A Look At Salesforce's Service Cloud

原标题：A Look At Salesforce's Service Cloud 来源：SeekingAlpha

Summary

Service Cloud is a fast-growing segment within Salesforce.com business, presently generating over $3.5 BB in revenue and could overtake the CRM business in the future.\n

A recent Evercore ISI interview provides insight into the segment\'s market opportunity, competitive landscape, and direction.\n

Service Cloud might offer an opportunity for sideline investors who are seeking to make an argument to go long on the company.\n

1.0 Introduction

Service Cloud, introduced as a distinct business segment in FY ’10, is a fast-growing category within Salesforce.com’s (CRM) overall software portfolio, with the potential to overtake the company’s “bread-and-butter” Sales Cloud category in the future, in terms of annual revenue.

Figure 1: Salesforce.com Business Segment Revenues and Growth Rates

Source: Salesforce.com Financial Update Q4 FY ‘19

With Dreamforce right around the corner, I thought to analyze this business via an interview on September 18, 2019 between Mr. Bill Patterson, Executive Vice President and General Manager for Service Cloud, and Mr. Kirk Materne of Evercore ISI. Service management is a very competitive area within the IT landscape, and using Gartner’s Magic Quadrant for Field Service Management as a proxy for the broader service management ecosystem, we see that Salesforce has no shortage of challengers, including Oracle (ORCL), Microsoft (MSFT), and SAP (SAP):

Figure 2: Gartner Field Service Management Magic Quadrant

Source: Gartner

In writing this article, I was eager to review the interview to understand how the company differentiates itself against the various players above. (Note that Salesforce announced its acquisition of ClickSoftware earlier this year.) Because, given the segment’s performance, we have strong evidence that the company has evolved far beyond its legacy CRM solution. Service Cloud may offer support to investors who have, thus far, stayed on the sidelines of the company, but are seeking to evaluate an argument to go long. I happen to be one such investor, and I have admittedly approached Salesforce with a certain hesitation. I feel much of the run in the stock has been based on market mania and media hype; and that many analysts have failed to objectively analyze the company’s numbers, technologies, and strategies. I always assumed Salesforce was just one or two quarters away from a big correction once the market finally “figured out” that the business had its flaws.

Nonetheless, the interview provides a basis from which to gauge the unique capabilities (if any) of this business, along with the dynamics driving/impacting its continued growth. The transcript of the interview is available on Seeking Alpha, and I am including it as an embedded document at the end of this article. I would like to stress up front that I attempt to summarize the interview for the reader. Accordingly, I am injecting subjectivity as I interpret and arrange different parts of the conversation in to what I think are logical relations. While I attempt to cover most of the content of the interview, there may be some mentioned points that I have chosen not to address. I strongly encourage readers to review the actual interview transcript for their own reference.

Before jumping in to the analysis, it is worthwhile to note the popularity of Salesforce.com among the investing community is undeniable and it’s difficult to find an analyst today who is not a cheerleader. In fact, using the data found at Marketbeat (NYSE:CRM - Price Target & Analyst Ratings for salesforce.com), not a single analyst has issued a “sell” rating over the last 180 days, and the consensus price target stands at $185.15 (as of the time I am writing this). That represents a nearly 26% upside given today’s close of $147.05. Despite the broad enthusiasm for the company, I attempt to analyze the Service Cloud business dispassionately.

2.0 Business Segment Overview & Forecast

A review of some basic data on the Service Cloud segment offers a useful background in discussing Mr. Patterson’s/Mr. Materne’s interview. As a bit of a Salesforce skeptic, I was curious to examine the annual report description of the business when it was first introduced in FY ’10 versus “today”:

“Our customer service and support automation features are marketed under our Service Cloud brand. Through the Service Cloud, companies are able to maintain better relationships with their existing customers and more efficiently address a variety of service and support needs, such as advice about products and services, requests for repairs, complaints about faulty goods, and the need for additional goods and services. Using the Service Cloud, customers can leverage our complete cloud-computing platform to deliver a comprehensive solution for their customer service interactions across every service channel: call centers with phone, email, and chat; Web portals for self-service and customer collaboration; and community interactions within social networks.”

