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

Thank you, everybody, for joining. My name is Alex Zukin. I cover enterprise software at RBC. And the headliner for the day, I'm very pleased to be joined today by the CEO of Salesforce industry cloud's, David Schmaier. David, thank you so much for being here.

Alex [Audio Gap]

We've known each other for a couple of years. We haven't seen each other for a while, but not everybody knows your story and not everybody knows the Vlocity story. So maybe just to start for those on the call, what was Vlocity, your role there? Why was Salesforce interested in acquiring the company? And what's your role now at the organization?

Sure. Yes, maybe I'll go before Vlocity. So I've been working in the front office for about 3 decades. So I was a product person at a Harvard B school back in the '80s at Oracle, where I worked with Marc Benioff and Tom Siebel. And I became one of the founders of a company called Siebel Systems, which was a pioneer in the CRM business. So back then, the worldwide market for CRM software, according to the analysts, was $50 million globally. So we thought it was a pretty good idea, but it turned out to be a really good idea. And then later in life, I saw the ascendance of Salesforce and decided that really there was a huge opportunity to take all the great things that Marc and Parker and everybody had created and take that in a very industry-specific way by adding industry clouds on top. So I founded Vlocity with 3 of the Veeva founders, who were prior -- who were former -- Oracle Siebel former colleagues and friends. And Veeva, as you know, was one of the largest companies ever built on the Salesforce platform as a public company today in the life sciences space. So we set out at Vlocity to build kind of multiple industry clouds in partnership with Salesforce as both the platform and Salesforce came on early as our largest outside investor.

So now you're -- and I apologize, I sometimes have to put the mute on so that the screens don't flicker. It's a feature, not a bug, of Webex, apparently. But let's talk about now you're inside the tent, you're inside the Salesforce umbrella. You're not working -- you're working with Marc directly. You're on the phone, closing big deals. What's been the biggest surprise for you so far being inside the Salesforce umbrella?

Sure. We've been -- at Vlocity, we built a great company, one of the fastest ever built on the platform in partnership with Salesforce. So I worked closely with the entire team, including Marc, to build that company, and it was great. But when you join a company, it's obviously a little bit different, as you asked. And so a couple just high-level takeaways. One is just Salesforce really has an amazing value system and culture. So I've worked for some bigger software companies and some good ones that everybody knows of. And this really is a different company. And so I just don't know how else to say it, things like therefore are core values and the Ohana value system and the way people rally and are agile and just the general passion and enthusiasm about what Salesforce is doing. I mean people really believe. And so it's just really cool. It makes it going to work every day exciting. So that's one thing. And then the second thing I would say is the -- just the welcome that we've got for Vlocity. And my new role as CEO of Salesforce Industries is to take all the industry clouds we built at Vlocity and also the organic Salesforce Industries products and really take that to the next level. And so it couldn't be a more exciting role. And just -- I'm just thrilled that everybody at Salesforce has been so welcoming and excited about the future. I think people really see the opportunity before us.

Well, this might now be the biggest software company you've worked for from a market cap perspective...

You know what, I think that's true actually. I always thought of Oracle as bigger than Salesforce but not true anymore.

So I guess, David, look, I think color us not necessarily surprised. I think we expected the company to have a good quarter in Q2. What we were hearing from the channel suggested incremental improvement in fundamentals and trends. But man, it was a little stronger than even we anticipated. And clearly, the stock reaction was stronger, I think, than anybody anticipated. So what was your experience in Q2? Talk to us from the front lines. What did you see from your pipeline, from the customer deals that you were signing? What surprised you? And again, it appears that the demand environment has meaningfully changed in a pretty short period of time. What's going on?

Yes. Again, this was my first quarter as an executive at Salesforce. So I don't have any specifics out of what Marc and Mark commented on in the earnings call. But what I would say that they did comment on and I think that Workday and others have commented on, and I certainly saw this, is if you didn't believe in digital transformation before this time, you certainly do now. And so it doesn't take a PhD in computer science to figure that out. And so it's really kind of amazing that -- all the things that we do in the software business, listen to customers, build really cool software, do requirements gathering, do tailored demos, write proposals, close deals. And even more amazing is doing full digital transformation projects and bringing people live all remotely. And it's really, really cool that you can actually do all this remotely, I think, number one. And number two is that because Salesforce truly is a pioneer of the cloud, cloud companies, in my opinion, have a real advantage. And I worked in the old days back in the on-premise world and now in the cloud world. And I mean you literally can do the whole thing virtually. And so it's just pretty amazing that you could one day not go to your office and work from home and you still -- everything works, it's phenomenal.

