Salesforce, Inc. (CRM) Earnings Call Transcript & Summary

All right. Thanks, everyone, for joining us. Sorry for the delay here. My name's Arjun Bhatia. I'm the research analyst here at William Blair who covers Salesforce. For a complete list of disclosures, please go to our website at www.williamblair.com. And with that, it's my pleasure to introduce Mark Hawkins, the CFO of Salesforce. Salesforce or Mark probably need no introduction beyond this point. But Mark, thank you very much for joining us.

Why don't we just get started maybe with a quick update on the company? You reported strong results about 1.5 weeks ago. There's a bit of a conservative guidance that you provided. Just give us maybe a high-level overview of where we are today, where the business is and what you're hearing on customers on the spending environment.

Sure. First of all, Arjun, thank you for the opportunity to chat, and always a pleasure to interface with you and the investor community. I -- the thing that we really noticed as we've gone through this first quarter of COVID, if you will, is we noticed the impact, the swift impact of COVID when it came. We noticed the -- in March, obviously, in the latter part of March, we were really, like probably the rest of the world, adjusting. And then we started to take a look at the beginning of April with an adjusted view of what would be happening. And then we -- from that point on, we started to see incrementally better than we expected from our adjusted plan. And that incremental improvement continued on into May, really right up through the earnings call that we had talked about. We were encouraged to see our pipe coverage be improved. We were encouraged to see the amount of commerce we actually did in the quarter. We were pleased, as I think you could tell, in the quarter, all things considered. And so that is probably the big thing that we saw. I would certainly say that what's very clear to me is that the imperative for digital is even greater now. I was talking to some people, Arjun, where I felt like there's been 10 years of society's enablement done in like 90 days. I mean in every aspect of life, whether it's telemedicine or e-commerce for people who never did, for -- let alone connecting with your customer in a whole new way with everything that we provide in a modern way to connect with your customer, be it sales, marketing, service, community, e-commerce, analytics, so on and so forth, and Tableau to see and understand. And so I really believe someday, when we look back on this time frame of the history of digital, it will come up to a point, and I think someday we'll look as an entire society at how it's going to accelerate. That's my personal view. So we certainly hear that from customers that they are more determined than ever to continue that process of digital transformation, and we're here to help.

Yes, absolutely. It's going to play such an important role going forward, even more so than it has in the past. One of the things, I think, a lot of investors were concerned with going into this earnings season, especially with companies that kind of cater to the enterprise, is this hesitancy amongst CIOs in maybe pulling the trigger on large transformational deals in this environment, right, as they're a little bit cautious on their budgets. But you announced a huge deal with AT&T last quarter. I think it's the largest in your history. And you talked about some of the positive commentary here that make it seem like you're past the trough. So help us understand what you're seeing in the pipeline that's giving you confidence in the back half of the year. And one of the things you touched on just now is that some of the products are maybe experiencing different levels of demand based on what role they're playing in digital right now. Can you maybe just talk about where you're seeing elevated levels of demand in the product portfolio versus some areas that are a little bit more subdued right now?

Sure. Well let me just touch on a couple of things here. One is that was probably one of the things that Marc Benioff had talked about on the earnings call, just how encouraged we were with the amount of business that we could do through a video conference, through connecting with these relationships with our customers as we pivoted and reimagine even some of our events and pipeline generation. And so that was encouraging. But then to your point, like, let's look at the nature of the deal. So AT&T is one of the biggest deals in the history of our company. Let's -- we're going to break that down. And then also, we'll come back and talk about some of the other areas that we're seeing, to your question. But with AT&T, I think one of the things that's really exciting is when you think about the vision that we've really created for the company, which is when we got MuleSoft, it was to help people unlock data, whether it was on-prem or whether it was in the cloud, and widen the aperture, unlock the data so they could increase the clock speed of digital transformation. Noted. For CRM, we have worked strategically to have some of the most critically strategic data in any company in any organization in the world, which is the go-to-market, the customer, the service, the marketing, the e-commerce, the community analytics and such. And so we have that data that we're using to help our customers modernize the way they connect with their customer. And then the third leg of the strategy was to have Tableau help us see and understand. So you widen the aperture of the data coming at you, you have been able to even more strategically connect your 360 CRM and all our capabilities to get a 360-degree view of the customer, and then we look at Tableau to see and understand data. And then the last leg of the stool really is around analytics and the application of Einstein. So the whole point there is that's the kind of thing that AT&T wanted. And I want you to bring it all the way home and kind of sew that all the way together. Imagine -- and I'll abstract away from AT&T, but imagine any customer that has different lines of businesses, and they're complex. And imagine they're not able to fully tap into their installed base to sell. That's a big deal. Let's take Salesforce. We announced it during a Dreamforce presentation that about 3/4 of our business goes into the installed base and 25% with new logo business for our new business. So imagine if we didn't have the power to see everything we had and see all the needs of the customer and then sell into that installed base. Well that's what Customer 360 is doing, is allowing people not to have silos and to be able to see all the way around the customer, all the way around the business and be able to sell in more effectively, more cross-sell effectively, and that's what our customers are trying to do. And we're trying to help them with that. So when you take that idea like the AT&T, where you have more access to data that you have that's valuable, the complete 360 view to help you see the entire opportunity, both new logo and in the installed base, and then you can analytically understand it and make better decisions to penetrate more and serve better, then you start to see what we've been doing. And that, I think the AT&T big deal, for example, we were able to accomplish right in the middle of COVID. I'm pleased about that. If you pivot away from that kind of a deal that took place in our COVID quarter -- and we had other big deals, by the way. We talked about Standard Bank, and it's one of the biggest banks in Africa. And that happened in a COVID quarter. And so we're seeing the appetite for the kind of solutions that I'm describing that's very, very powerful to the customer. Now let's pivot to something you asked, more -- almost more cloud-oriented. I certainly see the appetite for Service Cloud just continues to -- this whole omnichannel service has just got lots and lots of opportunity to it. I think public and what we're offering to the public sector is another area that, as we look back on that quarter, is also very exciting as an example. I could give you more, but I hope I've painted a picture of big deals, different areas by cloud, different areas even by kind of type of business. But that was the kind of stuff that happened in Q1.

