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

All right. Good morning, everyone. My name is Brian Peterson. I'm the application software analyst here at Raymond James. I'd like to welcome everyone to the Institutional Investor Conference. We're very, very privileged to have Amy Weaver, the President and CFO of salesforce.com. Here to join us today, we also have Alex and Evan from the Investor Relations team. So we're going to start a fireside chat. But if you do have any questions, feel free to e-mail them to me at [email protected], or the chat feature in Zoom. So Amy, thank you so much for joining us. It's a pleasure to see you today.

Well, it's terrific to be here. Thanks, Brian.

Well, we'll go ahead and get started. So I think I just want to start off with the fourth quarter results from last week. Obviously, some good growth upside on the current RPO. Just curious if you could just kind of give us a quick rundown on your highlights from the quarter last week.

So I'd be happy to. Q4 was a very strong quarter. We're very happy with our results. One of the things that I was happiest about is we really saw a return to historical trends on new business, so going back to pre-pandemic, back to those levels, which is just a terrific sign. I'd also point to 3 other areas that had great growth. The first was Tableau. And as you know, Tableau is our largest acquisition to date. A terrific business, and they had a very, very strong quarter. Second area I would point to is Commerce Cloud. And Commerce Cloud had 74% GMV growth this year, gross merchandise value. And what I love about that is this is really how we were helping our customers. Some of them who have kind of bricks-and-mortar presence, move online during the pandemic and excited to see that growth. And then the third is public sector. And public sector, if I look back to Q1 of last year. We immediately started getting a surge of state and local governments who are reaching out really trying to figure out what they could do to support their citizens. But it wasn't just a story of Q1. It has continued to have great growth every single quarter throughout the year, and we just see these relationships deepening. And not only in the U.S., we're seeing that around the world as well.

Interesting. Okay. So that's, obviously, lot of good tailwinds there. But -- so I want to get to start with you. It's a new role for you at Salesforce. And so I just -- as you think about your key priorities and where you're focused on, like what are you really trying to accomplish over the -- maybe the next 12 to 18 months?

So it is a new role, and I'm excited about it. But I've had 7.5 years as an executive here at the company, working side-by-side with Marc and really excited to be looking at this through a new lens. In terms of priorities, growth is #1. We have an incredible growth story that is still in front of us, and we need to invest into that, and we need to get on the path to $50 billion. But that said, we've got to do that at the same time drive efficiency. I'm just a huge believer in operating efficiencies, operating leverage. We're a big, grown up company. We should be able to do both. And right now, we have a really unique opportunity. We're coming out of a pandemic, and we have the chance to really develop an entirely new operating model. So when I look at the next 12 to 18 months, it's really going to be about finding that operating model, finding what's working best for us and at the same time, driving efficiencies for us.

Interesting. Okay. So moving on to the operating model a bit. But as I'm sitting here in a virtual background, and I see San Francisco, I'm always thinking about Dreamforce and how busy it is. And obviously, that's a huge event for you guys. And I just -- when you think about the demand and everything like -- so in a virtual environment, pipeline, engagement, generation, how does that all work absent the traditional Dreamforce and the San Francisco love that we've all come to enjoy?

Well, I'll be the first to say I miss Dreamforce.

Me too.

