Jeff Smith, CEO and Chief Investment Officer of Starboard Value LP.
Chris Goodney | Bloomberg | Getty Images
Salesforce Shares rose 98% in 2023, in part after the enterprise software maker increased its adjusted operating margin after Starboard Value and other activist investors raised concerns about the company’s financial performance. Starboard now sees more room for improvement.
“They’ve done a great job of improving their margins, taking a step further into the Rule of 40 or Rule of 50 for their industry, and we think there’s a lot more to do,” said Jeff Smith, CEO of Starboard , to CNBC’s David. Faber on Tuesday at the 13D Monitor Active-Passive Investor Summit in New York.
The Rule of 40 refers to the idea that a company’s sales growth and profit margin should add up to at least 40%. In 2022, it became an increasingly popular metric among software executives as stock prices fell and investors worried about central banks raising interest rates. For years, many software companies have prioritized rapid growth at the expense of profitability.
Starboard argued in 2022 that Salesforce, even as it dominated the customer relationship management software market, delivered a lower operating margin than some of its peers. Starboard unveiled a stake in the stock and Salesforce responded by cutting thousands of employees and pushing back the timeline for expanding its adjusted operating margin.
Starboard had a $432 million stake in Salesforce as of June 30, according to a regulatory filing.
Marc Benioff, co-founder, chairman and CEO of Salesforce, has said he “enjoyed getting to know the activist investors” who were investing. Mason Morfit, co-CEO of ValueAct Capital, joined Salesforce’s board in March 2023. And by June 2023, most of the seven equity activists had left, Amy Weaver, Salesforce’s chief financial officer, said at a UBS event.
On Tuesday, Starboard said in a presentation that Salesforce “can become more efficient and profitable.” Other major software companies are spending less on sales and marketing and general and administrative expenses as a percentage of revenue, and Salesforce can catch up, according to the presentation. Starboard used a total of Adobe, Intuitive, Microsoft, Oracle, JUICE, ServiceNow And Working day for comparison.
And Starboard said Salesforce must commit to adhering to the Rule of 50 in fiscal year 2028. The activist company outlined two scenarios, both of which involved an acceleration of Salesforce’s revenue growth and an expansion of its adjusted operating margin.
The Agentforce technology for automating customer interactions, which Salesforce discussed at the Dreamforce conference in September, has the potential to drive revenue growth, Starboard said.
Salesforce shares fell 1% during Tuesday’s trading session.
“We value feedback and dialogue with our investor base. Starboard remains a constructive shareholder in our discussions,” a Salesforce spokesperson told CNBC in an email.