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

Hello, and welcome to the Fourth Annual Wells Fargo TMT Summit. My name is -- pardon me, Phil Winslow, I'm the software analyst here at the bank. Very excited to have Mark Hawkins, longtime friend, join me up on stage today for what, unfortunately, will be our last fireside chat together from Salesforce. But Mark, like I said, it's been a pleasure working with you, not just in Salesforce, but in Autodesk before that. And congratulations on the news of your retirement.

Thank you so much, Phil. And it has been a great pleasure to interact with you, great partnership, friendship and the whole investment community, I'm very, very grateful and really looking forward to this discussion actually.

All right. Well, obviously, Salesforce has made quite a few headlines last night. So I've heard. Let's just drill right into those right off the bat here, and then we'll then kind of maybe level it up on some of the mega trends. But I guess starting first, Slack. Obviously, there was news that hit in the Wall Street Journal last week about this. But wondering if you can walk us through the kind of thought process, the vision, the price, opportunity costs, et cetera.

Sure. Of course, and we'll go all the way through that and the opportunity. I think one of the things, and of course, Bret Taylor is going to talk about that at length at our -- Dreamforce IR date is coming up very soon on the 8th of December. But let me just share with you that one of the things that Marc Benioff has always done, I don't know if a lot of the people on the Zoom have ever played hockey, but they always say to play hockey well, you don't skate to where the puck is, you skate to where the puck is going to be. And when we think about Slack and we think about the paradigms that are happening in the world, when you think about -- just ask yourself personally, are there more applications today that you're personally dealing with on your iPhone, let's say, for example, than you were 10 years ago? And of course, the answer is yes. Has it been more in the last 3 years? And the answer is, of course, yes. If you take it at a corporate level, the whole, as the world digitizes, as economies digitize, as companies digitize, as families digitize, as individuals digitize, there is an exponential growth and the need to integrate. And so one of the things that Slack does, and is the best asset in the world, is the opportunity to be an integration layer and a collaboration layer and a communication layer in a modern way that work will happen in a digital economy. We're excited about that. And we're excited about that in juxtaposition, not only is a business that we can run wall to wall. In so many ways, by adding something that, I'll give my sales team a compliment, kind of the superpower of an enterprise distribution system that Salesforce has. So you have a company with a great offering, and they have a self-service model, which is super exciting. But in terms of they're very, very nascent at being able to hit the mid-market, the enterprise level, and that's something we do really, really well. How many times, Phil, over my career, I've seen people take a great product that hasn't been fully distributed, buy it, fully distribute it, make money. There are like a litany of companies in terms of M&A that, that alone rationalizes an opportunity with that [ real-world ] opportunity. But for Salesforce, that's only part of the picture. Of course, we're going to do that. But at Salesforce, what we're also going to do is we're also going to take a look at this amazing capability and apply it to our own clouds, apply it to our own capability and apply it to our own ability to -- for workflow for engagement layer for integration management, for sales cloud, service cloud, marketing cloud, all our clouds. And so we see an opportunity to do even more unique things. And I'm not going to fully articulate the full vision that Marc and Bret have because, obviously, there's a lot there that's going to be secret sauce as we go forward. That's a huge opportunity. Running this as a stand-alone business with the super power distribution is an opportunity. Put it together, and it's a uniquely great opportunity and a uniquely great asset. That's what we look for, and we couldn't be happier about that. So I think the opportunity is huge. I think the -- when we go forward, we know that applications and integration will be more important. And really, really happy to have this opportunity. And by the way, so what happens when a -- assets such as this bubbles up? A lot of people, you think about it in business school, hey, we're going to have a perfect plan, this is exactly when the assets are going to come up, we're going to do this, this and this. No. Opportunity surface, unique assets trade once ever and it's done. And they happen, and they happen in a way that when they come, you have to be prepared to know, is this something that is important to you? Does this fit into your vision? And if it does, you go. So that probably is not a news flash, but I think if there's one thing we've learned this year and the COVID year is things change quickly. So I just want to call that out. And as far as the price, don't forget, we had this same discussion, not you and I, but the market on MuleSoft. And people said, wait a minute, like help me understand, why do you need to buy MuleSoft? Like why does that make sense? Is it expensive? People are not asking us that a year later, right? And I think from an M&A standpoint, I'll just end by this by saying that our ability to do Slack is because we are coming from a very strong position from the core. Our business is strong. And we are operating from a position of strength. And because of that, we're able to take advantage of something that our customers want, and we're building a generational company going forward and adding this asset to it. And we can talk about the core when you're ready. But that is why we're able to do this. We're investing in our core. We're strong in our core. Lots of stuff I can talk to you about there, but this is going to help us be even better on this journey.