Source: Salesforce.com Annual Report FY ‘10

“Service Cloud enables companies to deliver smarter, faster and more personalized customer service and support. Our customers use Service Cloud to connect their service agents with customers anytime and anywhere, on popular devices and across multiple channels: phone, email, messaging, chat, live video, SMS, self-service web portals, social networks, online communities and directly within their own products and mobile apps. In addition, Service Cloud offers a field service solution that enables companies to connect agents, dispatchers and mobile employees through one centralized platform, on which they can schedule and dispatch work intelligently, and track and manage jobs in real-time.”

Source: Salesforce.com Annual Report FY ‘19

I was pleased to note there is good consistency between these definitions, implying the company has maintained a clear strategy for the segment. While that might sound trivial, I would argue that in the world of tech, we (investors) all too often find companies adjusting strategies to fit the moment rather than holding course in a specific direction. One word that appears in the FY ’19 definition versus the FY ’10 definition is “smarter”, hinting at Salesforce’s incorporation of its Einstein artificial intelligence platform into Service Cloud. We see Einstein as a component of the segment, as illustrated in the following diagram at the bottom of the blue box:

Figure 3: Service Cloud Segment Components

Source: Salesforce.com Financial Update Q4 FY ‘19

Einstein is worth discussing more, and I will revisit the topic in the next section. The market opportunity for Service Cloud, and the company’s stated position as #1 within the service management ecosystem, certainly appears compelling, as highlighted in the following two slides:

Figure 4: Service Cloud Total Addressable Market Slide

Source: Salesforce.com Financial Update Q4 FY ‘19

Figure 5: Service Cloud Market Share, Rank, and Growth Rates

Source: Salesforce.com Financial Update Q4 FY ‘19

Recall from Figure 1 that Service Cloud revenues grew a substantial 26% from FY ’18 to FY ‘19 to $3.6 BB. If the segment grows only at the estimated market CAGR of 13% from Figure 4 through FY ’22, the business would generate in excess of $5 BB by the end of FY ’22:

Figure 6: Service Cloud Forecasted Revenues at a 13% CAGR.

Table Source: Yves Sukhu

That would make the Service Cloud business of FY ’22 larger than the Sales Cloud business is today, which generated $4.0 BB in FY ’19. Obviously, if Salesforce can exceed the average 13% CAGR mentioned on Figure 4, Service Cloud could conceivably overtake Sales Cloud to become the largest revenue-producing segment. Can they do it? The company has, in fact, exceeded the broader service market CAGR since FY ’15, although growth is slowing:

Figure 7: Salesforce.com Business Segment Revenues FY ’15 – FY ‘19

Data Source: Salesforce.com Annual Reports FY ’15 – FY ‘19

Table Source: Yves Sukhu

Still, using the market growth estimates from Figure 5, it is easy enough to model a complete forecast through FY ’22. Although, in the table below, I used estimated market CAGR’s for all segments except Service Cloud where I increased the growth rate from the estimated average rate of 13% to 16%. We see that the segment would be roughly on par – in terms of revenue – with the Sales Cloud business by FY ’22:

Figure 8: Salesforce.com Complete Business Segment Revenue Forecast FY ’20 – FY ‘22

Note(s):

16% growth rate for Service Cloud segment is 300 basis points higher than the average market CAGR offered by the company in Figure 5 and is used to estimate the approximate growth rate for the Service Cloud to generate revenues on par with the Sales Cloud business.On Figure 5, the average market CAGRs offered for Marketing Cloud and Commerce Cloud respectively are 13% and 14%. As these segments are presently reported together by the company, I split the difference to arrive at a 13.5% CAGR used to forecast growth for the combined groups above.

Table Source: Yves Sukhu

Given that Salesforce.com has managed a Service Cloud CAGR greater than 20% for the last couple fiscal years, it would seem plausible that the company could exceed the forecasted market CAGR through FY ’22. Also, Salesforce expects overall above-average market rate growth of 20% to 21% for FY ’20 as per the following slide:

Figure 9: FY ’19 Results and FY ’20 Guidance

Source: Salesforce.com Financial Update Q4 FY ‘19

Moreover, with a stated TAM of $29 BB for the service management market from Figure 4, which is the largest of all non-platform TAMs, it would seem – on the surface – the growth opportunity for Service Cloud is very good. All of this should get the attention of investors – bears and bulls alike – as it could suggest an even stronger service management focus for the company over the long-term, perhaps shifting Salesforce from historically being the “CRM” company of the past to the “Service” company of the future.

