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

Well, good morning, everybody. It's Karl Keirstead, and welcome to day 3 of the UBS TMT conference, the virtual version. I hope all of you are getting a lot out of the event this week. We are honored to host Salesforce, and in particular, the President and Chief Revenue Officer, Gavin Patterson. In terms of format, we'll go for about 35, 40 minutes for this keynote. If any of you have questions, you've got a question link, feel free to use it. I'll get the questions popping up on the screen right in front of me, and I'll try to leave a little bit of time at the end to take them. So with that, Gavin, thank you for joining us. There's never a dull moment at Salesforce. And if you don't mind, I wouldn't mind extending this fireside for about 3 to 4 hours to cover all the content we've got. All right.

Well, great to be here, Karl, and thank you for inviting me.

Excellent. Terrific. Well, Gavin, why don't we start more specific to your role? You took over the Chief Revenue Officer role in July, if I'm not mistaken. So you've had about 4 months to tinker. And it might be helpful for all of the investors and analysts listening to understand from you what's changed since you arrived, what -- either leadership changes or sales structure, comp changes you've made that are noteworthy that would be important to understand.

Sure. Well, just a little bit of context. I've known the company for a long time. So I've been a Salesforce customer for probably certainly well over 10 years when I was the CEO of a British telecom in the U.K. So I came to the role with the knowledge and insight of what it's like to be a customer of Salesforce, what it's like to be a CEO buying Salesforce. I then got involved again with the company as an adviser in August 2019, helping to build an advisory board in Europe. Then in February, when Keith left and Marc asked me to pick up the international part of the business. And then in July, I picked up the international and the U.S. part of the business. So the reason I give the context is I took the overall role, the group CRO role from July, but actually, there's been a long run-up to the company and my knowledge and insights into it. In terms of what I've been trying to do, I inherited sales and distribution organization that was basically run as 2 parallel organizations: EMEA and international. So my vision has been to combine them together into one sales and distribution organization with a sales operation that is able to work horizontally through all the operating units that we have around the world. So in other words, I'm able to identify best practice and deploy best practice quickly and consistently and ensure that our sellers spend more time with customers selling rather than reinventing sales programs and sales motions. So that's what I've done to start with. The second thing I've done is simplify the organization and particularly the international part. The business has become over-led. And we had some very talented leaders running the key geographies that were, I think, over-supervised. So I took out, across the business, a layer. You saw in the news, I think, you and I were just talking about it at the beginning, in APAC, that removed a layer of management. And that has allowed the key markets that we operate in to report directly to me. So we have a flatter organization, and I've got a significant span of control, but I'm used to that. But it means that we can deploy quicker, we get faster decision-making, and we're much more efficient. So change the organization structure. And then I've been through and I've assessed where we need to make leadership changes. And I've made those changes. And I think there's one person still to come in to run the U.K. that has been announced. But in general, I've been able to, I think, strengthen the leadership capabilities across the business and improve things like the diversity and gender balance across the organization. So it is more reflective of our customers, and we get a much better debate with a more diverse leadership team. Then beyond that, I've been focusing on driving the industry's practice. So increasingly, we're finding that customers within verticals want clouds that have some of the capability already built in as we deploy. So financial services is the first one we did. We've done health care. You'll see us increasingly roll these out. And as the market becomes more mature, we organize our sales motions around these verticals. And so we've been doing more of that. And we're beginning to think -- rethink things like the indirect channel, which hasn't been something we've used much, but can be very complementary to the strong, direct capability that we have and is really part of the muscle that Salesforce brings. And then finally, I've been working on getting the right capacity into the business. So hiring this year to ensure that we've got the capacity for next year and beyond. But also looking at the productivity measures within the business to ensure that actually more of our sellers are making a contribution every quarter and driving operational excellence through the existing Salesforce. So it's been a full agenda. To do that in a COVID environment, making sure we remain relevant to our customers and delivering results. And we've had a couple of really, I think, really good quarters. And that's -- you've seen that in the results.

