As we jump into 2023, I think most of us are expecting the economy to be more challenging than it has been in quite some time. The fed has hiked interest rates at an unprecedented rate in order to fight inflation. As a result, our companies are highlighting macro headwinds throughout their earnings calls as an explanation for the slowing growth.
In the next couple months, we will hear from all our companies as they set the stage for 2023. I personally think we are headed for a very difficult year, and it has made me begin to reset my expectations as to what good looks like for our companies. I believe it would be unfair to hold them to the same standard in 2023 as we have in years past.
In order to help define what good should look like for our companies, I figured it would be useful to look at past history. There isn’t a ton of historical information to review because SaaS as a whole is a fairly recent development and we have been in a strong bull market for quite some time. What came to mind was looking at how Salesforce performed during the GFC. Now, I am by no means calling for 2023 to be at the scale of the GFC, however, this was the best I could think of for looking at how a proven SaaS business held up during a recessionary environment.
I shamelessly pulled the majority of the data from @GauchoRico’s post from 2019. This is still hands down one of the best post I have ever read on this website. Thanks again for completing this, Gaucho.
Thankfully for us, at the time, Salesforce was about the size (in terms of revenue) of the businesses we typically discuss. This should help provide a decent baseline to compare with our companies. Below is some of their key metrics during the years leading up to and following the GFC.
| TTM Rev | YoY Growth | Avg QoQ Growth | FCF | FCF Margin | |
|---|---|---|---|---|---|
| 2006 | $497 | 60% | 12% | $90 | 18% |
| 2007 | $749 | 51% | 11% | $161 | 21% |
| 2008 | $1,077 | 44% | 8% | $169 | 16% |
| 2009 | $1,305 | 21% | 5% | $218 | 17% |
| 2010 | $1,657 | 27% | 7% | $367 | 22% |
| 2011 | $2,266 | 37% | 8% | $440 | 19% |
As we can see, Salesforce was still able to grow 20% at a $1.3B run rate during one of the worst recessions our country has seen. This is pretty remarkable to me and displays the strength of the SaaS business model.
With that being said, they did see their growth rate get cut by more than half, however, this rebounded quickly in the following years. Their sequential growth rate only fell below 4.5% once throughout the great recession, highlighting the consistency and resiliency of their business.
Salesforce has been profitable since their IPO and the recessionary environment had little impact on their ability to produce FCF. While margins did drop slightly, the impact was minimal and they were able to increase this back to normal levels following the recession.
So, what does all this mean for our companies? For me, it means I expect all our companies to continue growing at a solid clip, regardless of the macro conditions. If Salesforce can grow at least 5% QoQ in the face of one some of the nastiest economic conditions we have seen, then I would argue 7-8% should be the floor for most our companies. Obviously, each company is different and depends on their scale, business model, sector, etc. but the point remains.
Salesforce’s history through the GFC also means I will have less leniency with regards to cash flows. Salesforce was still able to grow their FCF in terms of the raw dollar amount and the margins held pretty steady. In essence, I don’t think our businesses can use deteriorating macro conditions as an excuse for a lack of progress towards profitability.
In total, Salesforce shows us that regardless of how ugly the economy gets, our companies should still have the ability to continue growing at a decent rate. Considering the fact that it is very unlikely we see the economy collapse like it did in 2007-09, our companies should face less challenging headwinds. While some deceleration is normal as businesses scale, there is no reason to believe growth should fall drastically in 2023. If this were to happen, I am led to believe it would be more company specific versus something driven by macro. Yes, expectations are lower this year, but Salesforce has set a pretty high bar.
The one other big take away for me is that our companies are growing at rates and producing FCF that would make Salesforce of the early 2000’s jealous. For instance, Snowflake grew over 100% last year to $1.2B in revenue while producing $150M in FCF. Crowdstrike grew revenues to over $2B this year while growing north of 50% with 30% FCF margins. These kind of numbers blow Salesforce’s out of the water. This gives me encouragement that we are selecting the best businesses who are on a path to becoming giants like Salesforce. However, they are valued accordingly at multiples much richer than any ever given to CRM.
Lastly, please no responses to this post regarding the outlook on the economy. This is indicated to be a review of Salesforce performance and our expectation of what can be considered good for our companies in a more difficult environment.
Rex