Yes. No. That was very helpful. And I certainly look at Dreamforce 2018 when you kind of announced that Customer 360 vision as a kind of a pivotal moment in Salesforce history. So that was very helpful. Digging into the last kind of point that you made there on Service Cloud. Last quarter, first official quarter that Service Cloud eclipsed Sales Cloud in terms of revenue, and it's still growing much faster, right, than Sales Cloud is. And we haven't really seen that deceleration. It's been very minimal over the past 3 years in Service Cloud. So maybe just unpack the growth there on Service Cloud a little bit for us. What's driving the sustainability there? And bigger picture for Salesforce, I know we just talked about the platform vision. But do you see yourselves landing deals with Service Cloud now as opposed to what we're, I think, as investors used to as Sales Cloud being the primary draw for customers?

I would say to the latter question, yes, definitely. And I would say that the market for Service Cloud is huge, as we've been looking on the TAM, the Gartner or you can look at your favorite IDC, whatever the TAM is, it's very, very big. It's fast-growing. What we have noticed, Arjun, is the ability -- it is just so innovation-ripe. And what I mean by that, we're using service bots to help people. We are doing field service capabilities, the need to modernize service, I mentioned public sector. Public sector provides services to its citizens. And the ability to automate and the ROI on that, the math -- it maths out so easily because of the scalability of what that does. And so I would say to you, Service Lightning, with the Einstein capability with service, with the bot capability with service, field service, I feel like this is a very target-rich opportunity for us. And we're pleased. It's one thing to be #1 in an area, which we are in most of our areas. But it's another thing to do what I call as competitive separation, where you try to innovate so much that your customer wants to continue to vote and trust you with their business. And that's what ours is all about, it's customer success. And it's innovation in the Service Cloud. And I'm glad you called out that point too because I've been monitoring this, and we've been calling the crossover point. But this business is -- has got lots of room to run, and it's fun to see how we -- by the way, I use Service Cloud just to bring it to home -- to run finance. All of our order processing, there are so many areas that we use Service Cloud. It's really, really helpful.

Wow. Yes. I think it got lost a little bit last quarter in the COVID concerns that everyone was focusing on. But yes, that's good to hear. One of the -- maybe switching topics a little bit here. Over the past few years, verticalization has become very important for Salesforce, and it's driven a lot of success, especially when you look at financial services, you look at public sector, like you just talked about. And recently, you announced the acquisition of Velocity. So maybe just give us some background, what does Velocity do for Salesforce and your vertical strategy? Does it help you kind of dig deeper into specific verticals or kind of give you broader vertical capabilities, maybe in areas that you're not penetrated yet? Just give us some background on the opportunities of Velocity.