Great. Yes. Definitely, we want to come back to the core because there's so many exciting things that are going on there, obviously, and we saw them in the numbers in Q3 last night. But I'm going to do rapid fire now, some questions that [ I have not known ] over the course of the day here on Slack. First off is, if you think about Chatter, if you think about what that was sort of potentially, it would be sort of an enterprise social network connectivity, call it, communications and collaboration glue. One of the questions I get is like how is sort of Slack "different than" Chatter in the sense that you can monetize Slack, whereas Chatter may be as not quite grown into what some people thought 10-plus years ago.

Yes. So the thing I would say about Chatter, I mean we use it internally all the time. But again, Slack is real-time asynchronous ability for collaboration, for engagement, for workflow. There's so much more that, that does than Chatter. But Chatter was the right idea. And one of the things that I always think about, and I'm just going to abstract away from our situation and say, Paul had a good idea that didn't quite take off. But shortly thereafter, Steve Jobs did a great job with an iPhone, and people would say, well, wait a minute, like phone didn't really go, the iPhone did go. Timing matters. Innovators, visionaries are going to be willing to explore, experiment. And when the moment's right, they're going to go and go big. And so that doesn't shock me at all. But Chatter is certainly something that we will use as part of a broader capability for sure. The second thing that that I would say to you is Qlik. Let's put Qlik in there. Qlik is additive right to Slack. And so in that sense, we're very happy about this. We're ready to go. We see what's happening in the marketplace. We see what's happening with applications. And yes, I mean, it's solving a much more -- a much broader need and opportunity. And the way people will work in the future, the world is changing, and the way people work is changing and Slack is where people work. The people used to think about where you work is, I work in 50 Fremont. No, you work in Slack. I mean think about where the world is going. It's a great opportunity. If I may -- yes, you carry on. I want to make sure you get all your questions right.

Feel free to wherever you -- next point was, you're going to go -- if I don't ask it, you should bring it back up. But the next question I get with that is how much of this is about, call it, productivity and collaboration sort of in and of itself versus one of the things that Marc talked about on the call last night, and you just mentioned too, is also sort of as a collaboration, communication channel across your different clouds, but also other clouds, such as the DocuSign, for example, connecting that and that, but bringing that into an ecosystem? So in other words, APIs and big triggers, et cetera. Maybe you can help us kind of contrast those two. Maybe the answer is the opportunity is in both.

Yes, I think it is both. And I think the idea of DocuSign, Workday, Coupa, all the API side of that and to make -- as those applications -- this is what I'm saying, when they're growing exponentially, the ability to productively integrate -- have an integration layer, if it was important yesterday, it's more important today. If it's important today, it's going to be more important tomorrow. That mega trend is happening and the ability to do that is super, super exciting. Of course, there's collaboration, communication productivity, but this is about a world that's changing, and it's much, much broader than Salesforce. It's about all apps and how do you productively integrate with those. That's exactly the opportunity.

Interesting. All right. And now moving on to the next topic. As I mentioned at the top of the -- of this conversation, your retirement. One of the questions I'm getting is that, is there a sort of a relationship here, so to speak, between the announcement of Slack and the announcement of your retirement? In other words, there's sort of conspiracy theory here of something happening behind the scenes. Maybe talk us through that and maybe if there wasn't some sort of conspiracy theories, sort of what are the factors that maybe went into your decision?