I would like to state, however, there is another interpretation of the data provided by the company in Figure 9 and Figure 5. If, in fact, Salesforce’s growth will ultimately mirror those estimated across its markets, then expected growth may be “front-loaded” in that growth may start to slow – significantly – after FY ’20. I have no idea if this will be the case; only that it is possible if my previous statement winds up being true (i.e. Salesforce’s growth will ultimately mirror those estimated across its markets). Of course, it is also possible Salesforce will exceed growth rates in all its markets for years to come.

I should also state here that Salesforce does not provide earnings data for its individual business segments. Accordingly, the impressive revenue growth discussed thus far may mask a consistently unprofitable operation. Obviously, without the data, it is not possible to know.

3.0 Interview Analysis

With our background on Service Cloud from the previous section, we can now better analyze the points discussed in the Salesforce-Evercore ISI interview, which is the main interest of this analysis. To reiterate from the Introduction, the interview occurred between Mr. Bill Patterson, Executive Vice President and General Manager for Service Cloud at Salesforce.com, and Mr. Kirk Materne, Senior Managing Director/Fundamental Research Analyst at Evercore ISI.

Broadly speaking, the interview questions dwell in three areas: (1) dynamics driving demand for Service Cloud; (2) the competitive landscape; and (3) platform innovations. Below, I attempt to organize the key points discussed during the interview within each of these 3 areas, even when those points might have been mentioned at different times during the interview itself. To reiterate, I strongly encourage readers to review the actual interview transcript for their own reference.

With that said, let us dive into each area and discuss the responses provided by Mr. Patterson.

3.1 Demand Dynamics

Mr. Patterson highlights a variety of points driving Service Cloud demand:

a. Companies (i.e. Salesforce customers) seeking to differentiate themselves on the basis of superior customer service, particularly as the products/services they provide become increasingly commoditized. Mr. Patterson makes particular note of field service management and Salesforce’s acquisition of ClickSoftware when elaborating on this point.

b. Companies seeking growth (revenue/profits) via improved customer service.

c. Companies attempting to lower costs/expenses via improved/streamlined customer service.

d. The introduction of new 5G-enabled devices which may drive increased demand for field service solutions.

These trends are logical, if a bit high-level. Mr. Materne does ask Mr. Patterson to provide some narrower (i.e. drill-down) commentary around demand dynamics, alongside the higher-level macro trends, but the discussion does not quite get there. Mr. Patterson notes at the end of one of his responses that:

“...it’s the high level of differentiation, it's the growth potential, a degree of cost savings sprinkled in that causes companies to really reflect on their existing [customer service] posture.”

In regard to the reference of cost savings, it would be useful to have Salesforce expand on how its price-point-to-feature-set value proposition may be/is superior to the competition. I do think Mr. Patterson possibly hints at this later in the interview, without stating it directly, when he notes:

”the thing that our [customer service] product does is, it's a fully functional capability for small business teams; it combines Salesforce automation and customer support together. And it starts at $25 per user per month. So, it’s a heck of a deal for small business teams wanting to grow their business.”

I think one of the things Salesforce has done well over its life is to capture the long-tail of enterprise business – i.e. those business opportunities much smaller in size, but greater in number than the “traditional” enterprise business sought by larger competitors such as Oracle and SAP. I, for one, would be eager to know if the company believes itself to have some kind of sustainable competitive advantage here, as well as the higher end of the tail, given that they are hardly alone in either area of the market.

Overall, the macro demands for service management seem quite good moving forward, but I’m not clear on demand drivers for Service Cloud specifically.

