Salesforce Inc

The letter discusses the current bearish sentiment towards SaaS companies, including Salesforce, due to fears that AI could replace human workflows and disrupt traditional pricing models. However, it suggests that the threat may be overstated, as the adoption of agentic AI is slower than anticipated. The manager draws parallels to ResMed's situation, indicating that while the market reacts sharply to perceived threats, real-world data often shows resilience and adaptation. The future of SaaS, including Salesforce, may involve a reinvention rather than extinction, as companies embed AI into their offerings.

Salesforce delivered a stand-out set of results in the quarter, with revenue growing 11% year-over-year and current remaining performance obligation growing 14%. The company's AI offering, Agentforce, saw annual recurring revenue growth of 240%. Management raised their FY27 revenue guidance from $45.9-$46.2bn to $46.1-$46.4bn, indicating strong demand and a positive outlook. This performance reinforces our view that Salesforce is well placed to capitalise on the AI opportunity as the leading CRM provider.

Salesforce's strong second-quarter results and raised full-year guidance highlight its accelerating AI-driven growth. The company is benefiting from AI-related products, which are producing significant annual contract revenues. This positive performance has boosted sentiment for software companies in general, indicating Salesforce's strong position in the market and its ability to navigate long-term structural changes effectively.

Salesforce was a detractor from performance during the quarter as investor sentiment remained cautious following another quarter that merely met its guidance targets. Current remaining performance obligations (cRPO) growth were in line at roughly 9% rather than the historical pattern of beating by about a point, and the forward quarter guide was modest. Management acknowledged continued weakness in Marketing, Commerce, and Tableau (roughly 20% of revenue), partially offset by strength in Sales Cloud, Service Cloud, Slack, and Data Cloud (roughly 75% to 80% of revenue). Despite concerns around AI-driven competition, we believe Salesforce’s integration into customer business processes, large installed base, and wide product set position it well to compete effectively in the Agentic AI era, supporting low-teens earnings growth over the next three years.

Salesforce was a detractor from performance during the quarter as investor sentiment remained cautious following another quarter that merely met its guidance targets. Current remaining performance obligations (cRPO) growth were in line at roughly 9% rather than the historical pattern of beating by about a point, and the forward quarter guide was modest. Management acknowledged continued weakness in Marketing, Commerce, and Tableau, partially offset by strength in Sales Cloud, Service Cloud, Slack, and Data Cloud. Despite concerns around AI-driven competition, we believe Salesforce’s integration into customer business processes, large installed base, and wide product set position it well to compete effectively in the Agentic AI era, supporting low-teens earnings growth over the next three years.

Salesforce, Inc. is a leading customer relationship management (CRM) software company that helps businesses keep track of every interaction they have with their customers, from initial sales to ongoing support. Recent worries that AI might allow companies to build their own 'DIY' software provided an entry into what we view to be a great business trading at its lowest valuation since coming public in 2004. We view this threat as overblown, because it is both difficult and highly risky for a large company to trust its most valuable data and mission-critical operations with homemade code. Instead, Salesforce is leveraging AI through its new Agentforce tool, which deploys autonomous agents to handle complex customer and sales workflows, and is already seeing impressive growth.

Salesforce, Inc. has shown resilience and growth potential, which is reflected in our decision to increase our position. The company is well-positioned to capitalize on the ongoing AI-related spending, which is projected to reach $700 billion. This positions Salesforce favorably within the tech landscape, especially as we adjust for the impacts of stock option issuance and other costs that can obscure profitability. Our confidence in Salesforce is bolstered by its strong free cash flow yield and competitive valuation metrics compared to peers.

Salesforce, Inc. has been a significant contributor to our portfolio, reflecting our belief in its strong market position and growth potential. We have increased our position in Salesforce, Inc. from 1.7% to 2.2%, indicating our confidence in its ability to capitalize on the ongoing AI-related spending and its robust free cash flow generation. The company is well-positioned within the technology sector, and we see it as a key player benefiting from the broader trends in digital transformation and enterprise software.

Salesforce is well-positioned to help its customers deploy and achieve the benefits of AI. Despite market concerns about how AI will affect the software industry, we believe the market is painting the software industry with too broad of a brush. Revenue continues to grow and margins expand, indicating resilience. Additionally, Salesforce is in the process of repurchasing $25 billion of its shares, which we view as a great use of capital at today’s prices, further enhancing its value proposition.

Salesforce has demonstrated strong performance, with a notable increase of 17.5% in the recent period, contributing positively to the Fund's overall results. This outperformance is indicative of the company's resilience and growth potential within the software industry, which has shown continued strength. The Fund's strategy of focusing on high-quality software companies like Salesforce aligns well with the ongoing trends in AI and technology, suggesting a robust investment case moving forward.