That is a -- it's such an incredible event, the energy, the chance to connect with our customers and our Trailblazers. But if I think back over the last year, it was actually about this time last year that I was forced to make one of our first really hard decisions around the pandemic. And it was mid-February, and we had the Sydney World Tour coming up. And our world tour is we have 10,000 people. They come together, live, in-person. These are huge kind of pipeline generation events for us. And at that time, in the U.S., we had no idea the Tsunami that was about to hit us. But we were seeing more issues in Asia. We're getting nervous, and we made the call that we were going to have to cancel that event. And that was a tough call. I think a lot of people at that time felt we were probably being overly conservative, but we felt it was correct. We wrapped -- I remember it was the Saturday afternoon, we were wrapping up this meeting and someone on the back of the call in marketing, said, well, what if we just do it online? And so that's what we did. We basically took all of the content we had planned for this big in-person event, and we just filmed it and stacked it online. But over the course of the year, we have gotten much more sophisticated in how we do these online events. And we've really learned that we can do high-quality, very targeted events online that really have a terrific impact on our pipe. So the test of all of that was Dreamforce. And I never could imagine doing Dreamforce virtually. But we did it. We had Marc and Bret and Salesforce Park, which I hope you got a chance to watch. We still had over 100,000 people sign up for Dreamforce.com for registration. But even better, we had 140 million live stream keynote viewers, 140 million. And that is something we could not have dreamed of with an in-person presence. And what was even better than that is we were able to do 4,000 Dreamforce TE meetings. So what those are is we basically take our Dreamforce message, and we make a very customized version of that for our larger customers, where we can tailor who is stopping in, which executives came in, which content walk. We were able to do that 4,000 times. And what we learned is we were able to generate pipeline, strong pipeline, that was in line with our historical norms. And you can see the confidence in our revenue guidance for this year coming of that. Now, I will say though, what we've got to figure out now, and this is going back to your question about looking to the next 12 to 18 months, no one wants to stay totally virtual. I'm not sure anyone wants to rush back to completely in-person. How do we pull out the best of both of these worlds and really come together with a very, very effective marketing.

So that's like -- I was actually going to ask you about that. Just like your operations in COVID and maybe we can do kind of a historical lens and then kind of a go-forward lens. But in terms of what you've learned and like we just talked about marketing, but -- product development and go-to-market and thinking about what you've learned through the pandemic and then maybe how you can kind of optimize some of those motions going forward?

Right. Well, I think on the first slice just to start is just with our go-to-market team. And I keep saying a year ago, but it really is -- coming up on this week, it feels like we really are hitting the anniversary, so to speak, of the pandemic. If we'd said to our entire army of AEs, or account executives, you cannot step on the plane for the next year, and yet I expect you to hit great targets, they would have left. And yet what we...

Yes, it's like it doesn't compute, right.

No, it doesn't. It does not. But we have to. And I think especially at Salesforce, we've always had a very high-touch model. We have always had a very in-person model. And we're going to be there in-person and sell this. And to suddenly have everyone working from their bedrooms or their mother's basements or wherever they wound up. And yet what we saw is that the teams had incredible flexibility, incredible resilience, and we're able to turn out in the quarter that we saw for Q4. Now a couple of the things that we did. One is we've really leaned into participation, and we leaned into enablement. And we try to focus our innovation really around things that were relevant. So this is Work.com, which helps get people back to the office and monitoring your workforce, have a vaccine cloud. So that was really critical, and it really reached our customers at a time when they were in need. But as we look forward, it's a little bit like marketing. How do we get this right? So we -- now we've learned, we can sell, and we can sell without ever getting on a plane. But we want to meet our customers where they are, how did they want to be sold to? Do they want to be in-person? We're always going to try to optimize for the customer experience. Then how do we get this right? And as we were really looking towards fiscal year '22 and plotting out our guidance for the year and our planning, we are assuming that there will be some return to travel in the second half of the year. But we're not assuming that's going to be a pre-pandemic level. And so we've got to kind of figure out how we do this. So part of this is really optimizing for the best sales experience and driving revenue. But I have to say as CFO, I'm also really excited to see what savings are involved and how we can get those efficiencies and how we can really improve our online at the same time.

Right. Great. Well, that's a good segue to my next question. I just kind of wanted to have the fiscal year '22 margin outlook. So it was flat for the year. It's interesting -- I know there's some Slack included into that -- into this number. So maybe unpack some of the drivers or moving parts that kind of get you to that flat margin outlook for the year.