Yes. Well, it sounds like you've had your hands full. And Gavin, as you just alluded to, a pretty unique time to take over a CRO role in the middle of a pandemic. So what I think a lot of investors might be interested in is how you envision the role of sellers as you describe them in a post-pandemic world. How you're advising them to transition from, I'm sure, what is largely a Zoom, phone, e-mail, customer contact motion to one that will have some semblance of a return to normal. But what does that return to normal look like for all the sellers at Salesforce, I'd be curious.

Well, I think like many companies, some of the accepted norms and the accepted wisdom of how you do business and how we do business have been proven not to be true and not to be limitations on the business. So -- but Salesforce is a phenomenal sales machine that is being built on face-to-face selling of using Dreamforce as the real touch point where everybody who's got a deal comes together and celebrates, if you like. And we close a lot of business that way. That is the 20-year story of Salesforce. There hasn't -- I mean if there's been a handful of face-to-face meetings since February or since March, I'd be really surprised. So we've had to completely pivot the way we build demand and close deals. And I think the good news is, actually, we've been able to do it all virtually and all through video and audio. And if anything, video allows us to have more direct contact with decision-makers. I think the stats show we have more than twice as many meetings with C suites because they're just easier to organize. No travel involved. And what we offer, what the core of our proposition is, its relevance is -- if it was important before, it's very important now, and it's become a Board issue. It's not delegated down into the divisions. It's not part of an IT budget. Companies are realizing that no digital strategy means no strategy and no future. And so we're finding we're getting those conversations. We can do it on video. We're closing deals and big deals. You can see that in our results. And the pipeline is strong. We're able to build a good pipeline going forward. So when you hear all that, I don't think we'll be reverting back to what life was like before. I think moving forward, I think video is going to be the core of what we do in terms of selling. I think we will increase -- we will go back to some face-to-face. I've done a couple of meetings myself. And for the special occasion, if you like, you do get something more from a 3D experience. And there will be times we want to use that. But the bulk of what we do, I think, will be -- and the core of what we do will be remote. And sellers will need to evolve into a work anywhere, sell anywhere motion. And I think it will be fairly seamless. So instead of going to the office 5 days a week, it might be a couple of days a week. But as long as we stay relevant to customers, I think that's the most important thing.

Great. Okay. That's good color, Gavin. And maybe we can flip to another subject, and that's what you're hearing from customers globally about, broadly speaking, the state of demand. One thing that caught my attention is, well, a number of tech companies on their recent calls described the tough macro, project delays, budget scrutiny. I really didn't hear Salesforce use those terms very much, if at all, on this October call. Your comments yesterday at the Analyst Day sounded like you're feeling generally good about the demand backdrop. But Gavin, for our audience today, do you mind elaborating on how it feels out there from your perspective? You're next to Marc, probably the individual that's interfacing with clients the most.

Well, there's no easy business. And in most clients, they're looking to conserve cash. There's no question about that. But if there's one budget that is being ring-fenced, it's the budget around digital transformation. And so we are sensing -- and I'm hearing from customers that actually decisions that we're taking months and often were progressing at a very slow pace and there was sort of [ filibustering ] and no sense of urgency. Those types of decisions are happening a lot quicker and with a lot more urgency. And I think we're benefiting from that because I think the core of what we offer is right in the sweet spot of the digitalization of somebody's business. So even in markets that have been really badly hit, we're seeing that there is the demand to invest in digital transformation and the -- our version of this, which is the Customer 360. So yes, we're in the same macro as everybody else. We've got the same effect of COVID as everybody else. But at the same time, I think what we offer is more relevant. And we're looking into the future, and the demand still looks good into fiscal year '22. So it's -- I'm not saying that every vertical is flying. It's quite clear, transport and hospitality is still a very challenging environment. But we are closing business there. And what's interesting is we're beginning to see businesses that have been largely in hibernation, if you like, are beginning to look out and say, we've got to invest in order to have a business on the other side, and we're ready for that.

Got it. And Gavin, do you think, just given your global purch, there's any significant demand differences to call out between the Americas and Europe and APAC? Are they moving at different paces coming out of the pandemic in terms of IT spend at different paces? Anything interesting? I know you're probably particularly close to Europe. Anything interesting happening around the world in those 3 major geos?

