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

Welcome back to day 2 of the Jefferies Software Conference. My name is Brent Thill. Thank you for joining. We're really happy to have with us Mark Hawkins, President and CFO at salesforce.com. Mark and I have known each other for a long time going back to the Autodesk days. I've worked with him at Autodesk and now at Salesforce. And Mark, thank you so much for being part of our virtual fireside chat. I appreciate your time. And congratulations on your virtual run from L.A. to San Francisco over the summer. That's an impressive feat. When you think about ...

Brent, I'd just say it's a pleasure to be interacting with you and the investors. So thank you guys for hosting the conference. I really appreciate the opportunity.

[Operator Instructions] Mark, maybe just to kick off, you just delivered a $5 billion quarterly revenue run rate for the first time in the company's history, high 20% growth. Maybe just talk to what this quarter meant. I think given -- I think you ticked many boxes in terms of the growth, the margin improvement. And then I think investors wanted you to take a small break from M&A. You kind of hit all those boxes. Give us a sense of kind of what you're seeing in the business.

Sure. Thank you, again, Brent. And we were really pleased with the quarter for sure. It was a strong performance for the company. It was balanced, and it was all done in the midst of this uncertain pandemic environment. We're mindful that the customers are trying to find their way. Our job is to support their success. But what I liked -- a lot of what I liked about the quarter was the balance that you point out, Brent. We had strong performance at the top line, at scale. We had strong performance across our clouds, across geos. We were able to really kind of have everything go our way on this particular quarter, and it was really great to see us performing even at -- even at historic norms, it was just a really strong performance. I like the margin leverage. And I think the investors appreciated that. So it was good.

When you think about kind of the key ingredients that led to what we're seeing in the core business, how would you articulate kind of the pieces that maybe we don't get to see that you see on the inside? What's really happening from the underpinnings of this?

Yes. I think what -- when you think about the strength of the quarter, Brent, one of the things that we saw was strong new business generation even by historic norms. And that was certainly very encouraging in light of the heavy, heavy uncertainty navigating through the pandemic, as we thought about it at the onset of the quarter. I think you saw, for us, we saw higher also license new business in addition to our historical strength in subscription. I think you could see also, we had things going our way like our plan for attrition actually was better than we expected. Again, everything was coming in, in a good way as we were strongly supporting our customers. We had foreign exchange, some favorability. And then we had talked about this AT&T transaction that was quite exciting. And we actually -- that progression of that implementation is going very well and got to a point where we were able to even recognize some additional goodness in that way associated with that deal. And we're just so proud to serve them. So I'd say it was one of these things where all the different things fell into place in a really favorable way. We were encouraged.

In the [indiscernible]?

No, I was just going to say, and obviously, that drove the top line. And of course, for me personally, Brent, you and I have talked a lot about, obviously, the margin importance. We hit a record for operating margin in the history of the company. First time we ever delivered $1 billion in non-GAAP operating margin in a quarter. We had a GAAP profitability record, all while delivering growth at scale that is hard to find. So -- and I think we did say we're well rounded. Well, I like the fact all our clouds performed, I like the fact that all the geos performed, which gave you a sense of strength that I think maybe surprised some in the marketplace, just the pervasiveness of the strength.

And the durability of that growth, maybe if you can comment. I think there have been some concerns that we saw kind of a sugar rush of demand that companies kind of emerged from this pandemic and said, "Hey, we've got to spend. We've got to digitally transform." But the durability has been called in question in terms of how long-lasting this is. And it'd be great to get your thoughts. Obviously, when customers make a commitment to your platform, this isn't a 1 or 2-quarter commitment, this is a multiyear commitment in most cases. But talk about that durability from the top line?

Sure. No, for sure. And one of the things I just -- I will share with you that we hear just nonstop. And I just want to kind of set a tone and come right to your question. We've always felt that the digital transformation was critical. And you can see all kinds of third-party market studies as some that have been public to a lot of people. We are hands down listed as in the best position possible to deliver the most strategic part of a digital transformation, which is things associated with the customer, with growth, with customer care, the brand, the marketing, the whole go-to-market side of it. So if the digital imperative was important before COVID, one of the things that people have watched is, in a way, Brent, like 10 years’ worth of humanity being digitally enabled in the last 6 months. And people realizing that digital being modern and being digitally transformed or just modernizing your digital capabilities is [ not a nice ] to have. I mean companies are literally failing. They don't have that capability. So we feel like that tailwind that's been a strong tailwind is actually being stronger going forward. And we hear that from across all kinds of industries and strata. That's one big point. The other thing about the durability of growth is you can look at our track record for the last 21 years of delivering growth and now continuing to deliver growth at scale, 29% at this size is just hard to find in a period. But separate from the digital tailwind that's out there, the digital transformation tailwind, what we're seeing, Brent, and your team and your investors can check this out, is there's nobody in our marketplace that has a Customer 360 equivalent. We are persistently competing against point solutions in a world where people not only want to digitally transform with a sense of urgency that's even greater, but the Customer 360 is absolutely separating us. You can see it in the third-party market share data, you can see us persistently taking share. And I know -- I don't have to tell you that growing 29%, we just took a lot more share this last quarter and persisted again in that way. So I think the digital imperative, the Customer 360. And I think you're right, the multiyear arrangements support us. And I'd say the last thing on the durability is the pipeline. We talked about at the time of the earnings call, our pipeline was consistent with historic norms. And I think these are the kinds of things we look at to give our view before we guided at the time of the earnings call. I hope that gives you a little bit of a high-level perspective and then right down to specifics.

