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

All right. Good afternoon. Actually, it's not quite afternoon yet. Good midday, everyone. Very excited to have Bret Taylor joining us. So Bret, it's been a bit of a week, right? Yes. It's like it's Exec Chairman...

Not Exec Chairman...

I'm sorry. And then Vice Chairman, it's like salesforce, co-CEO. So he question is, what are you doing in this weekend?

Thursday and Friday are...

These are big, big days. Stay tuned.

I've taken the rest the week-off.

Actually, I think you've earned it my friend. And so -- but seriously, congratulations. That's really, really great news.

Thank you. I really appreciate it. It's a privilege and both incredible companies, incredible brands. And in particular, I mentioned this yesterday in the earnings call, but I've had a decades long friendship with Marc and to have the opportunity to partner with him, it's amazing. Probably wouldn't have predicted I'd be here about 6 years ago, but it's an incredible partnership.

It's been a good ride, and we're looking forward to watching from the sidelines going forward.

Yes. Thank you.

All right. Well, let's focus in a little bit on Q3 just also because of the [indiscernible] last night and then afterwards, let's get into more of the strategic vision going forward. But what are you focusing on from the quarter last night? We talked about Q3 27% revenue growth, CRPO 23% year-over-year. And talk about the organic momentum that you're seeing.

Yes. For me, that was one of the highlights of the quarter. As we mentioned on the call yesterday, Sales Cloud, which is our -- I call it the OG, it's where we get our name from growing at 17%, now over $6 billion business, just like Service Cloud, which is continuing to grow at over 20% as well. Just incredible strength in our core CRM business. It's interesting I talked to 1 of our earlier shareholders who said they thought the total addressable market of CRM was $10 billion when they first got in the stock when we IPO-ed. And I just think when you look -- digital transformation is a word that's used and kind of overused in our industry. We really believe it starts and ends with the customer. When you talk to people today, a lot of boards, a lot of CEOs are talking about resilience. There's -- we tell these things black swan events, but we've had a pandemic, supply chain crisis, inflation. All these things and I think resilience is a big part of it, but it's not resilience in your back office. It's resilience in responding to customer demand and getting back to growth and finding a path to growth when your customer experience has been blown up. I mean it's -- you look at this past week with Cyber Monday, just happened a couple of days ago, cyber went up despite the fact that all the stores weren't open. This is like a one-way door towards digital customer experiences. And salesforce is really at the center of that. And I think that strengthen our core, the relevance of CRM just continues to grow. And I'm really -- I love all of our children equally. I love all of our products. But I do think we're just -- the relevance of our Customer 360 platform really stood out. The other thing, though, just to call it out, I think, really proud of the discipline we have in the business right now. We raised our cash flow guidance, 19%. We raised our operating margin for the year to 18.6%. As Amy Weaver, our CFO, said on -- in our Investor Day, 20% operating margin last year. We're really proud that we can be a high-growth company, but also a really disciplined company on the bottom line. And we've just been consistently raising both top line and bottom line, which is a big part of our new operating model.

Yes. Sales Cloud always jumps out to me, as you pointed out, thank you for rewinding back to IPO. I remember that how big as a TAM, but I also remember the conversations going back a decade ago. When it's going to be sub 10%. I was like we were still waiting for that. It's like still at 17%. It's honestly kind of incredible, to be honest and give the context of that.

Well, yes. And it's interesting right now because it's happening all over. It's new customers, it's people reimagining their sales process. It's interesting, we're in -- I don't even know how many months into this pandemic, you sort of lose track of time, but people are reimagining how they sell. Every single CFO in the world is reimagining their T&E policies, they're rethinking. It's interesting as painful as the wall-to-wall Zoom meetings are for the course of the day. You can call more customers. You can call hire. You can do all these things. I think every single one of our customers are saying, okay, coming out of this pandemic, if you don't reimagine how your company operates, you're losing a once in a lifetime opportunity to find new ways to grow and new operating margin improvements. And that's true in our customer base. So all of our customers, it's new and existing, you come in and say, how do we reimagine your path back to growth? And if it's saying, what's your flexible worth policy, we can really bring in Slack and our Customer 360. If you're talking about top line growth for a B2B company, you talk about reimagining and reimplementing your Sales Cloud to talk about digital selling. Or if you're go into any retail or consumer goods company, it's going direct to consumer, which is direct marketing, it's direct commerce. So I just think we have a really relevant product portfolio right now. And it's really striking to me and my customer conversations just -- yes, there's a lot of disruption, but people are focused on growth. And I think that's -- and you see there's just a lot of consumer spending despite all the kind of broad economic headwinds, it's growth mindset right now, and I think salesforce is really at the center of those conversations.