3.2 Competitive Landscape

As with the discussion around demand, Mr. Patterson makes a few different points on the competitive landscape:

a. “Pen-and-paper” customers (i.e. lack of digitization) still represents a barrier-to-entry for service management solutions.

b. Competitive solutions are more focused on the transactional nature of service management (e.g. scheduling a resource or service appointment), as opposed to creating a favorable customer service experience via the aggregation and analysis of the whole of customer data.

c. Service management is both a horizontal and vertical “game”. There are opportunities to innovate/compete in (narrow) verticals, as well as opportunities to pollinate similar capabilities across multiple verticals.

d. Salesforce is seeing varied competitive dynamics across geographies, with commerce-centric service management needs dominating in North America, field-service management dominating in Europe, and more broad service management needs growing in Asia-Pacific as a result of new(er) digital consumer channels.

As is often the case, the competitive landscape appears to offer good opportunities, but no “layups” for Salesforce and Service Cloud. With respect to the “pen-and-paper” aspect of the competitive landscape, Mr. Patterson offers:

“...we see a large opportunity to bring more modern technology to the front office operations [and] the opportunity is kind of large and profound. And I would say, it’s not limited to just, say, the [field service] marketplace; home health care professionals, financial advisers, organizations actually performing retail operations with this technology. There is a broad need for kind of modernizing the service operations that are out in field.”

My impression from his comments is that he believes a significant amount of white-space still exists within the broader service management market. If the TAM estimate of $29 BB from Figure 4 is accurate, then there could be billions of untapped service management market opportunity for Salesforce to capture. Of course, all of Salesforce’s competitors will be chasing after those opportunities as well, and I would expect competitors like Oracle and SAP – who have traditionally chased larger enterprise opportunities – to push deeper into Salesforce’s domain of mid-size and small transactions (as, for example, with Oracle NetSuite). Again, Mr. Patterson does not say it directly, but his comments around the transactional-nature of Salesforce’s competition (see point “b” above) suggest how the company believes it can attack and win against its competitors within these white-space opportunities, as well as displacement opportunities. He states:

“We see your traditional Oracles and SAPs that are there connecting kind of more of a focus on just that operational excellence, if you will. And I think where those entities kind of lack or where we differentiate is really focusing on the relationship side, the customer side of that equation. We have a lot of companies that come to us today with entrenched or prior investments in an Oracle and SAP, wanting to go the next mile in terms of customer experience and eliminate the guesswork on the customer side of the equation of going my technician will actually be there. And that's truly where I think our position at Salesforce is unique, our focus on putting the customer at the center of our operational strategy. And more companies are trying to get that way, become more customer-centered in their thinking that our Customer 360 platform really makes that come together in ways that they didn't know were possible, one; and two, unlocks a lot of potential to differentiate in that last mile.”

I understand what Mr. Patterson is saying, but I’m fuzzy on Salesforce/Service Cloud’s particular advantage here. In my (humble) opinion, the notion of the “360-degree” customer view is a tired cliché in enterprise software. The idea has been around for ages, and everyone uses it. Consider the following from Oracle NetSuite’s webpage on their competing service management solution:

Figure 9: Oracle NetSuite Customer Service Management

Source: www.netsuite.com

Here is a page from Informatica, who uses the concept of a 360-degree customer view for its Master Data Management offering:

Figure 10: Informatica Master Data Management

Source: www.informatica.com

Of course, I could go on and on. But my point is that Salesforce’s claims of providing a superior platform to aggregate, manage and exploit multiple sources of customer data seems a bit light, at least in the context of this interview. With that said, perhaps customers can build out more comprehensive customer engagement platforms faster, easier, and more cost effectively with Service Cloud for any number of reasons; but it would be helpful to have Salesforce make such statements clearly and directly, with both quantitative and qualitative evidence based on experience. I should mention the Salesforce Customer 360 initiative is a key part of its broader business strategy, and I discuss it more in Section 3.3.

Mr. Patterson rightly points out the opportunity for the company to innovate both horizontally and vertically with Service Cloud. He notes the company has 4 vertical solutions today:

“We have four products today that are industry oriented. These are products built on our platform of which kind of service contributes innovation. The first one is our Financial Services Cloud, which is focusing on kind of the wealth management and insurance markets, broadly speaking. And this is a great market -- a great example of wealth advisors spend a lot of their time selling than a lot of time servicing their customers. And so, this is just where, again, you see us bring unique and discreet innovation for this audience with the customer at the center. It causes us to really do something special on the platform. The other industry products that we have is for healthcare, and we call that our Health Cloud. And then, we just recently announced in the last weeks here a manufacturing cloud, as well as consumer goods cloud, both of which include the Service Cloud capabilities at the center, if you will.”