Yes, I'm going to do that. If I may just add one point that I was going to cover and then because we're kind of going off M&A., if I can just touch on one point, and I'll add comment, Phil. One thing I want to share, too, when we look at M&A, and it's akin to some of the questions you were asking is, at Salesforce, we always critique ourselves. Like where can we be better. And you've heard me say, Phil, better, better number down like constant, relentless focus on being better. But also know some of your strengths. Obviously, we've been an inorganic pioneer of innovation. But we also have done well. Our track record, our feedback on M&A has been well. It's been good. Take a look at ExactTarget, take a look at Demandware, take a look at MuleSoft, take a look at Tableau, and you're going to -- I always tell people there's a test at the end, we need to perform. But when you look back on that, again, I want to underscore, why do I say that as the CFO? Well, in FY '14, we made 8.9% operating margin, where we just came off a $4 billion a year. Today, the guide is roughly $21 billion in a couple of weeks, and there'll be -- obviously, the next year, you're talking north of $25 billion. And what are we doing? Our operating margin this year, the guide is effectively 17.6%. Okay, progress, better, better never done. But here's the key point, you know the attributes of each of these assets that we took on board. They were smaller, right? They lost money, most of them. They are getting started. We've added all those dilutive effects, and we've more than doubled our margin in terms of performance. We know how to take assets, we know how to make them grow. We know how to make them better and be successful with them. And that is a point that I want to make sure that we don't take that for granted. We're relentless on execution. It's all about performance. But I also want people to know that my boss has had a pretty good track record of picking pretty interesting things. We're not perfect, by the way, guys. We can -- but even when we didn't have perfect, Buddy Media, a lot of you track, we always critique ourself for that one. But if Marc were here, what he would say is, you know what, the best part about Buddy Media is it opened my mind to ExactTarget. And the best thing about ExactTarget is it opened my mind to Marketing Cloud. And the best thing about that is it created a Customer 360. And Customer 360 is the greatest differentiator we have in a world of digital transformation. So I just want to be really clear that we come at this with conviction, and we come at of this with informed realism, not uninformed optimism, about what it takes to pick something. The last point I'd say in M&A, just to bring a point on value. We heard about value with MuleSoft. Well, let's go back to ExactTarget. We've heard about that with ExactTarget, which turned out to be a massive success. The funny part about that one, I like to pull out, is the cherry on top of the cake for ExactTarget was a company called Pardot. What we've disclosed, Pardot competes extraordinarily well with Marketo, which was a payment of over $4.5 billion for Marketo alone which was our cherry on top of the cake, and we spent roughly $2.5 billion for all of ExactTarget, including Pardot. So history will be the judge of do things pencil out, but I just want you guys to know like I'm a big fan of the other flagship on the facts. If you don't, you pound the table. That's where we're coming from. And so I'll leave that -- it's just -- we're not perfect, guys. We know we can be better and I'll be the first one to line up for that, but I do want to talk -- just lay that to ground for M&A. Now to your question on retirement. Phil, it's kind of a crazy moment at a personal level. But just to share with you guys a little bit more personal. My public age, it's out there for -- long time, I'm 61. I'll be 62 in April. I just ran the New York Marathon, virtual, so it's all good. I'm feeling great. But the thing is, I've done 40 years. I will have completed 40 years in technology. I will have completed 15 years as a Public Section 16 CFO -- 15, and that's not...

Those were my dog years too.

Thank you. I'm glad to hear. And so that is -- it's been such a joy to work with literally, Hewlett-Packard, when I was young in my career, literally not working for them, but interacting with them, presenting to them, working with and serving Michael Dell, which I still do on his board at Secureworks. Working with Daniel Borel, who invented and was the Founder for Logitech. Working with Carl Bass, when we we're transforming Autodesk, which you now remember, when we shifted it -- beginning shift to the cloud. And then working with Marc Benioff for 6.5 plus years. It will be more -- and I'll be the longest-serving CFO ever at Salesforce by the time this is all wrapped up. It's an honor, I'm humbled. I grew up in a community with less than 3,000 people, in a farm community in Southern Michigan. This has been a total joy, but there's other chapters. I have my first grandchild.