Yes. I mean honestly it reminds me from 11 years ago, when we were coming out of the financial crisis, there was the pivot to growth from caution to growth, and salesforce obviously did phenomenally well. I'd say, hey, look, what did we learn last time when the C-suite pivots to growth, the projects that are tied to customer get funded.

That's exactly right.

And so let's talk about Q4 before we back up and think about the strategy going forward. So you got into CRPO growth Q4 19% year-over-year. One of the things that Amy called out was -- it was "uncertainty" around FX. And that #1 of the questions I've gotten from people in the audience here is could you help us quantify that? So my question to you is, can you help us quantify that?

Well, we don't guide our expectations, but it is something we take into account in our model. Amy brought this up yesterday, but outside the dollar, the main currencies we deal with are the euro, the Great British Pound and the yen and to a lesser degree, the Australian dollar. It has been a little bit of a rollercoaster. So the dollar strengthened even since our Investor Day pretty considerably. So it's something we take into account. We don't guide it specifically, but it's something we're keeping our eye on just because it's obviously moving pretty quickly and even since our Investor Day a couple of months ago.

Got it. Okay. Now let's go back up a little high level, okay, your new role, you're co-CEO, Vice Chair. What are you going to be focusing on? And how does your lens change now?

Honestly, Marc and I have had a really great partnership through the years and through this pandemic. So it's not some big change. It's not coming -- and I think that's really what defines our partnership as we've learned over the past 5 years, how to operate as a team and play to our strengths. And so I'll tell you, I mean, first, number one, is focusing on our company values. Especially in this time, I still open up the headlines every day and you read about the great resignation, the great relocation. The reason why salesforce is a destination for talent is because we're a values-driven company of trust, customer success, innovation and equality. And I think that focus on trust, particularly in technology, is a big deal. Just a great anecdote. Marc alluded to this on the earnings call. We had a few CEOs give Marc and me direct calls because either their storefront was down or their marketing engine was down because they're using one of our competitors, and it's like Friday and said, "Could you fix this over the weekend? I was like, "Would have been better if you called this 2 months ago." But it's interesting when we whole company -- when the whole world is running on digital technology, whether it's privacy, availability, trust is at the center of those conversations. And I think salesforce and having that as our highest value is incredibly important to our relationship with our customers and society. And then simply, customer success. I think we we've been on this journey really growing our enterprise business, growing our international business. The -- I think the amazing part about the Software-as-a-Service business model is it's an annuity, it's a recurring revenue model. It only works if you're driving success for your customers. And so we really reimagine how we think about our customer success team, how our professional services team partners with the global SIs to make sure we're driving outcomes for our customers so that we can drive larger and larger accounts, drive more complex, multinational, multi-cloud deals. And I think that's really important. You can see it in our really great attrition rates. You can see it in the growth in enterprise and multi-cloud deals. But I -- if you talk to Gavin or Brian Millham or me, we're focused on customer success, number one, and then selling new products because we know that sort of basically earns us the privilege of expanding within those accounts. And then finally, talking about innovation. I think one of the things I'm most proud of is I think our innovation has accelerated organically at the company. I didn't know what contact tracing was 2 years ago. And now I think we're the #1 platform for contact tracing around the world, vaccine management, all the innovation we've delivered, integrated Slack with our Customer 360 platform, I've talked about a few like how we've integrated Service Cloud and Slack for case swarming. The company is really on fire right now. And I think there's a little bit of a swagger on the engineering team that I'm really proud of. And I think especially coming out of the pandemic, where expectations have really shifted in fundamental ways, I just feel really proud of where the team is, and I think it's showing up in our -- the growth in our organic business right now.