Great. So I think at Investor Day, we kind of foreshadowed that Slack was going to have quite an impact on our operating margin. And as we went through that, we're looking at probably a headwind of about 160 basis points, and that's a combination of Slack and Acumen, although I think you can figure out in the relative sizes that, that is at large Slack.

Right. Largely Slack.

It was -- as we went through the planning process, it was actually very, very important to me personally that we were able to hold our margins flat for the year. I did not want to start off with moving backwards. And I think it's really important as we do M&A and as we become a larger and larger and more mature company that we are able to absorb these acquisitions as they come in and find savings in our business. Again, this has to be a focus on growth and efficiency at the same time. So looking at how do we drive these efficiencies, we've talked about the sales motion. We talked about T&E. We talked about marketing. Although, I will pause on marketing for a second. There is not, at this point, a big difference in costs between high-quality marketing online and in-person events. And the reason for that is a lot goes into the production. And also, when you have in-person events, you're virtually offsetting that by ticket sales and registration and then also sponsorships. So we're going to have to get the balance right on that one, but I do want to caution that we're not seeing a lot of savings in that area right now. And then the third is real estate, making sure that we are really effectively using our real estate going forward. So those are some of the major, I think, levers that we have going forward on managing our operating margin.

Understood. And maybe looking at margins from a little bit of a different lens. I know in past Investor Days, you guys have talked about contribution margins and customer-level margins. Any help on unpacking that a little bit, whether that's cost to book or cost to serve? Any higher-level thoughts on that in terms of the margin framework?

Sure. And that's actually one of the ways I really like looking at it, and I thought Evan did an amazing job at our Investor Day in really diving in on these areas. So we've seen a lot of improvement over the recent years in terms of our unit economics. And the 3 that we really look at the most closely: cost of book, attrition and cost to serve. So if you start at cost of book, cost of book has actually increased. We found that it's actually gotten slightly more expensive to sell. But this is deliberate. It increases as you get more sophisticated with this and you sell more into the industry. Or -- excuse me, if you sell more into the enterprise and then also as we look at more industry-specific sales, I mean these just require more sales resources and it's a longer deal cycle. But the trade-off is, these are also the areas that have the lowest attrition. So the more you're selling high in the enterprise, the more you're selling multiple products to use a multi-cloud customer, that attrition really goes in our favor. So by seeing a slight raise in the cost of book, it's paying off on the attrition numbers. And then the third metric is cost to sell, and we have seen that decreasing over recent years, which is terrific. That is largely from efficiencies in G&A, and I expect to keep driving those. The one thing I do want to note is that we have seen some other fluctuation in all of these due to the pandemic, particularly around attrition. But I think the trends are great, and we will continue driving all 3 of these in a good direction.

Understood. Understood. I know we mentioned Slack earlier, but obviously, that's some pretty big news from last year. I know the deal hasn't closed yet, but can you maybe talk about some of the strategic ramifications and benefits that you think Slack really brings to Salesforce?

Great. Look, as you know, the deal has not closed yet. We do expect it to close probably late Q2. That's not completely in our hands, but that's the time line that we should -- people should look to. So we are incredibly excited by adding Slack to our portfolio once we close. And today, when I look at what Salesforce does well, we help customers digitally transform the business. We help them sell better. We help them service better. We help them market better. We help them do their commerce better. And as we look forward, the number of applications used in these businesses is rapidly expanding. It used to be spreadsheets and paper documents. Today, people are using everything from Coupa from Salesforce, DocuSign, which is one of my favorite. And that increases their productivity, but we also need that integration. And I think Slack is really the leader here. And they're making the integration not only of these products possible and these apps possible but they're really integrating people. So Bret had described this as someone that came to MuleSoft. So if you look at MuleSoft when it came out. MuleSoft powers the integration of data. It allows you to bring all of your data in from these disparate sources and really unlock the power. You can think of Slack as being like MuleSoft with that, but really with applications and with people. You're integrating your people, letting people work more carefully together and more closely together. And I think we're going to find that 100% of our customers have integration needs in this area. So I'm really excited to see where this is going to go. But most of all, I'm excited about getting the deal closed and really proving out our theories here.