Oh, yes, congratulations yet.

Yes. Thank you. And then I have a second grandchild on the way. So I'm doubly excited about that. And there's just a whole lot of other nonoperating opportunities you can imagine over the years with just the community and the friends that you develop over the years, and that will be fun someday. So that's where I'm at. It's very simple. My wife and I are excited. We met when we were 22. And she's dealt with me being a public CFO for the last 15 years. And anyhow, I'm super excited. But I'm super committed to help us in my emeritus status as we -- after I pass the baton and do my best. But I hope -- and I'm happy to take questions on that, but that is -- that's where I'm coming from, personally.

Yes. Because obviously, with the time here too, there's been some conspiracies and there was a disagreement. And [ Mark, hey ], it's like, I'm out of here and so.

Nothing like that at all.

[indiscernible] that hit on you.

And I want to say nothing like that at all. And I hope the attributes, maybe it doesn't mean a lot to you, guys, but to me when the Board tips their hat to, like the emeritus is quite a kind thing to do. Marc is like a brother to me. He's amazing visionary. This is an amazing company with great opportunity. And I'm just super grateful. And I'll always be an advocate for Salesforce. And as Marc said, he wants me to stay connected as long as we can. And that's awesome. And I feel really deeply grateful for that.

Okay. Cool. We hit the two big, what I call it, headlines. Now let's actually get into the operations, the core here. And so that little thing, about Salesforce itself. Yes. But I guess starting maybe with Q3, last night, solid revenue, operating profit, cash flow. You've hit the RPO number in addition to beating revenue. And Sales Cloud continue to grow in the double digits, every other cloud north of 20%. What are you seeing in terms of, in your opinion, sort of the dynamics and durability of the growth? And what you're hearing from customers right now?

For sure. I'm going to kind of clip right down there because this is really important to me. Because some people said, "Hey, like, okay, Q3, we're sounding strong. CRPO for Q4, I mean you tell me that people said, been great if it was 1% higher growth, I think, okay. But on the other hand, don't forget, it's biggest new business quarter of the year and also renewals quarter. You guys have known me for a long time in terms of the say-do ratio. I would step back and say, here's the real message. The only reason we're able to go buy Slack right now is our core is very strong. Let me tell you my facts for that and the commitments for that. We raised FY '21 actually to the pre-pandemic level. I never dreamed we'd be able to do that. That, we are super happy about. Number two, we put out an FY '22 guide that was way above even the Street's expectations organically, pre-Slack, okay? That's great. Number three, you look at the market share data and what's happening and forget all the marketectures and everything that people say. You guys need to see math, you need to see things show up. Take a look at IDC, take a look at Gartner and see what's happening and what happened this quarter, in Q3? what's going to happen with our guide for Q4? What's going to happen with our guide for '22? That 21-year trend is not changing. It would be a point that I would say. Our pipe, we talked about, we're very happy with our pipeline. Gavin got on to tell you about what's going on in that way. So the demand environment, I'm very happy with the durability of it, to put the kind of numbers up that we are at our scale. It's fair to say unprecedented. If I look at the portfolio across the clouds, as you touched on, I'm happy. Across the geos, I'm happy. We had a little bit of decel in the Americas. But that was not really decel as much as the annualization at Tableau, which we called out, when we hit it, you've told me what the extra points were, so we always try to be transparent with you. I feel great about our demand environment. I want to come to profitability. And I want to make this point, Phil. We hit our highest levels of profitability ever, while doing what, [ own ] investments in from next year. So we'll be even better positioned and stronger coming out of this pandemic. Doing things, cleaning up, lease assets, organizational scaling, making critical investments, helping our people be productive at home. We made more expenses than the T&E benefit we got in the pandemic to about 50 basis points, and we're still delivering 75 basis points. So we're not trying to back away from that. We're trying to position ourselves to be better. But here's the point. People in the market told me for a long time, said, Mark, just make 20%, just show us you can. Well, we did that in Q2, and we came close to doing that this year -- this quarter, even though we made big investments. We delivered over $1 billion of non-GAAP operating margin, highest profit levels we've ever had while taking market share. Those two together ought to tell you about our market position. We ought to tell you about, you can see it in the Gartner Magic Quadrant, you can see it everywhere. I'm just trying to point the full picture, we're coming from a position of strength. And that I'm excited about. Because we can then go take this asset and go take this company, this generational opportunity in an incredibly sticky market, the fastest-growing market in enterprise software, one of the, and go take this hill as we separate. And to me -- and there's so much room to run to innovate on behalf of the customer. That's the way I feel about the core. Those are the facts that I just want to make sure are very clear.