Yes, definitely. No, in fact, actually, I was just talking to 1 investor outside. And he was like, the amazing thing about salesforce is when you see a CIO survey, they're still at the top in terms of who's gaining share, who do you trust. In other words, like the customers still like you, right?

That's a key to our business model. And now you probably have like 8 SaaS companies on the stage today alone, but 21 years ago it's pretty novel. And I think it creates a really deep, trusted relationship with your customers when you do it well. And we -- when we show up, particularly at the CEO level, it's about being a trusted digital adviser, not a vendor of software. And I think that's a position that we've earned with many of our customers, and for the ones we haven't, we're working to earn that seat at the table. And I think it's a key strategic differentiator for us as a company.

Let's double click on what you said earlier, the future work. From salesforce's perspective or vantage point, what does the future work look like? And what is salesforce doing to position itself well against this vision?

Well, the short answer is I don't think anyone really does. It's actually, we've been talking about for 20 months because we've all been working from our kitchens or home offices. And everyone's talking, will anyone go back to the office. Some banks are saying everyone is going to come back to the office. It's coupled with a labor shortage, with great resignation, great relocation. A lot of people have permanently moved locations. So a couple things. Number one is talent will move -- speak with their feet. And I think because of that, I think flexible work is without question in the future because it's not up to an individual company to decide what your work policy is because if you say one thing, and your talent has a different opinion, we'll go to your competitor, right? So this isn't -- there's a market for the future of work. And I think that's why we're so bullish on the Slack opportunity because Stewart Butterfield, remarkable entrepreneur and visionary, I think really articulates it well, it's not like the office is going away. But if you're in the office 2 days a week, 3 days a week, the digital infrastructure, you used to connect your employees, your partners and customers is actually more important because that's the constant, whether you're in the office or at your home or on an airplane or at a conference here in Phoenix. And we call it the digital headquarters. And that's really, we think, just a key foundational part of the future of the work as it becomes more flexible. The other thing that I'd say is I do think that we're really -- every time there's like a new news about a new variant, I pick up the journal, it's like pandemic stocks [indiscernible]. Not really the way I think about it. I think we're actually at the beginning of the future of work. We've been -- we've had 2 stages. We had no pandemic, and we were kind of in autopilot where we all worked the way it was done. So didn't know it just showed up and that's the way it was, right? Then you had the pandemic where we're on Zoom 100% of the day. And now we're entering this next era. And I think that next era is actually at the beginning. So both for Slack, certainly, and just thinking about that digital headquarters and how it plays into the next decade, but also just as an entrepreneur and an active investor, I think there will be a lot of entrepreneurs really defining this right now. And I think people sort of think that like we're going to snap back and like, we're not snapping back, like I have a subscription to toilet paper right now. I would have never done that, but I'm not going to cancel it, right?

You never get back on the list.

These consumer behaviors we've learned and the flexibility that our employees have seen and that's something that now is an expectation. And so that's really, I think, the way -- when I talk to executives, they feel the same thing, and you're seeing it like every time you say, here's our return to work policy. You can see it in every big company, it's like well, we're going to go back on this date. Okay, how about that, date? We're never going back. It's like -- and as that -- I think as things move, I really think the future of work is something that's being defined right now, I think Slack is at the center of that discussion, but it's not just Slack. And I think if there's any thing I feel strongly, and I mentioned this, I think I'd talked to over 100 customers this past quarter alone, had a great trip to Europe. Everyone is really thinking about this. And the question is not are things going to change? It's like what is it going to be? And how is it going to change? People reimagined their real estate, their travel and entertainment policy, how they recruit, where they recruit, their workforce plans. I think these are really systemic changes, and we're actually at the beginning, not the end. And I think that's probably the one narrative that I sort of see out there that I really like to correct.

Yes. It's the beginning of the beginning.

Yes.

And so when you think about salesforce's ability to deliver against sort of this -- well, call it, the future of work, whatever it does look like, how do you feel about sort of the completeness of your offering? And then you mentioned, obviously, there's going to be a lot of innovation here. How does sort of M&A fit into the context?