Again, all of Salesforce’s competitors are following the same playbook here, and some – such as Oracle and SAP – have many more years of industry-specific experience/technology, along with an arguably more granular set of industry verticals. My personal belief is that the most successful software application providers of tomorrow will be those that can efficiently and effectively tailor their offerings to increasingly narrow vertical segments, as customers seek out greater specializations to differentiate their own businesses from their competitors. I do think Salesforce has had some historical advantages here given how the original CRM platform was designed and delivered – it was purposely designed to be fast and easy to customize. So, theoretically, Salesforce should be able to continue to take advantage of this competitive dynamic moving forward. That being said, I suspect that Service Cloud may lack substantial moats against competing solutions and we are not offered any specific features/data in the interview to suggest otherwise.

3.3 Platform Innovations

I remarked in Sections 3.1 and 3.2 that I find the interview lacking in specificity, for example, around the demand drivers distinctive to Service Cloud or those features providing a unique advantage for its vertical industry solutions. Perhaps we can find some of that detail in a review of the areas where Salesforce is concentrating its innovation effort for the platform. Broadly, Mr. Patterson touches upon 4 topics: artificial intelligence (Einstein), Mulesoft, Tableau, and the company’s Customer 360 initiative.

In regard to artificial intelligence, Mr. Patterson is asked to elaborate on those “opportunities to go deeper in AI”. He responds that Salesforce “[centers their] innovation thoughts” around 3 areas when it comes to artificial intelligence: (1) deflection technology, (2) routine systems technology, and (3) call optimization and prediction. I generalize each of these drawing upon Mr. Patterson’s commentary:

Deflection technology: the use of artificial intelligence to provide an automated response to or interaction with a (human) user. The use of automated bots, which has become quite common, is one such example.Routine systems technology: recommendation systems used to enhance the customer service experience, such as the suggestion of knowledge base answers or recommended articles that are meant to help service the customer more efficiently and effectively.Call optimization and prediction: the use of artificial intelligence to interpret a customer service engagement and subsequently take intelligent actions to optimize the value of the engagement. An example could be an AI system providing suggestions on cross-sell or up-sell opportunities.

In a sense, all three of these areas could be considered variations of the same theme, namely recommender systems. Thus, they are not purely separate from one another. Mr. Patterson provides “time” as one of the distinctions between implementing a call optimization solution versus a routine systems technology solution, meaning the former involves more design, setup and implementation work.

So, what makes Salesforce different/better here? Surely, none of what is mentioned above is unique to the company. Mr. Patterson suggests that some Einstein-related capabilities are “very easy to get up and going and get up and running”. That may be true, especially for those customers who are deeply invested in a Salesforce.com stack, and may thus benefit from some kind of “plug-and-play” advantages. In the case of routine systems technology, Mr. Patterson notes:

“[These solutions] just turn on and work immediately as part of the service cloud product. There is no setup – no additional setup required to make that happen.”

While this makes for a good soundbite, I am a bit skeptical of this claim. Good recommendation systems require expertise, training and tuning. Consider that while writing this article, I decided to engage with Salesforce.com’s Einstein-enabled service bot on the main website. Here is a set of screenshots which capture my interaction, with the Einstein service bot messages in grey and my message in blue:

Figure 11: My Interaction With Salesforce.com’s Einstein-Enabled Service Bot – Part 1

Source: Yves Sukhu

Figure 12: My Interaction With Salesforce.com's Einstein-Enabled Service Bot – Part 2

Source: Yves Sukhu

As you can see, I made one request which was to get more information on Service Cloud, to which the automated bot was unable to respond effectively. You don’t have to be an expert in recommender systems to know that the bot should have been able to parse “Service Cloud” from my message and at least “guess” that I am asking about that specific subject, at which point it could have suggested some related web links, articles, Salesforce.com resources, etc. To reiterate, Mr. Patterson claimed above that this kind of “intelligence” is available out-of-box with Service Cloud, but yet the Einstein-related offering doesn’t seem to be very effective here.

