Benioff calls profitability Salesforce's 'top priority,' underscoring why he should remain CEO

Published Wed, Mar 1 20232:04 PM ESTUpdated Wed, Mar 8 20232:21 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

After delivering a knock-out earnings report Wednesday, Salesforce CEO Mark Benioff said driving profits is the enterprise software giant's primary objective – demonstrating to the Club he has the wherewithal to aggressively improve margins in the face of an onslaught of activist pressure. "Our profitability is our highest priority," Benioff told Jim Cramer in a post-earnings interview Wednesday His comments came as shares of Salesforce (CRM) climbed nearly 15% in afterhours trading, to around $192 apiece. Investors cheered Salesforce's fourth-quarter beat and strong full-year guidance. Salesforce said Wednesday it expects a 27% adjusted operating margin in its fiscal 2024 — a key metric for activist investors — compared with analysts' expectations for a margin just under 23%. More broadly, Benioff told Jim that an adjusted operating margin around 30% is becoming the company's north star – a barometer that pleases investors like us. Salesforce's stellar earnings and better-than-expected forecast come as the company faces growing demands from activist investors like Elliott Management. The hedge fund nominated a slate of candidates for Salesforce's board, CNBC reported exclusively Wednesday, representing an escalation in the battle being waged by activists to reshape the company. It's unclear whether Elliott is nominating two or three candidates for Salesforce's board, according to CNBC. However, Elliott Managing Partner Jesse Cohn will likely be among the nominees, CNBC reported, citing people familiar with the matter. Salesforce's board nomination window opened Feb.12. and lasts until March 14. While we generally believe activists' wishes for greater profitability at Salesforce are warranted and positive for shareholders, in our minds, Benioff deserves to remain at the helm. That view was only reinforced by Wednesday's earnings results. Elliott is among the five known activist investors who have built positions in Salesforce in recent months, with one of the key issues being the enterprise software maker's profitability relative to peers. Elliott, run by founder and co-CEO Paul Singer, has a multibillion stake in Salesforce. The unusual extent of the activist presence in Salesforce became clear in early 2023 — and by February, the number of known firms with stakes swelled to five. In addition to Elliott and Jeff Smith's Starboard Value, the other three activists are Dan Loeb's Third Point, Jeff Ubben's Inclusive Capital and San Francisco-based ValueAct. CRM 1Y mountain Salesforce (CRM) 1-year performance While tech companies like Salesforce had for years been rewarded for aggressively pursuing top-line revenue growth, Wall Street's focus has shifted to the bottom line due, in part, to the Federal Reserve's interest-rate hiking campaign. Those higher rates have muddied the economic outlook, prompting many of Salesforce's customers to tighten their belts and scrutinize their spending on the company's suite of software offerings. Additionally, higher rates have made the promise of future earnings look less attractive, putting pressure on the valuations for Salesforce and other companies while boosting investors' appetite for near-term profits. Salesforce laid out a plan to grow profitability in the coming years at an investor day in September 2022, targeting an adjusting operating margin of 25% for fiscal 2026. For comparison, Salesforce reported an adjusted operating margin of 22.7% in its fiscal 2023 third quarter . The company's 2026 target was issued before any activists publicly disclosed Salesforce holdings. However, the margin outlook was not nearly ambitious enough for Smith and Starboard, which in mid-October, became the first activist hedge fund to publicize its position in Salesforce . But based on what Benioff told Jim Wednesday, it would seem Salesforce now has more ambitious goals of its own. "We have hit the hyperspace button," Benioff said. "We decided it's time to go. We weren't going to wait two years, until fiscal year '26, to deliver this profitability acceleration. We were going to do that right now, and that is what is happening." In early January, Salesforce announced an expense-reduction plan that included laying off more than 7,000 workers and office space cutbacks — moves Jim previously suggested were advocated for by Starboard. The software firm, which for more than two decades has been run by co-founder Benioff, shook up its board in late January. That included naming ValueAct CEO Mason Morfit as a director, as well as Mastercard (MA) Chief Financial Officer Sachin Mehra and Arnold Donald, former CEO of cruise line Carnival (CCL). Those three appointments became effective Wednesday. Benioff is chairman of Salesforce's board. How all those moves figured into Elliott's decision to nominate its own board candidates is unclear. The hedge fund did not respond to the Club's request for comment. Jim said Wednesday he thought there would be a "meeting of the minds" between Elliott and Benioff that resolved some disagreements among the two parties. CNBC's David Faber, who helped break Wednesday's story on Elliott's slate of board nominees, said it's his understanding that Salesforce management's conversations with Elliott had been in "good faith." But they have not necessarily brought "peace" to the matter, Faber acknowledged. It's possible that a settlement between Elliott and Salesforce is reached before the situation escalates into a full-blown proxy contest – generally considered a contentious development in which an entity such as Elliott campaigns for other shareholders to vote for its nominees against the wishes of management. In past activist campaigns, Elliott has reached amicable agreements with companies such as Pinterest (PINS) back in December. Elliott secured a Pinterest board seat for one of its portfolio managers, and the two sides entered into a "long-term cooperation agreement. "We can learn from everybody. We do learn from everybody," Benioff told Jim Wednesday, when asked specifically about the activist campaign. Bottom line The Club's decision to stick with Benioff has been validated by Salesforce's earnings print Wednesday, along with the CEO's subsequent comments to Jim. In general, we've hoped to see Salesforce become more profitable and recognize that questions around succession to Benioff have been asked for years. However, we do not want to see activist pressure at Salesforce to cause Benioff to depart the company. We see him as an invaluable asset to the enterprise software maker, with a deal-making prowess that's helped shareholders, including the Club, make lots of money over the years. We reiterate our 1 rating on the stock . (Jim Cramer's Charitable Trust is long CRM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Salesforce cofounder and co-CEO Marc Benioff speaks during the grand opening of the Salesforce Tower, the tallest building in San Francisco, Calif., Tuesday, May 22, 2018.

Karl Mondon | Bay Area News Group | Getty Images