One thing we've been pretty clear on is we're really focused on integrating Slack successfully. So we don't really have plans for short-term M&A. Obviously, we're always opportunistic. You can't pick the time of all of these things. And I think that's something just to recognize. But we're really focused on integrating Slack right now. Just talking broadly about the completeness of the portfolio, we feel really good about where we are. So we have Sales Cloud, we have Service Cloud, Marketing Cloud, Commerce Cloud, our platform business, MuleSoft integration platform, Slack, our system of engagement really connects all these things. That portfolio and that total addressable market I wouldn't pick anything else. We're just really well situated to, I think, capitalize on not just the natural growth in those markets, which has just continued over the past 22 years. But as I mentioned, the reimagination of people's customer and employee experiences that's being motivated by the sort of post pandemic get back to growth this endemic that we're in right now. And we feel really, really bullish about our current portfolio. What's really exciting to me, too, we talk a lot about multi-cloud deals. It's an interesting way of putting it. It sort of misses like what our customers think. And I'll just paint a quick picture. If you're a consumer goods company, and you were previously working through retailers and you cared about trade promotion management and where your products are being placed on the shelves of a store, and now you're going direct to consumer, it's a complete transformation of the software you need to run your company. You need a direct marketing capability, you need to manage your first-party data with something like Salesforce's customer data platform, you need customer service because all of a sudden you're servicing your customers rather than going indirect, you obviously need a storefront and something like our Commerce Cloud. When you think about a multi-cloud deal, I think some people think about is like would you want fries with that. It's not really that. It's actually saying, we need a complete transformation of our customer experience. And I think the completeness of our portfolio is our -- one of our greatest strategic assets in those conversations because people don't want to piecemeal by all of these things and then spend tons of money wiring them all together. They want a complete digital customer experience. And I think we're really the only vendor in the market that can provide it.

Yes. And the thing that we've heard just -- in talking to people in the industry, too, relative to salesforce is that time is of the essence now more than ever, sort of the pivot where it's like, I've got all of these things to do at a very short window to do them in. And so salesforce is a natural end point to go to because of the in-process integration and the data model, et cetera, the value of the suite wins.

What it is, and we use this for a single source of truth. And it's -- our customers want a single source of truth about their customers. How many times have you like called up a support line and been transferred 3 times, right, because you have 4 different systems, 4 different departments or you show up 1 of the -- we have a great relationship with AT&T that we've talked about a number of times in our earnings call, trying to transform their customer experience. If you show up in a AT&T store and they don't know who you are, they don't know that you -- how many lines do you have, all these other things, and you just want to upgrade your phone, that could be a really bad experience. The other side of it, they do know who you are, it's an upsell opportunity, it's a cross-sell opportunity. All of these, and I think that's why it's not so much the suite, which that word in sort of the old days of enterprise software meant like you had a good relationship with IT or something, now, it's value, right? You don't want fragmented customer experience, you want to unify customer experience because that's where growth comes from, that's where customer satisfaction comes from. That's what -- and I think that's really what our focus is. And when I came in as Chief Product Officer a number of years ago, my focus was on integration and integrating our clouds because that's really, I think, where all this value is unlocked and it's really been a driver, particularly in the enterprise for our growth.

Yes. Great. Now as you mentioned earlier, let's circle all the way back to Sales Cloud and Service Cloud. I mean like I said, who would have guessed? $6 billion of revenue each, still growing at the rates they are growing. How do you think about just where we are in the penetration of this opportunity and the growth drivers from here?

It's surprisingly still an incredibly fragmented market. We released the IDC numbers every year because we're proud to be the #1 CRM. But actually, the absolute market share is we still got a lot of runway to go. And it still boggles my mind just because it's been 22 years of a company. I think we have a really wonderful CRM. I think that, that market, I think, continues to grow. The TAM is already large and it continues to expand at a -- I think, a really, really healthy clip. The other thing I'd tell you is just, I think technology disruption is also driving this market. Just look at customer service. When we talked about Cyber Week, Black Friday, Cyber Monday, things like mobile push notifications were up, I think, 114% year-over-year from the previous year. What that means to translate that out of tech speak is people are building their own mobile apps and sending push notifications through their apps rather than sending SMS or e-mail, and it really affects this trend towards really trying to build first-party brands as a retailer rather than working through nonproprietary channels. You look at customer service chatbot usage just exploded through the pandemic. That was not a channel that was available 3 or 4 years ago. So you combine the natural total addressable market expansion, which I think is just continued to impress everybody who's followed salesforce over the past 20 years, also just with the natural disruption of technology and how much it impacts customer experience. And I think it really -- we're really excited about the opportunity. And I'm just -- we are as excited about sales and service now as we were 22 years ago.