What's interesting is, I mean, to your point, Karl, the sort of coming out of COVID, you could argue parts of Asia have already come out of it and are back on a normal growth trajectory, whereas we've probably not peaked in parts of Europe and the U.S. However, if I look at the balance of our business, actually, it's a very well-rounded set of results in Q3. The U.S. demand is strong. We're really, really pleased with the performance there. Our most mature market, in some ways, but we're seeing demand across the board. And you can -- as you say, we may not have peaked in terms of COVID in the U.S., but we're not seeing that in our numbers. Europe is strong. Probably Southern Europe is a little bit more affected by COVID and struggled a little bit more. But what's interesting, I think in both Europe and the U.S. is the first part of -- when the pandemic really struck, you could really feel it in the SMB sector and you could see it in terms of new logos were harder to win. That is the most sensitive part of the business. That's -- if you want to find the real sort of the fidelity for what's happened. What I'm really encouraged by is how it's come back. And small business is spending and the deals that are being created and closed within a quarter are strong. And that's usually a good signal for future demand. Because that's -- we always talk about the big deals, but the bulk of the revenue still comes through the sort of mid and upper-mid market.

Got it. Gavin, I'd love to maybe dig a little bit on your comment about digital transformation being ring-fenced and being a strong area. And in particular, customer engagement modernization projects. And I'll throw 2 anecdotes, Gavin. I'd love your perspective as to whether you agree. So certainly, when I and my team do checks with CIOs about -- within that digital transformation bucket, what projects are the biggest priority? And I'm not just saying this because I've got you on a video screen, but I often hear the need in this post-COVID environment to upgrade your customer engagement systems, given the significant change that's occurred post-COVID. Systems that might have been only deployed 5 years ago, suddenly seemed 20 years old, and hence, there's a big modernization theme. I was, just yesterday, hosting a fireside chat just like this with your peer at Microsoft Judson Althoff, and he mentioned that if you're not upgrading your omnichannel technology today, you're missing the boat. So it does seem to me that there is a bit of a, call it, CRM upgrade cycle going on post COVID. Do you agree with that hypothesis? Or do you think that's a bit of a stretch to suggest there's any unusual CRM cycle going on right now?

No, I think it's a fair observation. We're seeing that across the board. If you haven't got a direct relationship with your customers, if you're unable to manage the complexity of B2B and B2C. And many businesses are going through that change. They've gone from being a pure B2B and they want to have a direct B2C relationship. I think increasingly, we're seeing customers want to be able to pull data from multiple sources into a single data set, single source of truth, and that's a big opportunity. So look, the whole environment around customer management, customer relationship management, is definitely a theme that is within the whole digitalization agenda is probably one of the primary sub themes, if you like. I would agree with that. And look, it's the right -- it's the sweet spot for Salesforce.

Yes. Got it. And if we dig one layer deeper into the specific clouds within the Salesforce suite that might be the biggest beneficiaries of a modernization of technology that enables you to engage with your customers, we see the revenue data. But what's kind of interesting is in terms of new bookings, which of the cloud segments feel like they've got the best traction. Intuitively, I would think that it has to be the commerce cloud that's seeing a big uptick, probably the service cloud as well. Do you agree? Maybe you could elaborate on what segments feel like they've got the best traction, Gavin.

Yes. Service Cloud is doing extremely well. Commerce blew the doors off last quarter. MuleSoft. So your ability to integrate old technology to new technology is doing extremely well. I see -- it was interesting, Sales Cloud is a very -- our longest tenured cloud, in many ways. It was probably slightly weaker, but we're seeing strength come back on that. And it makes sense because often the sort of point of market entry, if you like, for a customer into Salesforce is through Sales Cloud. If you're starting -- it's a fresh customer, a greenfield customer, they usually come from Sales Cloud. And they -- and Sales Cloud is particularly strong in the sort of mid-market part of the business. So ergo, my earlier point, when there's a real contraction, the peak of COVID fear, that's where we felt it probably more. But looking forward, we can see a good pipeline building in Sales Cloud. So I think it's good strength across the board.