It truly is incredible. We call it kind of the rise of Work 2.0 and being completely location agnostic in your ability to provide value. So I completely agree, it's truly a revolutionary time. I guess, David, though, one thing that I get asked a lot by investors, and I'd be curious on your perspective, is it's clear that, digital transformation, it was a thing. It is a thing, it will be a thing, but there's a lot of priorities. There's a lot of budgetary pressures. How are the conversations in those large deals that you're participating in or participated in, in the quarter? How are they similar or different from the pre-pandemic conversations, not necessarily as an executive of Salesforce but as an executive talking to other executives?

Sure. Yes, I think it's as you would expect, but it's just kind of interesting when you see -- I do this all day. And when you kind of see the trend lines, that I think both things that you said are right, Alex. One is people are certainly looking at the dollars and cents just because everybody is watching what's happening to their business because this is an exogenous event like we've never seen before. And so you've got -- if you're not -- if you don't have your hand on the steering wheel and you're not watching carefully, you're doing something wrong. And so everybody's like leaning forward in their chair, watching what's going on. So that's interesting. You might think that would make people spend less, but I do think there are people that were maybe vacillating on digital transformation. I mean any CEO you talked to before this kind of got that this was happening, but I just think that it kind of took the priority level to 11 out of 10. I mean just this meeting we're having, we're doing it all virtually. I mean, if you can't conduct your business in a digital way, increasingly somebody in your industry can. And it's just kind of that simple. So I think anytime in turbulence, it's like -- I always think of these things as a -- what do they call those, the boats with the paddles where you're kind of going down a stream, and when you get in rough waters, different people can kind of dart ahead or dart behind. This is one of those times of rough waters. So this is like what the winners and losers are made. A kayak, a sea kayak or something like that is kind of the analogy. And so that's what the CEOs and management teams are looking at is, "Hey, I need to transform. I need to do it before my competitors do. And if I don't, it's not going to be good." And so at some point, these are decisions you've got to make.

Is this a catch-up? Like, I guess, is there a feeling like there were laggards and they were -- that had talked and discussed the digital transformation but always found a reason to put it off and now they can't put it off and so there's a bit of a catch-up [ really ]? Does that enter into the thinking either from an opportunity or a nervousness perspective, that yes, we're getting through the pipeline we had. It's great because now they need to move. They have urgency, right? But once we do that, where is that next win? And maybe comment on pipelines as well.

Yes, sure. I think it's, like anything, there's a full Gaussian distribution of people, right? So there are some people way over here and some people way over here and some people in the middle. I mean I've seen some companies that have been kicking around our pipeline for a long time finally wake up and get it and like, "Holy cow, we got to do this right now." I see other companies that want to do things but are still mired in bureaucracy or there's still the classic IT professionals that want to build all the stuff themselves. Why? I don't know. I mean, in the year 2020, you can buy -- there's an app for it and basically everything. And so why these people custom build it really never -- it always takes longer and always costs more money, but people still want to do it. I think they want to be computer hobbyists. And so there's different, like, local politics within these companies that kind of make some people laggards, but I would say the sea change affects that, too. Like, there's kind of people coming and going on the executive teams and new people coming in are looking at these things with fresh eyes and saying, "I'm a big believer. If you're going to play, you might as well play to win." And so you're seeing the people -- the smart people are playing to win and saying, "Hey, I'm going to like -- we're going to go for it." And then -- but not everybody fully gets it or not -- or some people get it, they just can't get it done in their companies.

I'm with you on that notion of playing to win. I guess I'll shift the conversation to something near and dear to your heart, which is verticals, right? And so from a vertical perspective, when you think about the industries that you're close to and are core to the Vlocity business -- or were core to the Vlocity business, now more so the Salesforce industry cloud, can you give us a sense of the challenges that you're -- that they're experiencing right now in kind of the COVID-impacted landscape? And so that investors can just better understand and empathize, what are the challenges and which specific verticals that you're close to? And how you can partner to solve those challenges.