Got it. Thank you, Mark. Now just to drill down on that. And one of the things -- this is my sort of third recession as a software analyst. And I feel every time that sort of whatever trend that was in place going into the recession, it accelerated it on the back end. And obviously, when we come into this one, we were talking about digital transformation, modernization of applications. And I feel like what we're seeing already is an acceleration of modernization of the customer-facing applications, digital transformation. And then we piloted Salesforce as being sort of a key beneficiary of that monetization because of the breadth of your portfolio, sales, service, marketing, commerce, data platform. And then obviously, now we have collaboration and communications, too. But if I rewind back to Dreamforce last year, we learned that 60% of customers were on a single cloud, but 93% of revenue was derived from multi-cloud customers, obviously, a pretty significant multiplier effect from multi-cloud customers. How are you thinking about, call it, coming out of the pandemic? What are customers telling you about sort of adoption of the broader, call it, like a front office suite?

For sure. And so for multi-cloud, a couple of things that I would say to you. One is the environment that we're in, even for our new business, now is at pre-pandemic levels, which again, to me is encouraging and feels sustainable in that way. The -- you're exactly right in the quoting of the multi-cloud opportunity. That continues to progress. We continue to have more opportunity, but that is a long runway. And that will take -- because we have a lot of -- we have a long tail, if you go into ESMB, SMB, wherever, where people may start with one cloud, but as you work up the stack, whereas, like you go upmarket, we want to get more and more multi-cloud because the reward is so powerful. So I would say, irrespective of the pandemic, the modernization we talked about is true. We feel more normalized right now in terms of the kind of top line environment what we're seeing and experiencing right now and hearing from the customer. We feel like the opportunities for multi-cloud is ever present. We're making progress on that, but that's a long journey. So it's not like flip a switch, put in a special or whatever. It's a long journey, which we like actually, because it creates a durable opportunity for growth over a much longer period of time. That's what I would say. But I want to make sure I answered all questions....

Yes. I mean, because one of the things I thought about is sort of we had with the COVID-19 pandemic, sort of solidified competitive positions in the sense that the keyword being sort of accelerated. I think about accelerated being some sort of, I don't have time or money, and you need to get somewhere fast. And so I figured with Salesforce, the idea of having the most complete front office portfolio and those integrations, those workflows already out of the box that you could be -- even sort of outsized beneficiary from the word accelerate.

Yes. I do think that when people are calling for digital transformation, and this is all, there's so much external data that you guys can look at, not refer to me on, is they're calling us. And they're calling us. And one of the fun parts of my job, I have to tell you, is whether it's at the World Economic Forum or all over the world when we used to be able to travel and meeting with CEO and staff in every industry I can imagine. I never, a single time, Phil, not even once, heard somebody say, I want to have 7 or 8 vendors to modernize my front office. That's what I want. It's quite the opposite. What they don't want to do is have a point solution. They want to basically say, let's look at the CEO of AT&T. I just use that it's such a great example. We said, not only do I want one person to provide all the cloud. So this is a little different. He had a little twist at the end. He said, "I want you guys to also do the ProServ." I want one accountable body to do it all. By the way, do you know that deal in that we're progressing very nicely with the success for our customer? And it's an example of the way people are thinking in a world that's getting more digital when they're dealing with more applications. And does that sound familiar, applications skyrocketing the need for an integration layer. You see where this comes together, Customer 360 and Slack, which is a best-in-class asset. And we have -- yes, I mean that's what I would say.