Okay. And maybe, in particular, on the Service Cloud, given that, that feels like it's got good momentum, if I'm not mistaken, it might now have surpassed Sales Cloud as being your largest. How does Salesforce sustain 20-plus-percent growth in Service Cloud, Gavin? Are there -- is it just that there's a penetration gap that's sitting in front of you, a runway? Is it new feature improvements that might be creating a tailwind for all of your sellers next year and in fiscal '23? How do you sustain that growth? How durable do you think it is?

Look, I'm confident of its sustainability. It's got plenty of runway still in terms of penetration. I think the feature set is really rich. So it goes from voice on one stage through to managing digital interactions on the other. You can do field service out of it. So it's a big TAM, and we've got a product that covers all bases. And I would say it's a pretty concentrated market. So if you look at the commerce market, it's a bit of a patchwork quilt. It's big, but there are a lot of players in it, and there's a lot of niche -- a lot of niches or niches, as you guys call it, to operate in. Service is pretty concentrated in terms of the players. So we're confident we have a road map on it, and we can continue to grow at that sort of rate.

Okay. Great. Gavin, I'd love to ask you about the -- this gets a little bit into Evan's turf on the financials, but the translation of this evidently strong demand backdrop to the numbers that Salesforce posted on the recent October call. Don't get me wrong, they were solid. But maybe some investors were thinking that the demand backdrop was strong enough that the upside to at least the guidance might have been a little bit more than it was. You made a comment yesterday at the Analyst Day that maybe that didn't translate perfectly into some of the 3Q numbers, if I heard you correctly. Do you mind elaborating a little bit, Gavin? How might it not have translated as well as you would have thought?

Well, what'd I mean by that? I read some of the notes, like we all do. And I saw that some of the analysts felt they were mixed. And I know a number of analysts sort of back, do a calculation to work out what our billings number were and suggested that, that wasn't growing at the same sort of rate. We don't look at billings in that way. We have a model that has revenue, ACV, attrition, goes to next year's revenue type of thing. But we don't release the ACV number. And so I can't tell you what that is. But you can probably work it out with -- because we signaled what next year's revenue is going to be. We gave you guidance for fiscal year '22. We upped our guidance for fiscal year '21 for revenue. We signaled what's happening on attrition. And I sort of -- I do the back of an envelope type of math on that. And I come out to the -- actually, you could probably retrofit a number that is indicating that business is pretty good still. And we're not seeing a slowdown. So that's what I meant by that comment. Look, I know you guys expected a better beat on CRPO, but it is a beat. It's -- the CRPO number is at 20% versus consensus at 19%. That's not [ gappy ]. So I know people wanted more of a beat. But look, I'm confident, as I say, that we're confident of the guidance we've given next year, 17% revenue growth on the base business. That's pretty good. I can see the demand on the pipeline. It's well-rounded. So we've got great, I think, a good geographical spread across the business. And I'm confident across the full range of clients. So I can see what I can see, you guys can't see it all, so I sort of respect that. But I feel pretty good about the prospects of the business going forward. And I think the underlying demand will, if anything, I think it could strengthen.

Okay. Maybe just to dig one layer deeper, but not get too detailed. If we loosely think about bookings or CRPO is being driven by 2 primary catalysts. One is new business activity and the other is renewals of existing activity. Gavin, was there one or the other that felt, in your judgment, to be strongest in the October quarter?

No. Look, new revenue activity, if you want to describe it that way is good. I would say in the round, Q3 is as good as Q2 in terms of what we're seeing. Attrition, as we flagged, ticked up across Q2. We're beginning to see progress in that in Q3. It ticked up for all the right reasons or -- and we worked with our customers in some places because they didn't have customers themselves. They were shutting down. The airlines being an example of that. So we've done the right things to work with our customers to ensure that when we get through this crisis, this pandemic that their businesses have every chance they possibly can to succeed and that we are supporting them along the way. So it's a well-rounded set of results. That's sort of probably the best way of describing it. It's good across the board.

