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

Hey, there good late morning here on the West Coast and thanks, everyone, for joining us for day 3 of the Wells Fargo TMT Summit. I'm Michael Turrin, software analyst here at Wells. We're pleased to be hosting a great list of software companies this week, but not many. I'm looking forward to as much as the next one. Joining us, we have Amy Weaver, President and CFO of Salesforce. I'll start off with questions. I have a list. There's obviously a lot to get through in 30 minutes. But if anyone tuned in and have a question they'd like for me to ask, you can shoot an e-mail to [email protected]. I'll do my best to sprinkle those into the conversation, too. But Amy, thank you very much for joining. I appreciate your time.

Great. It's great to be here, Michael. It's great to see you again. It was fun getting a chance to see you actually in person at our Investor Day in September.

I feel guilty. You did such a great job of hosting us for a couple of days, and we're not able to return the favor but maybe someday soon, we will. I want to, before we go into some of the financial details, it looks like it's close to at least 1 year ago that you were announced as CFO. And so congratulations on that. I was hoping if you could maybe just start, walk through the transition from your end. How the first year has been, and then we can just discuss some of the more recent happenings as well.

It's great. Yes. So last year, it was announced on December 1. So it just hit 1 year since the announcement. I actually took the job on February 1, so about a 2-month transition period in there. It seems like we tend to use this week at Salesforce to make big announcements every year. It's been a really exciting week with Marc and Bret as well.

I'm writing that down.

Exactly just mark your calendars. It's been an incredible year. I have already been at the company for 7 years when I took on this new role. So I worked with this team, I knew our customers, I knew our product, I knew the company. But I've said before, it really felt like I've been at the table, been at the room, and I got up and kind of moved 3 seats down to the right. And certainly, the view across the company changed. You see everything through a different lens, and you see the opportunities in front of you. And what really struck me was really the power of the finance model. And what you can do strategically to make changes and how they pull -- how they're going to play out through our long-range planning and into the future. So it's been a great year, a year of a lot of discovery about a company that I thought I already knew pretty well.

Yes. That's excellent. So you also printed Q3 results as part of the busy week that you're referencing.

We did.

So I'll let you start, maybe walk through the major highlights, key takeaways for investors. And then I have a few follow on questions, I can ask there as well.

Sure. Well, just 2 months ago at Investor Day, I was talking about, where the focus it is for us to really have disciplined and profitable growth. And I think Q3 really showed that. We had a fantastic top line delivery and a great performance in terms of op margin again. For the revenue, we were up 27% year-on-year and op margin 90.8% with great cash flow as well. And what I really liked in the quarter was it really showed the strength of our core and really the engine that's driving Salesforce. And one example of that was an absolutely spectacular performance by Sales Cloud. And Sales Cloud is our oldest product, is literally where we get our name from. And for years and years, I think that there was a sense that Sales Cloud was kind of a little sleepy, it was probably going to go down to single digits in growth. And instead, we saw 17% growth in revenue year-over-year from Sales Cloud, and it's been accelerating for 3 quarters. Really amazing to see, it's now a $6 billion business along with Service Cloud, which just makes this incredible strength at the core. We also saw a lot of strength in North America, which was great to see. And the other area, I would point to, is just fabulous retention rates with our core products. We saw the lowest attrition that we've seen in customer in company history this quarter. And I think all of that really goes to the long-term strength of the company. Now I have to say it wasn't perfect. And I am guessing your first question is going to be on MuleSoft. So let me address that one right off that bat. We did -- MuleSoft has been a terrific acquisition. We acquired them 3 years ago, and they have really filled a critical part of our Customer 360 with their integration products, and they've grown remarkably fast. And when we acquired them, they were a $250 million business. They are now have had a run rate of $1.5 billion. And this is in a period of 3 years. So really exceptional. But what we did find this quarter is that they hit a rough patch. And I want to talk a little bit about what that involved. First, I think when you are growing that fast, you tend to hit some scale issues. And you've got to kind of step back and look at, if we want to continue this growth and continue the support, what are the changes we need to make at this point to do that. And we made some proactive changes to the distribution team. And that included, we go every year through the typical process of territory carving and territory alignment. And this past year, we really tried to align that even more closely to Salesforce. We also really increased the sales capacity because we believe in this business so much and this product. But I think all of this coming together will end up being pretty disruptive. And I think it's a short-term disruption, but you can see it in the numbers. We have had 39% growth, the quarter before from MuleSoft, it was 16%. I want to recognize that right upfront because this is something that we're spending a lot of time focusing on. I think that we have identified what the issues are. We're gaining the support, but there was really some short-term disruption, and that was part of our quarter as well.

I'm pleased. I'm frankly surprised you [ want the first ] actually going to go Sales Cloud first. But we'll stick with your thought for second.

No, I'm sticking straight on.

And just in terms of -- so you're categorizing to some degree of mild disruption, investors just thinking through the longevity or thinking through the potential duration of those impacts, is there anything you can add to help just clarify or add some context around the duration? Is that a 4Q and then recovery into next year? Or how we should just think about the time line there?

Sure. Well, I think one thing that's really important to remember is that a large portion of MuleSoft's revenue is recognized in period. In contrast to most of our business with the typical subscription, economics that you see there. And because of that recognition and period, you get that lumpiness really right up front. We saw that in Q3, I think we will see that in Q4 as well. And then hopefully, we'll see more of a turnaround.

Okay. Okay. The other thing that you mentioned, and this is completely, I mean, this is difficult to control and difficult to forecast. It's just some sharp moves in FX recently. It sounded like it's difficult to quantify. It's really hard to forecast or tell. But it's on your mind when you're thinking about the framing of Q4 and just look ahead. So can you just provide some context for those that maybe weren't tuned in for the call just to understand that piece as well.