Our 30 minutes has gone super fast. I'm going to ask you one last question here before we wrap up. Let's say, hopefully maybe you'll come into the Wells Fargo TMT Summit as an attendee in the coming years. But let's say, we're in the audience, I'm talking in the hallway, what do you think we're going to look -- you're going to look back on and say, wow, this happened faster than I thought or this trend was more impactful than I thought back in 2020 during our keynote?

One thing that is incredible, I mean I'm like so happy with our GMV growth, e-commerce is going great. And that I think is going to continue to carry on. I -- Phil, you'll recall, I'm a big fan of history. And I study patterns, I'm obsessed with them, I always have been. But I put a thesis out probably 8 months ago when I began to realize what's happening with the broader step back and what's happening with the pandemic. And the pandemic will someday be in the rearview mirror, but one thing will remain is basically humanity, not the United States, not just corporations, but humanity's level of digital enablement is -- I like to say, you pick the number of years, has been condensed into 9 months, a year, 1.5 years, however long it takes us to get this in our rearview mirror, think about that. When I've seen people -- when you can digitally enable people, and I'm going to give a fact around this. It plants a whole another seed of innovation for digital transformation in the economy to go even faster digitally, here's what I mean. And let's start with Wells Fargo. How many people in the audience, rhetorical question, used online mobile banking, deposited their checks with a snap of -- I use Wells Fargo, by the way, probably. I use their application, I take a picture of the check and I deposit it. How many people did it honestly before the pandemic? How many people used online banking? How many people did e-commerce? We all do e-commerce. But think of the number of sigmas, the standard deviations of the United States, older people, younger people, everybody in between, who not only use it, we use it comfortably now. How many people did e-learning, e-medicine, e-banking? It goes on and on. And what I mean by this is everybody's level of digital video has step functioned in ways we couldn't have wildly predicted. So what I think that means looking forward is the environment and the momentum to realize the criticality of being modern. Nobody wants to be metaphorically on a typewriter in a computer world. It's growing rapidly. And I think people will be surprised, even a year from now, how fast this goes. Last point I would say is, well, AI. I never thought I'd tell you, and I don't know it was in 2019 or '18, we were so proud to say we had 1 billion AI predictions in 1 day at Salesforce. You know how many it is today?

I think, it's 80 billion-plus.

80 billion plus. And so where is that going? We're at the beginning, in the beginning, in the beginning. And so I think people are going to underestimate that in so many different ways. And then lastly, just get ready for the applications growth like we have never imagined in the digital world. And I think customers are going to need solutions to that, and I think we're going to have one of those. That's what I would say.

Awesome. All right, my friend. And I just want to reiterate. It's been a genuine pleasure working with you over the years, Autodesk, Salesforce. And as you mentioned, you've had a -- you have amazing career, I want to congratulate you on that. I want to congratulate you on your new grandchild and 2.0, where you say your software terms, accommodated company as well. So please enjoy your retirement. And you're not getting rid of us just yet. You're going to be here until October. So it's been a pleasure and looking forward the next, call it, 11-plus months.

Phil, I can't thank you enough. I wish you all the best, your family, the Wells Fargo team and all of our investors that are online. I wish you guys are safe and happy holiday. Thank you for your -- just the opportunity to interact. And I'd just say, I'll be around. And then I'll be in the broader business community, for sure, but just in a different way, over time, which will be exciting, too. So really looking forward to.

Also we're looking forward to you being attendee one day.

An attendee, [ one day ]. All right, buddy.

Awesome, thank you, everyone.

Take care, bye-bye.