Great. Okay. I think that's terrific on that subject. The other one I wanted to bring up with you, and it's obviously timely is acquisitions. But maybe before asking for your thoughts on Slack, I'd love to ask for your perspectives on some of the deals that have been done so far, Tableau and MuleSoft. One of the, I thought, a strong disclosure that Salesforce made at yesterday's Analyst Day was where MuleSoft is today relative to the quarter before you bought it. And if I -- my math is right, the revenue base is up some 3x since you bought it, which speaks to sales synergies. But maybe on Tableau, do you want to talk a little bit about how the Tableau integration has gone? To what extent the sales motion is now fully integrated with the core Salesforce and how much sales synergy you're seeing. Or maybe the organization, in its first year, was left somewhat independent, and a lot of those sales synergies are now sitting in front of you in fiscal '22.

The company is, I think, good at acquisitions. I think it picks its targets well. It's prepared to pay full price for the right businesses. But from the vantage point that I've had, it's got real strength in this area. And I would point to not just MuleSoft, which is couple of years in now, maybe 3 years in. And the results you described there, Karl, are absolutely the case. It's -- the natural fit between MuleSoft and Salesforce is really clear and working extremely well. ExactTarget is another example, and that turned into Service Cloud. And that's proven to be the biggest cloud we've got now. So it's -- the company does know what it's doing and is good at this. Tableau is a great business. It is a -- it's business that opens up, I think, a different sales discussion in some places. It works extremely well, in my experience, at a Board-level with a CEO because that is the cycle of instrumentation, if you like, and analytics that many CEOs, many CFOs want to have to be able to run the business. So it's one of those things where sometimes when you talk about CRM, if they haven't grown up in a digital environment, the CEO can sometimes sort of -- there's always a risk that they lose a bit of interest. They don't lose interest on Tableau. So it has a different buying process in that respect. But it continues to be a great business. It's in its first year. The process was probably delayed more than the company would like because of an antitrust process, in fact, here in the U.K. with the CMA. So we're not quite at the same point in the cycle. And at this point, a lot of the synergies that you talk about there have not been realized yet because the businesses have been shoulder to shoulder as opposed to fully integrated it. But what I can be sure of is, if I look at how we've managed to realize those benefits, both on the sale side and the cost side as well with MuleSoft, I'm confident we'll achieve those with Tableau.

Got it. Okay. Terrific. And can we talk a little bit about Slack? Gavin, obviously, a hot topic. Marc obviously had the microphone at yesterday's Analyst Day. I think you did too. So I don't want to ask you to totally repeat yourself. But do you mind sharing with all of the investors and analysts on the line, your perspective as to the merits of the Salesforce-Slack marriage? And I think it'd be fun to hear from you, Gavin, as well.

Absolutely. I think this is a transformational deal for Salesforce and for Slack. It is, I think, the perfect combination of businesses, which I'm confident when we look back on this in a few years' time, we'll be able to demonstrate that it's had a synergistic effect, a multiplier effect for both businesses, both the base business, the core business, if you like, as well as for Slack. Why do I think that? From a product and proposition perspective to start with, Salesforce today is all about Customer 360. It's all about a single view of the data, a single source of truth and being able to pull that from very different sources and sell, serve, commerce, analytics, et cetera. What I think Slack brings to the party is it's the modern way, it's the 21st century way of collaborating, not just for your employees around the business, but also the partners you work with to get -- today as well. So they don't all have to be part of the same employee base. It's open. It's a way of pulling it all together. And I guess if -- an example of this was a call that Brett and I were on, and I think we referred to it yesterday, with a big customer of ours, who is a big Salesforce customer, but also has a big deployment of Slack. And what was really interesting was the discussion we had, a really rich, engaged discussion about how the combination now could come together that would allow the customer to pull together everybody in an organization, not just the customer-facing employees within the organization. Everybody in the organization behind us, a workflow that helps you sell, serve and provision and build customers in a much more efficient way. And they could see it immediately. So it was -- the pull from the market is there. So from a product perspective, these 2 things will come together really well. And then in terms of distribution, actually, they're quite complementary in terms of distribution strength. So look, our army is enterprise sellers. And we've got 10,000 of them. Their strengths lie in viral marketing and upsell into enterprise. These are complementary sales strategies. I think we'll be able to help really drive Slack's penetration into the enterprise space. And I think we will benefit from some of their viral marketing skills, their consumer marketing skills, which is actually where Salesforce started, in many ways, and really using that to open up the point of market entry for SOHO and SME customers into Salesforce again. So I think it's a great opportunity.