Right. Well, it sounds like there's a lot of opportunity on that once you get the deal over the finish line. Well, I wanted to stay on M&A synergies, so we hit on Slack. But obviously, you said Tableau was really a strong point switching to fourth quarter. So we're thinking about -- we're still, I guess, earlier days or over the last few years as acquisitions closed. Tell about where we are in terms of synergies or cross-selling into the installed base or penetration? Anything you can share on that?

So Tableau, we're still in fairly early days for that. After we acquired them, we did -- we were expected to hold a separate order for about 4 months, we're a little over a year of full integration for Slack. But they did have a very strong Q4, 34% growth year-on-year. And so I think that they're set up very well for fiscal '22. We're continuing to emphasize cross-selling integration between the teams and that will continue to be a focus. But I mentioned MuleSoft. MuleSoft is also been just a terrific, terrific acquisition. I have a hard time even thinking of them as an acquisition. I feel like they've always been around. We're about to hit the 3-year anniversary. And when we acquired them, their revenue was around $250 million. They are about to pass a $1.5 billion run rate, and that is from 3 years. And what I love about this is, first, it shows that by focusing on what our customers need, we can really hit home runs in bringing in these acquisitions. But it also shows the strength of our integration team and how well we can bring these companies in, and then also how well we can drive them up market. And the combination of some of these smaller companies, bringing them to Salesforce, where we have a very sophisticated selling motion, and we sell high into the enterprise is really, really powerful. We're starting to see that with Tableau. We've seen that play out with MuleSoft. And I think it's a very good sign for what we'll see with Slack once we have closed.

Yes. Well, those are some pretty impressive revenue synergies there, particularly on the MuleSoft side. But yes, seriously, that's great to hear. All right. So maybe hitting on a couple of the specific products. I know I get a lot of questions on Sales Cloud. You think about digital engagement. If you had to take a step back, thinking about the Sales Cloud and how that's helped customers through the pandemic, what would you really highlight there?

On Sales Cloud -- it's fine that you're asking about this. At Investor Day, Mark Hawkins mentioned that the very first question he ever got on an earnings call was about Sales Cloud and could it continue to grow. And Mark told me last week that when he -- after he had that question, Graham Smith, the CFO before him, said that, that has been one of his first questions that he had received, could Sales Cloud continued to grow.

Well, in fairness, it wasn't my first question to you. So maybe this is question number 9.

That is question number 8 or 9, but I do love the fact that 3 CFOs in, we now have this product that is $5 billion, and it's still continuing to grow. And it's growing really impressively at scale. And I think it's terrific. It's our flagship product. It's our oldest product. It had growth of 13% last year even at this scale. But what I really also love about Sales Cloud, even though Graham was asked about it, Mark Hawkins was asked about it, and I've been asked about it now. It's not the same product. Every year, we are innovating still within Sales Cloud. We've got 3 releases a year. We are adding tuck-in acquisitions. We were doing different things for this. And I would point to, for example, high velocity sales. We have built in more and more features just to help customers sell very, very efficiently, Lightning scheduler, a Lightning dialer. CPQ is a great example, a very powerful feature that we've added in, and that was also largely from an acquisition that came from SteelBrick. which is probably 4, 5 years ago and it's been great. There's industries, and we've customized part of this for different industries. And that really allows just time to value. It kind of lets our customers skip right to third base when they start using that. So Sales Cloud is terrific. It's also only one of our products right now. And if you think about our Customer 360 and that kind of clock dial, we are always showing people, There are 11 other phases on that dial, and it's one of our portfolio and growing well.

So that sounds like we'll take this one up to 11. But I did want to hit on Commerce Cloud a little bit, too. You mentioned the 74% GMV growth. Just thinking about people that maybe traditionally sold more retail than a shift online. Anything that you can kind of highlight or double-click on the GMV or what have you seen in Commerce Cloud? Because that seems like such a natural synergy for your customers as they've gone through the pandemic?