For sure, Arjun. I think Velocity has been something that we've been excited about almost since its inception. It's built natively on the platform. It is dedicated to verticals. And moreover, it has a capability where you can replicate some of the capability and go into more and more verticals. And so as you know, years ago, we talked about we're going to go upmarket in the enterprise. And we've done that and done that in a big way. And that's part of our DNA today. We also just talked about verticalizing. And first, we'd get the team that could speak the language. We'd get the ecosystem, including ISVs and their app exchange, to help us, and then we would do products. And then you started seeing financial cloud and Health Cloud, and they took off. And we've made really good progress. I mean the Health Cloud, for example, there's always, it seems like, something big we're working on in that one, the retail banking side of it, the wealth management side of it. And so we started getting vertical capability not just with language and partners and app exchange for products. And so what Velocity, the reason we're so excited about it is the ability to take products and make that go faster. The scalability and the time to market to create more vertical products is going to be improvement of Velocity, number one. Number two, it's going to take us into places like telecom, telecommunications, where they have developed a tremendous expertise that we're going to go deeper into. And so we're going to -- that's just one example, but we're going to have more verticals immediately. And then we're going to have the capability to develop more verticals quicker. And we like both aspects of that as we continue to drive this strategy for verticals for the future. So we're definitely excited to have David Schmaier and the level of expertise there. And it's time. We're now part of the company, and it's going to be fun to talk to you about products over time.

I was on mute. There we go.

No. No worry.

There we go. You obviously have a very big customer base. It's broad across SMB, across enterprise, across different industries and end markets. When you're looking at your existing customer base, how are you thinking about the growth opportunity that you have in that customer base? How penetrated are you? Do you see a lot of kind of runway for ACV growth [ through Velocity ]? Just maybe walk us through not maybe the new customer acquisition strategy but [ kind of progress ] with existing customers.

Yes. No. Happy to do so. So one of the things that I see is when I look at our installed base, one of the things, and I want to make sure this hits the mark on your question, which is like how much runway do we have. When I look at a couple of things, one is the $170 billion TAM, according to Gartner, growing double digit, one of the most attractive markets in all of enterprise software, in our space, that's a lot of runway. Then when I look at the fact that we're very honored to be #1 and certainly making gains on that, but the market share is really just a reflection of are we making progress, making customers successful? I was heartened by the fact that according to the latest report, we took more share last -- in the last measurement period than the next 13 companies in a row. So that is public data, not our data. But I think what it tells you is between the B2B and the B2C opportunities, just a lot, a lot of runway. And that's something that we've always felt, and we just want to be really, really focused. And I think customers realize -- you touched on Service Cloud, Arjun. And I think when I talk to customers, they think of it as a growth strategy. Think about that. Service Cloud as a growth strategy as opposed to a cost. And I think that's really interesting because what they're doing, back to not being siloed, they're selling, they're servicing. But when they service because they have a 360-degree capability, they can then cross-sell right away. And so I think that's just a great example of more penetration, more progress into an installed base, that would be the second point. The third point that shocked me is just how stable the amount of our new business is that we get from our installed base, which I said earlier, 75%, and about 25% new logo for our new business. And I would have thought over the years, Arjun, that, that would have moderated a little bit. But at our scale as the fourth biggest software company in the world, to still have that opportunity and bring in new business, with a logo percentage at that level, at least in my mind, is another data point that we've got a lot of room to run here. That's what I would throw out.

Okay. No. That's helpful. Let's turn to M&A for a second. In 2018, I believe it was, you acquired MuleSoft, which you talked about a little bit earlier, the value proposition it provides and how it fits into the Salesforce puzzle. It was arguably, I think, one of the most successful acquisitions in Salesforce history. And last year, you acquired Tableau, which is the largest acquisition that you've done to date. Walk us through how the Tableau acquisition and integration is going and maybe how do you think you can take some of the lessons that you learned from MuleSoft and apply that to Tableau to get the same kind of success there.

I would enjoy doing so. I agree with you on MuleSoft too, in that to accelerate growth, while it's bigger, has been really something that we've been pleased about. But the root of that question, Arjun, if I could just back up for a second, it's like when we bought MuleSoft, why did we do that? And back to being obsessively -- obsessed effectively, with our customer. It was around the world trip, meeting customers. We'd take -- we not only talk to them, but we keep track of all the topics and suggestions and then do an analysis of that. And the single biggest thing that came out was that we needed to help them with integration, full stop. Almost immediately, we began the plan for MuleSoft. Almost immediately. But the reason that that's important is that our customers were telling us they need help with that and that they would find that valuable. So that's a process that's not uncommon with us. And I think, frankly, it's a process that's helped us be successful largely with M&A, not perfect. But most people give us a lot of good kudos from the team that all is involved in doing that. So now let's take it to your question on Tableau. We do the same process with people. We're trying to understand what people are looking for. When we talk about like thinking about what's important to people, Tableau is one of the few businesses that can help us improve every single one of our clouds, every single one of them. It can help people see and understand a lot more data that's unlocked through MuleSoft, and it can leverage Einstein. And that becomes a really, really powerful capability. And so we are very excited about that. Now it's a bigger deal. It's going to -- it takes time to leverage that in that way. But the same playbook will be applied in terms of how to leverage it with our Salesforce army of AEs, in terms of how we leverage the other technologies around it. All the different playbooks to bring everybody together, lock and load and accelerate is in terms of doing the very best we can with our growth. Now the one thing that's tricky about Tableau is we never experienced before CMA. Just putting that on the table. That was a new experience for us completely. So right on the eve of getting it, we had to completely put it on hold, and it was this thing called hold separate order. So literally, whereby we were allowed to legally close it, we had to operate it as a completely separate and independent company until we got clearance from the United Kingdom, which we honor that. Trust is our #1 value. We're able to do that. But my only point of bringing that up, Arjun, is we have to then think of the clock as kind of post getting through the CMA, which we just had kind of a -- it was nice to have a quarter where we weren't impacted by the CMA. Of course, we were impacted by COVID. But all that being said, I can tell you that we, as a leadership team, could not be more excited about Tableau. With the technology, with our overall product strategy, with what customers see as value and why they're asking us to have this capability. And I just look forward to doing readouts over the years on how we're doing. Because we -- sometimes you buy something and you go, gosh, I hope that's as good as you think it's going to be. We have a good feeling as a leadership team. I hope that gives you a little bit of construct. And we're doing -- we're now integrating the sales capability and the go-to-market capability. But keep in mind, for an integration this big, it's not like a light switch. There are stages of integration over 3 to 4 years even, in that way. We're very happy about it.