And Gavin, will the integration from a sales standpoint of Salesforce and Slack -- maybe it's hard to predict right now, but will it look a little bit more like MuleSoft, where as you were describing earlier, it seemed to happen quickly and with a bang? Or a little bit more like Tableau, where it was a little bit delayed because the organizations, as you put it, ran side-by-side for perhaps a little longer than you would have wanted. Any early view on Slack?

Well, we haven't closed it yet, and I don't want to get ahead of [ my shoes ] on it. So I think we've got to make sure that we get support from the antitrust authorities around the world, and we can close the deal, which we hope to do in the first half of the next calendar. But my sense is the opportunity to realize those synergies will be earlier rather than later. One thing I would say, just going back on the MuleSoft point, Karl, MuleSoft's first year integration wasn't quite as stellar as year 2 and year 3. So we always want to realize benefits quickly, but they tend to come -- they don't come in a straight line. They tend to come in a more exponential curve. And so I don't want to leave you with a view that MuleSoft has been the star it is today for all 3 of the years since the time we acquired it.

Fair enough. Gavin, we've just got a couple more minutes. One thing I did want to make sure I asked you about, because you mentioned it with me now and at the Analyst Day, is just this broader Customer 360 strategy of Salesforce. And I'm wondering if you could put a little bit more meat on it. Whether there's still feature improvements that Salesforce needs to make to it. It sounds like customers are, post COVID, quite eager to understand their customers better. I'd love to hear a comment on what you thought of Twilio's acquisition of Segment, which was a CDP platform. It just feels like the space, it's hot, if I could use that word. Maybe just a comment on Customer 360 for everybody.

Well, I think it is, certainly, the real source of competitive advantage for Salesforce. We're the only company that has all aspects of that 360. Some of our competitors talk about 90 degrees of that, some of them 45 degrees, but nobody has 360 degrees, I think. So I think the fact that we're able to give that complete picture to the customer -- of the customer to our clients, that we're able to create a single data source without ripping out all the existing data sets through integration through MuleSoft. And that we're able to operate in both a B2B and B2C world is really, really important. A lot of our clients we're seeing are making this transition from being -- we were only B2B. We went through a retailer. We went through a franchisee. And now we want to do both B2B and B2C, and we need to be able to segment our customers accordingly, whether it's on a deal basis on the B2B side, or it's on a segment basis on the marketing side. And that's why we're seeing this sort of opportunity really grow for what we would call multi-cloud deployments, multiple clouds and often significant contracts in multinationals. And the source of -- the center of it is the CDP. It's the customer data platform. I'd say just one other thing I would say, which is I don't think we draw enough attention to. But I think it's a real advantage of what we offer is the platform itself. You -- it's a very powerful element of what we offer. There are 5,000, I think, different applications that sit on it. You can build your own capability or that against just specific needs so that it sits on top of the platform. Or you get somebody else to do it. It's a low-code environment, so it doesn't require a lot of SI time or your own programmers. We announced -- one of the things we announced on Tuesday was Hyperforce, which is a way of deploying Salesforce into a market so that you can have a version of it within that particular market. Now this is a big theme around the world. There are a lot of markets where this is -- if you don't -- if you can't put a data center in Germany, for example, it's a problem for your business going forward. Now we've seen ahead, and we've been able to deploy that through initially AWS but available on other clouds, public clouds going forward so that you can put a cloud in a specific market. So look, I think there's plenty of people talking about this, and people see what we're doing and want to emulate it. But we've got, I think, a significant lead, and there's no shortage of opportunities for us.

Excellent. Well, Gavin, I know we're up against time. So why don't we end it there? And let me just thank you for carving out time to educate me. I learned a ton. Thank you. And with all of the investors listening in, and to Evan, to having Salesforce attend our event this year, it made it incrementally better. So thank you, both. And if we don't connect in the next few weeks, Gavin, Evan, have a wonderful holiday in a couple of weeks.

Thanks, Karl. You too.