Yes, Commerce Cloud is great. And I'll tell you, it could have gone either way. Commerce Cloud is retail-based or the vast number of our customers are retail-based. And I think looking back, we weren't sure what was going to happen with these customers over the past year. I mean, it could have -- this could have been a very different story. But it has turned out to be terrific as customers have really, really leaned in to their digital presence. And as I've mentioned, GMV went up 74% year-on-year. And GMV for us -- I want to pause on this for a minute because it's a great leading indicator, but our contract model is a little bit different from some of our peers in this space who are probably more directly tied between GMV and their revenue. So how it works for us is customers had GMV kind of minimum commitments as part of multiyear subscription contracts. So they have higher GMV. What usually happens, there could be like an overage. But what's more likely is that they hit those numbers earlier than they had expected. They're going to do an early renewal or a larger renewal. So it's a little bit of a longer process between seeing the GMV and seeing that in revenue. So -- and principally, it's not apples-to-apples with some of our peers in this area, and we're often asked about that. So just be a little bit careful. But again, 74% growth, terrific.

Yes. That's pretty impressive at scale. So -- and obviously, I think I would say there's visibility. And obviously, that's just 1 segment, but we have 11 products to talk about here. But like can you just talk about maybe the RPO and some of the longer-term targets? And how do you think about the visibility into the growth profile maybe versus a couple of years ago? Any thoughts on the visibility here?

Well, it's great. We very publicly said that we are headed to $50 billion, and that's in FY '26. So that means, based on our guide this year, we're going to double the company in the 4 following years. So we ended Q4 with around $36 billion in RPO. And really the beauty of our model is being able to see that and have it give us the confidence that we're going to be able to reach key revenue numbers. Now aside from RPO, one of the things that really gives us confidence is looking at our markets and looking at how fast the TAM is expanding. So if you go back to Investor Day, we showed that our core markets are large. They're growing fast. And I think on average, it was around 10% to 12% is what Gartner is showing. Now we are a product leader in every category. And as we continue to drive success, and we continue to expand our functionality, that is really just expanding our opportunities. So if you look at long-term targets, and you exclude Slack, this is implying about a 17% CAGR each year. And you look at our markets, which are also expanding in double digits and you look at our RPO and our ability to compete effectively and continuing to do so at this rate, it really gives us a lot of confidence in how we're going to get to $50 million -- I'm sorry, $50 billion, let me get that one right.

Yes. You sound a lot of confidence in $50 million. Yes. Right.

Brian, let me just tell you. I feel really good on $50 million. But I feel equally as good on $50 billion. So...

I will take the other. Right, right. So I do want to hit on the remote workforce aspect. I know I'm sitting in my office. I have spent some time in my parent's basement. So look, as you think about people trying to get work done remotely, how do you think about how that changes things for Salesforce? The ability to recruit, the ability to diversify? Any thoughts on that?

So we're talking a lot more about this kind of work-from-anywhere or success-from-anywhere model. And I think it's been a bit misunderstood. I think people think that we're going to have 56,000 people working from beaches with their laptop. But as we -- I know it doesn't sound too bad. But as we really talk to our employees, what we're really learning is that they want some sort of office presence, the vast majority of them. So we have a small portion who have always worked from home and will want to continue to do that. We see that proportion growing a little bit. But for the vast majority, they're saying that they want some sort of office presence. They want to connect with their colleagues. They want to have those meetings and brainstorming sessions actually somewhere. Some of them just want to get out of their basements and get back into an office. Beside what we're hearing is, if we don't want -- they don't want it to look like it did before. They don't necessarily want to be in the same office, 5 days a week, 9 to 5. What they really want is some sort of flexibility, and that might be between -- we're hearing the most between 1 and 3 days in office. And so what our challenge is, how do we continue the really unique culture Salesforce has, how do we reimagine our office space so that we are getting -- we're using it effectively, if someone who usually used to be in the office 5 day a week is now there 1 day a week, and how do we just reimagine what we're doing with our real estate. I think this gives us a lot of opportunities, not only to relook at this but to look at where we are, how we're hiring and what sort of flexibility we have? And we're certainly early days in this. But I think it's one of our most exciting levers going forward and most exciting opportunity is just to be changing our operating model.