Sure. Yes. Just to recap, and I think this is all publicly available information on our website, but we focused on 6 vertical industries at Vlocity. And these are the 6 industries that are all regulated and they're known to have the worst customer service. And so it wasn't by accident. We focused on these on purpose. We knew from prior experience that they needed help. And to kind of go through them, like, typically the worst is government. And then there's your telecom provider, and then there's your insurance carrier and then there's your health care company and then there's your energy provider. So these are all regulated industries. And in the year 2020, I mean, our vision was you shouldn't have to wait in line to renew your driver's license or it shouldn't be like getting your wisdom teeth pulled to get insurance or health care. It should be easy and it should be digital and it should be modern. And so what we did is build cloud-native applications that allowed people to take the full power of Salesforce, but now it comes out of the box for those 6 vertical industries. And it really was exciting as Vlocity and even more exciting as Salesforce because now we're part of the mother ship. But these industries, again, it's like we said before, there's this distribution of decision makers. Some of them really get it, and they're the innovators and the early adopters. That's starting to move to the mainstream now where people are saying, "Hey, I got to transform." And then there's, of course, the laggards who are maybe a little more frustrating to deal with or we just spend less time with the laggards [ till ] they get it. But those industries, there's challenges. And some of them are similar, some of them are different. I mean I'll give you a couple examples of industries. Like, in the telecom industry, there are some upticks, like there's 5G and broadband. Broadband has never been more important. I mean this meeting is a testament to it, right? And so if you don't have high-speed broadband in your house, you're going to get it. And so that's just kind of an obvious one. Health care is obviously pretty important in this day and age given what's going on. And so there's just -- there's puts and takes in these industries. Luckily, we didn't build an app for the cruise line vertical. And I didn't -- all kidding aside, I mean, some of these industries are better than others, but -- and it's interesting, too, to see changes in these industries. Like the government is being forced to do things that they never really did before. And that's why I applaud -- it's been great to be part of Salesforce. Like Salesforce created Work.com to help governments and companies go back to work safely and did it in record time. And it just shows you the agility and nimbleness and innovation of Salesforce, it shows you the power of the platform. And it shows you the strain on these industries and organizations, that they got to do things that maybe they couldn't do before but now they're trying to.

David, from a vertical perspective at Vlocity, where were you furthest along, furthest penetrated and from a vertical perspective between those [ stints ]? And then if you look at Salesforce, where is the -- I mean, where can you make magic happen in terms of just kind of 1 plus 1 equals 30 where you had expertise that they didn't and now you all -- you have a combined angle and there's a lot of low-hanging fruit to go get?

Sure. At Vlocity, when we founded the company, our vision was not to do 1 industry but to do 4. And so that was communications, insurance, health and government. We then, over the years, added 2 more. So we added the energy vertical and we also added the media vertical, which we had sort of -- we were sort of half doing as part of the communications and media space, but we decided to hire a leader and kind of segment that out. So we've been in those later 2 industries for the last couple years well in advance of the acquisition. And so those -- and we picked those strategically. We wanted -- the formula was actually very simple. They were regulated industries. They were ones where they had the largest TAM, and we knew it from our prior experience. And then we measured another important factor, which was the need for industry-specific capabilities in the software. So some industries, you can kind of take generic CRM and just use it out of the box and add a couple of fields to it, and it works pretty well. And others like -- I'll pick our sister company, Veeva. Like I know from prior experience, in the pharmaceutical industry, if you don't have a purpose-built product, you're not going to sell anything. And so I built a pharma CRM product before at Siebel and then Veeva did it again in the cloud. And so like without those industry capabilities, there is no business. And so some of these businesses are more industry specific than others. I'll give you an example. Like in the telecom industry, which was one of our largest at Vlocity, they do things called moves, adds, changes and disconnects to your service like when the Verizon or AT&T or T-Mobile person comes in your house. And the concept of a premise and the concept of activating the service and the geolocation of, if you buy it, [ it's turned on ] in your house, not my house, those are pretty industry-specific concepts. And so -- and that's what these companies do every day so the software has to reflect that. So those are some of the verticals that we picked. Now if you look at our 6. The second question you asked was -- 3 of them are kind of net new industry clouds to Salesforce. So communications, media and energy are net new. And then our other 3, enhanced or enriched existing clouds. So Vlocity Health, which is Salesforce Health Cloud, there's not much overlap. We were sort of smart in kind of going after different things. Vlocity Insurance adds real depth and insurance to financial services cloud and our Vlocity government applications and public sector applications really provide new apps for the Salesforce government cloud. So it's -- 3 of them are new and 3 of them enhanced existing clouds.