Mr. Patterson also discusses the value of MuleSoft, which Salesforce.com acquired last year, in the context of Service Cloud. He explains:

“So, imagine in the case of MuleSoft, our ability to interface multiple applications at the moment of interaction that a customer might experience the brand, whether that be on a website or in a product, they experience themselves, or even an agent facing desktop application, the ability to pull multiple data points together to ultimately solve problems, there is beautiful partnership that we have with the MuleSoft innovation portfolio, really is getting to the heart of what service is, which is getting you back to your life. Because, last time, I checked no one really wants to call a customer servicing for a day. It’s really about getting back to continuity of experience in products that customers and companies really want to focus their efforts on. So, that’s the case of MuleSoft.”

The scenario is valid, but hardly anything new. The case that he describes is one of the most common for any middleware stack, whether that be MuleSoft, Oracle Fusion Middleware, IBM WebSphere, Microsoft BizSpark, Red Hat Middleware, etc. My point in mentioning so many stacks is to emphasize that the scenario on its own is not representative of any real differentiation – or innovation for that matter – that Salesforce/Service Cloud has.

Mr. Patterson ties the general themes above to the company’s Customer 360 initiative. An unidentified analyst who participated in the interview, aside from Mr. Materne, made a request to understand the “key pieces of the initiative”, to which Mr. Patterson offered 3 areas of focus:

“Number one, the area of focus on the first set of Customer 360 is bringing together all of the view of the customer and all of the positions that a customer might hold in terms of data and allowing you to have a more complete view of that in the service moment.”

“The second one is on communications. Today, a common scenario for marketing is to use a channel like SMS to broadcast promotions to a customer...What we're doing at Salesforce is building our technology, so that you can send a marketing promotional SMS, reply to that and then that actually makes this hand into a service team or service technician to be able to engage you and serve you better.”

“The third area of our Customer 360 I would say that we’re really excited about is, using our AI functions to reach into a service moment and make intelligent recommendations or predictions about products that you should be using...”

I would stress that there is nothing original or special in these descriptions; and, at the risk of further repeating myself, these kinds of use case descriptions have been around for so long and are so overused, I am a little disappointed as an investor that Salesforce seems to struggle to describe their business value in novel ways. There may be something original or special in the underlying technology, but we are given nothing in that regard in this interview. Given my “little” experiment with the Salesforce.com website bot mentioned earlier, I am increasingly flustered in regard to what exactly Salesforce brings to the table.

Tableau, which the company just acquired in July, is mentioned only briefly toward the end of the interview. Mr. Patterson indicates that he is unable to discuss Tableau-Service Cloud innovations in any detail given that the acquisition is so new. He offers a simple use case exploiting Tableau to visualize service-related data, but I do not feel it offered anything compelling to mention it here. I leave it to the reader to review Mr. Patterson’s response.

4.0 Conclusion

The interview questions posed by Mr. Materne were not exactly challenging, and I recognize they were not meant to be – it was a cordial, friendly interview. However, the result was a discussion that offers investors superficial answers as to the unique value proposition offered by Service Cloud.

As an investor contemplating the prospects of this segment, my main takeaways – which are really personal inferences – are:

The service category has a very real “shot” to match the legacy CRM business by FY ’22 in terms of revenue.Service Cloud may be winning the “long-tail” game, by capturing many smaller size opportunities (see Section 3.1).Speed of implementation may be one of Service Cloud’s advantages over its larger rivals, such as Oracle and SAP.Platform innovations appear weak.

The last bullet is, of course, quite concerning -- and I’m sure the company disagrees wholeheartedly with my assessment. But, I reiterate something I said earlier and pose it here as a question: if Salesforce is seemingly struggling to describe their business in unique and novel ways, is it unique and novel? I concede that with Dreamforce around the corner, perhaps good answers to this question are forthcoming.

Despite what I just said, some sideline investors might be encouraged sufficiently by Service Cloud's impressive revenue growth, and the possibility that the business might overtake the CRM segment in the next few years as I modeled in Section 2.0. I, personally, would like to explore additional data on the business, with the hope that the company may also consider the provision of segment-specific earnings data.

5.0 Supporting Documents

crm_q3_fy2020_analyst_interview_with_evercore_isi.pdf

crm_q4_fy2019_earnings_presentation.pdf

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.