Yes. And then turning to the second thing that I think investors really enjoyed about the quarter was that record 20% margin. We knew you were capable, but maybe we didn't see it in action, you put it into action. And many are kind of asking your thoughts about, again, the durability. And I go back to kind of the one thing that we've all known from Mr. Benioff is he does like to spend. And we saw that in his book about spending more on the B52s than I think you had revenue that year. So that's been a consistent trend. But when you have a -- the issue that's going on, you can't hold all these events, you can't do all these things, everyone's asking, "Well, why -- how would margins fall back if you can't have these events anymore?"

Yes. So I think a couple of things here. One, we were pleased, Brent, to just show people that profitability is a choice with our model. We have such a strong business model. But mind you, we raised the operating margin for the year and at the same time, we accelerated our go-to-market growth into the second half from first half of '22 to really capitalize on what is a totally, totally unique position in one of the most attractive markets in all of enterprise software. So we're in the pole position. We're #1. We continue to separate. And so we're investing and we're delivering more margin. But you could see in Q2, operating margin is a choice on how much we deliver. And I'm really proud that we were able to do that. Brent, you and I remember -- we're having dialogues. Years ago, I remember, we are in high single-digit operating margin, and we delivered 20% plus this quarter, not to say better, better number done. We got more work to do, but it is a choice. And what I really like is not only what we did in the quarter, but the fact that we're accelerating investment and really preparing ourselves. And Mark does like to invest, to your point, because he's trying to build something. This is a generational opportunity. This is a generational company. Brent, you've watched it from almost the beginning when we're in an apartment in Coit Tower to now being a Dow Jones 30 company. We had to invest and make decisions to really build this generational company. Now we have a very unique position in the world, right when digital imperative has never been critical, and it's never been more critical in the space that we're in. And we now have a chance to serve our customer in a better way. So that's what I would say. Maybe you'll hear more about our profitability views for next year, we'll do that, of course, in February as well.

And where do you see the big investments coming back in the back half of the year that you didn't maybe see this quarter?

Yes. For sure. So the thing I want you to think about is if you think about our investments, think about product, think about geo and go-to-market regions and think about industries. And we are accelerating hard in those 3 areas to really support this durable growth that you've seen for 21 plus years and unmatched at the scale. It's hard to find a Dow Jones 30 company that grew 29% last quarter. We've been delivering for -- in a consistent way for a good period of time.

Great. I think the -- between revenue margins and I think the third thing that was investors wanted to hear was Mark saying, "We're not in a good M&A environment." And I was curious if you could shed light on what that meant. Everyone's kind of asking, does that mean there's nothing left to buy or valuation is too high. Or what that actually meant from your perspective? And...

Yes. No, for sure. The thing that I would say that really, I think my additional narrative on this is really that Mark talked about the environment right now, you look at -- obviously, there's all kinds of things to think about, valuations, things of that nature. But I think the spirit of what Mark was really getting at is Tableau has been the biggest M&A that we've ever achieved. We're very happy. I hope that was really clear. We're very happy with the way that's going. Same way with MuleSoft, ExactTarget. Brent, you've watched us make plays that have really penciled out, so to speak. But I think integration is big on our mind from that standpoint and really having Tableau do all the things that we think it can do. When you think about it, we've unlocked the -- we've widened the aperture for MuleSoft to unlock data for everybody, which is extremely valuable. And now how do you see and understand data with Tableau, putting that as part of the picture plus our entire Customer 360 solution is just proving to be a really winning strategy. I think integration's on our mind for Tableau. But Mark also said, beginner eyes. We always try to approach the market-based on what the customer wants. We always try to stand back and think about that, and we've always been opportunistic for 21 years. I don't think that's changed at all. I just think Mark's also said, "We're busy." We've got integration. We got a great thing going with Tableau. But the customer wants more and more from us than ever before, and we're always trying to keep again our eyes there. So I just -- that's what I would say. But we're busy. I want to see the integration go well. And as you know, Brent, some people think of an integration like it's a month or 2. Obviously, we had CMA slow us down. Then we ran right into COVID. But our playbook is working, and you're starting to see Tableau really with the -- ticking all the Einstein stuff coming together and running an analytics business that is very exciting. So hopefully, that helps you.