And I know you love your children, but if you had to kind of stack rank the TAMs or maybe just level set for us where you think the largest incremental opportunity is that investors should kind of focus in on, where -- how would you stack, forced rank it?

Sure. The -- our view is every single vertical we're going after, there's a real business. Like, I would say that, from prior experience, we think in the long, long, long run, there's a real industry cloud business in every one of these. And it's kind of our job to, like, build the products and then build the business, but I like our chances because I think we picked good ones. Then if you look at the industry analyst numbers or if you look at data from other companies that are in some of these spaces, so just publicly available data -- so this is not my opinion, these are kind of facts. I mean I don't have the exact numbers on the top of my head. But financial services, telecom and media, HLS and government are some of the bigger ones. Like, those are massive, massive spaces. And so those are some of the bigger ones. But again, I think there's an interesting business in each and every one of them. I mean we now have -- I think what's really cool, too, is with the Vlocity acquisition, all of our stuff was 100% native on the platform. So usually, when a bigger software company acquires a smaller one, you got to -- there's a whole integration project like the Oracle fusion or what some people called confusion project. And we don't have that. Like, our products are already built on Salesforce, and they're 100% native because we built them that way. So the cool thing is that's already done. And so we have -- if you count the net new ones and add the existing ones, we have 8 industry clouds that are all built on a common architecture on the world's leading cloud platform. And so that's pretty exciting.

So let's get into the master plan, [ right ]? What's your master plan to scale the industry cloud business at Salesforce? You are a CEO of this division. Talk to us about go-to-market, what you need to -- what we should think about bringing on building that team. How much of the products are kind of fully built out and ready to go and ready to grow versus need to kind of think or tailor it for a year or 2?

Sure. Yes. I think that like all companies, Salesforce is going through an evolution. So one of our former execs, Keith Block, had talked to a lot of the financial analysts about the language of the customer and going to market by industry. And so there's a lot of earnings calls and other discussions out in the public domain that where Salesforce had organized increasingly by vertical and sales teams. And I think that makes a lot of sense. So I'm a big fan of that. I'm a big believer that magic happens when you have verticalized sales teams with verticalized software. Like, that, it's like 2 plus 2 equals 5. And so that's really -- to be very, very simplistic, that's the play we're running. Like, we verticalized sales teams, and that's still continuing over time. I mean you have to look at where does it make sense to do that on a worldwide basis and now Salesforce has built a number of industry clouds and Vlocity has built a bunch of industry clouds. And so now the union of those 2, we have a bigger and expanded product portfolio to take to those verticalized sales teams. So I think it's build the enablement, build the awareness, go deeper, rinse and repeat is kind of the model. And so I don't think it's magic. I think it's just getting the synergies of us becoming part of Salesforce and just amplifying it. And I think the headline with the Vlocity acquisition is Salesforce is doubling down on the industries. And I think if you go to a telecom CEO or an insurance CEO, and you say, "Hey, do you want generic cloud software? Or do you want telecom-specific cloud software or insurance-specific cloud software?" I mean that's kind of an IQ test. And so I think most people will want the one that's already tailored for their business. And so I think of the industry cloud, as we call it, industry specific in the cloud, this is going to become the new normal, just like digital is going to become the new normal. And we're seeing a lot of receptivity to that.

So David, on the telecom side, there was a large deal that Marc referenced on the call, and it was actually signed, I believe, in the prior quarter, which was AT&T. Is there any kind of incremental you can -- was -- this is obviously a deal that was in the pipeline probably long before the acquisition. But anything there that was either additive from the Vlocity side now being a part of the Salesforce umbrella or anything we should look forward to as a kind of [ part ] of the possible longer term with respect to that kind of a scaled customer?

Yes. I don't think I can comment on specific deals or specific customers beyond what was already said in the earnings call and in the press release, but it's super exciting. I mean AT&T is one of the biggest telcos in the world. And I think that the story is incredible that they want the Customer 360 for all their different channels. And for a company of that scale to be able to know who you are and what you want and when you want and why you want it and to provide you better service and to provide greater loyalty, I mean that makes a lot of sense to me. And that's kind of the story we're telling around the world. And nobody tells it better than Marc, but it's -- that's a...