Yes. That's amazing. Now let's stick with the clouds. I mean I know you said you love all your children equally. I'm going to make you pick.

[indiscernible]

Exactly. I'm setting this up right now, just phone is going to start vibrate. The -- if you could choose 1 cloud, where is the...

Are you seriously going to...

Yes. It's happening. It's like -- it's like...

This is very good.

But it was like where do you think -- it's not that bad, though. It's like where do you think the greatest innovation is going to happen?

I have to give like a BS answer I really can't answer that. So I'll tell you, I do think every single one of our key markets is actually undergoing a pretty significant transformation that is accelerated by the pandemic. It's interesting. I'll just -- I'll go back to the example I just talked about with chatbots, chatbots have existed for a while. They're getting better as natural language processing gets better and the user experience gets better. What happened in the pandemic though is because all customer service went digital, call centers were overwhelmed and everyone wanted to talk about sort of case deflection. You want people calling up asking, where is my order? Can I change my password, whatever it is. So everyone deployed chatbots over the past years, and 2 things happened. One is adoption of the technology increased but also consumer expectations also shifted. Now we've all used chatbots. It's part of our normal life and almost it becomes like a socially acceptable customer service solution. So everything and you can go across our entire portfolio and every single 1 of these clouds has really shifted in really fundamental ways. But because I promise you, I would not give a BS answer here. The 1 that I'm really excited about right now because it's -- the new one is Slack. I think that when I look -- we talked a lot about -- at Dreamforce about the impact of Slack on our portfolio. And I just think across our portfolio, Slack as an opportunity to reimagine the user experience of our core platform, but more importantly, help our customers start on third base as they go into this new normal. So if you have a sales team that's maybe on the road, half as much, but they're still selling it as a team, how do you do deal rooms? How do you -- can you set up a Slack Connect channel with your customer, connecting DocuSign, connecting Sales Cloud and actually close the deal in a new digital way that actually improves your close rates and make sales cloud more effective. If you're a customer service team and you didn't actually reopen that building that was a contact center and everyone's in their headsets in their homes, how do you do case swarming? How do you find a subject matter expert to actually resolve those cases faster? Well, we built that with Service Cloud and Slack. I looked at Cyber Monday, and it was just so cool to see how many of our retail customers use Slack as their command center for Cyber Week. And they had a Slack Connect channel with their agency, with the merchandisers, with their tech teams. We're talking multiple organizations all in 1 channel to run what is an insane 24-hour period where nothing can break, right? Or you're going to lose GMV? I think the opportunity to really just not only reimagine parts of our product and technology experience, but the most important for our customers is kind of bring them into the future a little bit. And so that they know if they partner with salesforce, they will be able to grow faster in this new normal.

Got it. Now let's talk about some of the newer solutions that you brought to market. Let's start with CDP. Wonder if you could talk about the demand you're seeing for the CDP product? And what impact overall has this brought to Marketing Cloud?

Yes. The customer data platform in our Marketing Cloud has just been a really, really exciting launch this past year. The broader trend that we see in the market is with both privacy laws like GDPR, CCPA, California, but also some of the changes you probably read about in iOS and sort of the kind of different technical challenges around third-party cookies, there's really a move towards first-party data. And so if you talk to a modern CMO, she'll talk a lot about really saying, how do I actually grow my first-party data, my customer base. I mean it's really changed the landscape of digital marketing. And so it really plays to our strength because when I hear that, I think CRM for marketers, and that's really what we do. And it's been a really successful product launch out of the gate. What's really powerful about it, though, is it's natively -- with no integration natively works with our sales and service clouds as well. We really did a good job to really play to the strength of our Customer 360 platform because it's interesting. If you go into a modern enterprise, it's a little depressing at times because it's like you've got 1 department over here with like a data scientist doing this, and you copy data over here to activate your e-mail and can your sales team with a different set of data. We think all of that fragmentation is actually not only a liability from sort of a privacy and compliance standpoint for a lot of customers, but also just reduces the value of having a single source of truth of your data. So I think these trends are really interesting. I think the market around data and privacy is shifting rapidly, and I think we're really well situated to help our customers navigate it.

