26.300 --> 00:26:29.300 sport, which interestingly is a 535 00:26:29.300 --> 00:26:32.700 very strong and aggressive competitor all sales force 536 00:26:32.700 --> 00:26:35.400 snowflake. You remember the feet cast 537 00:26:35.400 --> 00:26:38.700 in March 2021 about the IP 538 00:26:38.700 --> 00:26:41.400 of the company Etc. It's a company 539 00:26:41.400 --> 00:26:44.400 was quite successful the community investment made 540 00:26:44.400 --> 00:26:47.300 by Salesforce in these project is about 541 00:26:47.300 --> 00:26:50.600 5.5 billion dollars so far the 542 00:26:50.600 --> 00:26:53.100 company as recorded capital gains. 543 00:26:53.100 --> 00:26:56.600 Of 4.1 billion dollars though. They 544 00:26:56.600 --> 00:26:57.400 are quite good at that. 545 00:26:58.400 --> 00:27:02.300 Now before I conclude this vidcast, let's 546 00:27:01.300 --> 00:27:04.200 have a look at the beta out 547 00:27:04.200 --> 00:27:07.800 Salesforce. The Beto Salesforce is quite close to one. It's 548 00:27:07.800 --> 00:27:10.900 being close to one for a while now, even 549 00:27:10.900 --> 00:27:13.700 though it is a little bit up these last 550 00:27:13.700 --> 00:27:16.400 weeks and months, but why 551 00:27:16.400 --> 00:27:19.800 is it quite low because the company is quite recurrant 552 00:27:19.800 --> 00:27:22.700 in its business. Now when the beta is 553 00:27:22.700 --> 00:27:25.200 one and when the NASDAQ is 554 00:27:25.200 --> 00:27:28.900 down by 25% the company stock 555 00:27:28.900 --> 00:27:32.300 price should be down by 25% This 556 00:27:31.300 --> 00:27:34.800 is a normal return but when 557 00:27:34.800 --> 00:27:39.000 the company stock price is down by 40% then 558 00:27:38.200 --> 00:27:41.900 you can calculate an abnormal return 559 00:27:41.900 --> 00:27:44.400 of 15% which is 560 00:27:44.400 --> 00:27:47.600 a difference between minus 25 what it 561 00:27:47.600 --> 00:27:50.200 should be and minus 40 what it 562 00:27:50.200 --> 00:27:50.300 is. 563 00:27:51.200 --> 00:27:55.100 Now when the company store price started getting down the 564 00:27:54.100 --> 00:27:58.100 market value of equity was 300 565 00:27:57.100 --> 00:28:00.800 billion. So the abnormal loss 566 00:28:00.800 --> 00:28:03.900 in terms of value is 15% of 300 567 00:28:03.900 --> 00:28:06.700 billion, which is for the 5 billion dollars. 568 00:28:06.700 --> 00:28:10.400 It is the exact value of Tableau purchasing 569 00:28:09.400 --> 00:28:12.400 price and slack purchasing price. 570 00:28:12.400 --> 00:28:15.700 So it is as if the value of 571 00:28:15.700 --> 00:28:19.200 these two Acquisitions where just evaporated on 572 00:28:18.200 --> 00:28:21.500 stock market, I strongly 573 00:28:21.500 --> 00:28:24.900 recommend you to think about these similarity. 574 00:28:26.200 --> 00:28:26.800 Thank you very much.