Absolutely. We might have time for 1 or 2 more questions. But I want to turn to guidance real quick.

Sure.

Obviously -- it's obviously a big topic for investors, [ and investors are ] always concerned about that. But if I look at quarter-over-quarter guidance, you're talking about CRPO being down sequentially quarter-over-quarter. But in a lot of what we've talked about today and what you talked about in the earnings call is that we're kind of past the bottom. We're starting to see a recovery, pipeline is stabilizing. So maybe just help us -- or walk us through your philosophy and how you're taking into account some of the current macro conditions in putting out your next quarter guidance and your full year guidance as well.

Happy to do that. So -- and I think it's actually really -- it's a great question because I think you probably have 1,000 different companies you talk to, and each has a little bit of a different construct on how they did it. What we wanted to be is incredibly transparent about how we did it because none of us have ever been through a pandemic before. And it's kind of a given, but it's kind of an important framing. So when we thought about the -- what we could see in Q1, despite not being immune, for sure, to COVID, we put up a lot of business in Q1. And I think people were maybe pleasantly surprised is the feedback we hear. We put up a lot of new business. And our attrition went down, and it actually went down year-on-year not immaterially. And so those are good attributes. Our pipe, as we talked about, as we came right up to the earnings call, we can speak up to that point, was getting incrementally better from our adjusted plan week-by-week and almost day-by-day. We thought that's a good attribute. And then we have to look to the future. And we -- to look to the future, we went back and studied the past and said, whereby nobody has been through a pandemic, we have been through the great financial crisis. What did we do and what would we have modified if we had the opportunity looking back in history? And the first thing we realized is we had to make 2 adjustments when the great financial crisis hit. And we said, let's not do that. Let's measure twice and cut once, number one, and be very clear with everybody about that. Number two, we saw attrition take a tiny dip-up -- or step-up. And then over time, it reverted back down to a path of decline, as you would expect. And in that moment in time in the great financial crisis, as people worked through that short-term period, which is only a point in time, that's what we learned as we looked back. And then, of course, it sailed -- the company sailed through it with flying colors and is where we're at today. And so in the same point, this is a point in time in a company that is unbelievably strategically well positioned. We know that. We can see that with 21 years of market share gain. We can see that with the Gartner customer feedback. We can see that with our growth rate relative to the competition and such. But when we have a point in time, and that's what this is, we said, let's assume that the IT spending recovers to the beginning of next year. Fine. Some people picked yesterday. Some people picked fourth quarter. We picked the beginning of next year, factor that in. We said, let's assume that attrition goes up slightly, dollar attrition. It's not customer attrition per se, but dollar attrition, assuming that customers are in business. And we said, fine, we'll do what we've learned there before. And we'll go ahead and model that out. We'll make the adjustments, and whereby a lot of people are not even guiding, we said no, let's guide. Let's try to help as best we can and be as clear as we can on our construct and be appropriately conservative. And that's what we tried to do. We know there's a test at the end. And so we dealt with the duality of what we thought was a good quarter and the reality of an unknown. And the best thing we could do is be clear about how we're handling the unknown. And then our investment community can take that into consideration as they interpret how they think about the world. That's what we did.

That's very helpful. Really appreciate the transparency in keeping the guidance. I think it helps us all out. But I think we're up on time here. But I want to thank you for joining us. It was a pleasure having you, and hope the rest of the day goes well.

Thank you, Arjun. I really appreciate the chance to chat. And wish you guys all the best, and wish you just a fantastic conference.

Thank you, Mark. Same to you.

Take good care. Bye-bye.