You mentioned that at the start, but I wanted to hit on hiring, right? Because as you think about this whole work-from-anywhere dynamic, it does give you the ability to add a lot of different types of people, different locations, different roles. So as the CFO, obviously, you kind of control the budget. So how do you kind of manage that whole process with huge opportunity? And I'd just be curious to get your thoughts on hiring plans.

So on hiring plans, yes, we're still executing to our hiring plans. We executed very, very strongly on those this year, which is a terrific testament to our employee success, our HR teams. And to really go into our growth plan, we need the continued headcount, and we need to invest into that. So we wound up ending the year with around 50 -- a little over 56,000 employees, which is about 14% increase year-over-year. Now in terms of hiring the right talent. First, we believe the right talent is out there. We believe that we are getting very, very high-quality, terrific new employees coming in. But one of the new operating models and one of our new opportunities going forward is to have more flexibility in terms of where we hire. And I think that this is going to really give us opportunities to get into untapped markets. We've always been very, very focused on big cities right downtown. And I think if we are willing to really embrace this work-from-anywhere program, if we are willing to look at more flexible schedules, I think we're going to be able to get a tap into all sorts of new opportunities for hiring going forward.

And so actually it's a really good segue to my next question. But just international, obviously, I think there was a slide at the Investor Day maybe 4 or 5 years ago that talked about how the international markets were still small in comparison to the adoption curve to where you are in the U.S. or in North America. So just a huge opportunity. How do we think about that adoption curve going forward?

So international is one of the areas that I am most excited about and really most passionate about. I've lived abroad for many years and this is something that's kind of near and dear to my heart as well. We -- simply put, we have an incredible opportunity in the international market. I think it's one that we really need to seize. Digital transformation, especially this last year, wasn't just in the United States, it wasn't just in Europe, but it was all over the world. So at Investor Day, I think we showed that we had about 34% of our ARR is international. Now that is up from 31% 2 years ago. But that's not a high number. We have a lot of room to grow. And we are seeing that there's high demand in markets throughout the world. One of the places I would call out is LatAm. We have a terrific leader there. We are seeing growth in huge -- while, it's a small numbers at this point, but yet extreme growth every year. And I think we need to really continue to focus on that. One of the things that we've done that I think is really going to help us was actually hiring Gavin Patterson and putting him in as our Chief Revenue Officer. Gavin is British. He lives in London. He brings a new lens to us. And simply having someone who is constantly in the room in the C-suite, reminding us of the international markets, I think, is broadening how we look at things and really helping us -- preventing us from being too myopic as we look at our traditional markets and start to broaden out.

And I'm just curious, maybe double quick because I know it's -- just given the mix, it's been growing faster than the average, right? Is there anything in terms of the existing products? Or what's driven that above-company average growth for international over the last couple of years?

I think it's a lot of things. I think first is just the market and the white space in these areas has been terrific. I think having -- like I said, having Gavin came in, I think a lot of it is also just multi-country deals. We have incredible customers who are all over the globe, and we need to be able to serve them. We need to have a strategy for them so they can log in to Salesforce from Germany and from Mexico and from Japan. And you really can't be -- you can't just be international. We have to be an entirely global company. And we have to serve global customers, and that really means adapting and making sure that we're available in every place that they are.

Understood. Amy that's all the time we have for today. Thank you very much for joining, and everyone we'll be in touch.

Great. Brian, it's a pleasure. Thank you.

Thanks.