Yes. Separate from the M&A discussion, I think many investors saw the Snowflake investment and was curious to get your thoughts on that. And any color you could shed, I know they're on the road for their IPO, and there's a lot of interest in that story to put it mildly. I think they broke their Zoom meeting the other day from investors trying to get in. So can you provide any details around that?

Sure. We -- as part of our Salesforce ventures, one of the things that we've done, Brent, is probably 2 motions. We've always tried to stay in touch with the community and also look in particular for things that might be of interest to our customers through collaboration or whatever the case might be. And so we're always trying to understand what's happening in the tech environment. And we invest in a lot of different companies. As you know, our portfolio is more than 200 companies. And so one of the things that -- Snowflake is obviously part of that, in our ventures fund, and we're excited about it, obviously. And we try to be very thoughtful in our investments. And that's what I would say. Like, [ within this ] we've done this for a long period of time. We're going to partner with them. We're going to continue to collaborate. And that's what I would say about it. But I know it's got a lot of excitement out there. I understand.

Yes. You mentioned on Tableau that you're very pleased. Are there any kind of mile markers or any updates around how you would -- you're basing that decision, what you're seeing? Is there -- how would you basically put more finer points to that comment that you're pleased with what you're seeing?

Yes. I think one of the things -- first of all, if I just say a few things about Tableau. When you buy -- when you have, like, a lot of experience with mining companies, which I do, we do, you begin to understand how critical culture is, number one. And the culture is super compatible with these companies. Number two, you begin to see that this is a company that can help improve every single cloud that we have, in addition to being an outstanding market in and of itself. And the way it plays with MuleSoft is unfolding as we would hope. Tremendous leadership team, and then we are able to begin to work together right away to think on how to go-to-market and use the playbook, the same playbook that helped us with MuleSoft, ExactTarget and some of the other M&A that has proven to be very attractive to the investor. And so I would just say that having experience in helping to take assets and just create a world-class portfolio. That's what we're doing. And you've seen what we've done with it. And in the past -- and I mean that's what I would say. Obviously, we compare those to all kinds of internal metrics you can imagine, including our original expectations.

Great. You mentioned MuleSoft. I guess that, I think, you highlighted at the last Analyst Day about the synergies and the real acceleration that you gave to that asset. Maybe if you can just further comment about what you're seeing from MuleSoft and how this is helping this whole digital transformation happen?

Continued strong performance with MuleSoft. And one of the things that is very clear is how many -- or Brent, this is like a real insight for our company. We talked to you. I know you've heard this story before, but for all of our investors, when we decide, like in that case, to buy something, it was driven by a lot, a lot of customer input. And the story was that Bret Taylor went around the world, where we have a [ cut ]. We used to travel, right, and we would go meet with all these different customers around the world, and we would talk to them and we would analytically tally all the good stuff that they talked about in terms of what they need, how can we support their success. Well, at the end of that tour, the #1 single request is integration and helping with integration. That was immediately -- when we came back, we immediately engaged and beginning to look at MuleSoft to really go drive this thing. And what we found, once we bought it, is exactly what the customer said is that they wanted help and they started buying it. So to listen to the customer about the target and about the need was the beginning of success on this particular investment. Once we got it, the customer was serious about it, they really did need to help. And as we keep unfolding this thing and we really weave it into our Customer 360, that momentum continues to build. So I would say we kind of got the North Star. The customer pointed us to the right place. And now we're just trying to keep refining this and deploying it in a way that helps them. And they're using it more and more. Like, if you look at, Brent, the -- a number of the major deals, AT&T deals, so on and so forth, you see -- with big deals like that, you see MuleSoft being used more and more and more. And I -- by the way, this is the last point. I think this is going to help also, as we think about it, customer success long-term and attrition long term, I think this is going to help us be even more valuable to the customer.

Another transaction that looked really interesting to us was Vlocity. I think they were in your building. If I'm not mistaken, they were a very close partner. And probably integration there is going to be a little easier given they're already instrumented on your platform. But what does Vlocity bring that you didn't have before?

Yes. No, I think that's great. The thing about Vlocity, Brent, is it accelerates our already strong industries deployment. We get 6 additional industries that we get to work on even more so if you think about it. And you've got communications, media and entertainment, energy and utilities, insurance, health, so on and so forth, government. And what we're able to do is make even more progress on the industry side. The thing it also does that I tried to call out in Dreamforce last year at Investor Day is it picks up an incremental $160 billion TAM. So that's incremental to an already massive TAM. And if you look at some of our existing industry SKUs that we sell, you see attrition rates that are down into low to mid-single-digit compared to a company attrition rate that's less than 10%. So the attrition rate in industries is way bigger -- better. The TAM is way better and the price delta, obviously, when you're adding more value, value is better. So we like everything that Vlocity is doing to move us down the path of industries in a more progressive way. So I think David Schmaier is a terrific executive. And I think that's good.