Okay. Let's stay on the data theme. I mean one of the lines we've been using this data at cloud scale. And obviously, salesforce, you've got a ton of data as you just mentioned, Customer 360, MuleSoft augmenting that data. And what do you think is sort of the, I guess, the vision here, I mean, Einstein, Einstein Analytics? What is the sort of opportunity for enhancements to the customer value from the data at cloud scale?

Well, it's engine. How many years did we launch Einstein? I want to say 6 years ago, probably.

Probably 6, yes.

It has just really taken off in this pandemic. We -- a couple of quarters ago crossed 100 billion predictions per day. I think over through Cyber Week was doing over 140 billion. I might get -- that number might be wrong. But it's really just experienced just incredible nonlinear growth in part because of 2, I think, broad trends. Number one is the explosion of data, as you said. So that really played into our acquisition of Tableau and our investment in Einstein. But with more data, you can make more intelligent decisions. But really, that's where AI shines. And so it's everything from set and time optimization in our marketing cloud, you send it when someone is likely to open it to personalizing that page view of your website, you're not getting what every single person sees, but what will make you most likely to convert to become a customer, become a more likely loyal customer, really, really exploded there. I also think that on the other side of that, what Tableau, what really attracted us to Tableau was creating what they would have called creating a data culture. So many executives I talk to have more data than ever before, but don't feel like they're actually getting value from it. And you have all this data and you make decisions through anecdotes and intuition. And I think the mission of Tableau to help people see and understand their data. it's really important to us, and it's why we felt there were so many synergies between Tableau and our Customer 360 is when your data is going up exponentially, the tools to actually activate every individual employee or company to actually make intelligent data format decisions is as important than ever before. So I'd say on the analytics and Einstein are just 2 areas of extreme focus, and we've just seen incredible adoption through this pandemic, particularly as the whole world has digitized, data in and data out, and it's a virtuous cycle for our customers that set it up correctly.

Got it. Unlike the Q&A at the Analyst Day, I left operating margin to the very end, not the beginning. So operating margin is the question at the Analyst Day. So a 20% guide for fiscal '23. But if I also do step dive for a minute, I mean there's just a tornado activity and call it just right punting ground for salesforce provide [ value to ] customers. But at the same time, you talked about almost sort of efficiency as weapon, too strong of word, but as a way to actually drive value for not just the company, but for shareholders and customers. How do you think balancing sort of the opportunity that you have, all the changes that's happening right now with margin?

Yes. I mean, Amy, and I talk a lot about this. And we're committed to growing both top line and bottom line at this company, and we don't think we need to choose between focusing on growth and focusing on bottom line and focusing on discipline. And as we've talked about this year, our overperformance has been due to top line revenue growth, efficiencies from the pandemic. But the one [indiscernible] third, I think, is the most important, which is really a new operating model and a new discipline at the company. I give Amy Weaver a ton of credit for driving that culture at the company. It involves making decisions and just making sure that we're focused on the area that are high leverage, they're going to drive value for our customers and top line growth from the customer -- our company and not doing the things that are lower leverage. And I think we -- this -- I really enjoyed the conversation on the earnings call. Actually, Marc was motivating, which is we've taken the pandemic as an opportunity not just to build better digital employee experience to really say, who do we want to be as a company 10 years from now? When we hit that $50 billion target, what's the shape of company we want to have and being disciplined as a part of it. And we think we can be -- we want to be a growth company that's incredibly disciplined.

Yes. Well, we've been longtime friends of salesforce, so I'm personally excited to watch the ride, the $50 billion and beyond. So thank you, Bret. That 30 minutes went super fast. And once again, congratulations. It's going to be great to watch.

Thank you very much.

Awesome.