Sure. I think any global CFO you're going to talk to right now is focused on foreign exchange. It really is some pretty extreme volatility, it had just since Investor Day, both the euro and the British pound are down approximately 3% against the dollar. And a lot of the volatility has actually just come in the last month. And if you started looking right November 1 is when things got really, really choppy. The last week has been extreme, Friday, I think it was the euro strengthens in the morning and then there were some comments from [ Jean Paul ] it went way down. I haven't even checked in a while. I'm usually checking every hour, and I think I have checked in the last hour. So I can't provide the update.

We're not going to let you.

All right. You see me looking down at my phone, I might be checking the FX rates. But for us, our FX exposure is largely in 3 areas. It's the euro, it's the British pound and it's the yen. To a lesser extent, a little bit the Australian dollar, a little bit at the Brazilian real. So as I'm looking forward, and as we look to our guidance and look into the next year and our long range of planning, we factor in exchange rates. Now we don't, and we haven't in the past, explicitly guided or disclosed ForEx, but it's always something that we are considering on that. And the other thing, I want to point out on that is, keep in mind, when you're thinking about FX that it's primarily an impact to us on revenue and CRPO, but it impacts us differently. And revenue you're recognizing through about the quarter, so that kind of averages out to a certain degree. CRPO, it's going to be what it is on January 31. We snapped that line then. So we did that. But yes, the important thing to remember on foreign exchange is it has -- yes, it will affect our financials one way or another. It has nothing to do with the core of our business. And if I look at the strength of our business, it's all there, but we've got to manage through some choppiness in these international waters.

Yes. No, that's clear. In ebbs and flows, you give us some constant currency numbers to help there, too. So certainly appreciate that. You've talked about margin often, there was a clear focal point at the Investor Day. You brought the few jokes there, too. You brought the fiscal year '22 target up to 18.6%, you held to the fiscal year '23 target to 20%, both of which I think are encouraging and well received. The Q4 implied margin just within that does suggest there's a bit of a dip before we kind of move to the '23 expansion and so. Is some of that just tied to some of the nuances you're describing and " Hey, there are just some moving pieces right now to be mindful of. " Is there any other context you'd add just in terms of the seasonal profile just to kind of help paint the more complete picture between the 3.

Right. Well, as you know, and as you mentioned, op margin is a huge focus for me and something I'm really proud of what we've done this year. So we started the year at 17.7% and that was just holding on last year. We were hoping to hold in face of bringing in Slack and Acumen and other headwinds and despite thinking and that's right where we're going to be, we've actually been able to raise considerably across the course of the year, including this quarter, we took it up slightly to finish the year at 18.6%. Now we manage that, we focus on op margin for the year. We don't manage to a specific quarter. So you're going to see going forward, there's going to be quarters where we're up, quarters where we're down, but we're trying to hit that final number. Now I think what surprised people a little bit is I think we were higher than people were expecting for Q3, which makes us lower for Q4. That is simply how a lot of expenses happened to hit right now. It's also because we are seeing some continued seasonality, which I think is getting a little bit more extreme towards Q4. I mean it's really where we make a lot of investments in our workforce. It's when we're investing a lot for growth as we go into the next year. And it is where I was expecting at least to see some modest uptick in T&E with additional travel as we have get the teams out on the road really to close our biggest quarter of the year. So that's what you're really seeing. And I do think that there's a little bit of a mismatch on expectations in terms of when those expenses were going to hit in Q3 or Q4. I think it was kind of surprising people when we're doing the math to get to 18.6% at the end of the year, but that's really what's behind it.

Yes. No, it's all very helpful. So let's zoom out a little bit. And one of the things that was, I think, clear to myself and many who are able to attend the Dreamforce event was just this kind of close knit group between yourself, Gavin and Bret. So Bret was recently named co-CEO. So congrats there as well. Maybe you can just talk about the cohesion of the management team and what brought transition to co-CEO means, if anything, from your perspective?

Sure. Well, let me start with that because it's something I'm incredibly excited about. As you mentioned on Tuesday, we announced that Bret was going to become Vice Chair as well as co-CEO, along with Marc. And I am -- first, I told Bret, I think I'm more excited than he is because I think what this says in terms of their partnership and where the company is going is just so powerful. I've worked with Marc for 8 years now very, very closely. I've worked with Bret for the last 5. In fact, I met Bret initially when I had to negotiate on the other side of him to bring [ equipment ] to the company. And either despite that or because of that, we became very, very close afterwards. He is one of my closest friends at the company. He's also probably one of the most impressive executives and well-rounded executives, I have ever met. And what I love is seeing that Marc and Bret together because I think they challenge each other and inspire each other in a way that's really unique. So it makes me extremely excited for this new structure going forward. So in terms of the rest of the management team, we've always had a great executive leadership team. I enjoyed being part of that for many, many years. But there's something pretty special about the current group. And I think it's really the alignment working so closely with Marc, with Bret, with Gavin. I think you could really see that alignment at Investor Day. I felt like we were kind of finishing one another sentences the entire day. And I think it's really a focus on the long-term success of Salesforce and doing what we need to do to do that. We also just really enjoy working with each other, which makes it fun.

That helps. That helps. We've talked about margin. But let's talk about growth a bit as well. Clearly, a lot of ambitious targets there, still growing 20%. You've talked about the scale of the Sales and Service Cloud business. Maybe we can start with Sales Cloud. And you mentioned how it's turned the corner and is going in a different direction than maybe some were expecting. Do you have a perspective on kind of what's driving that core strength? And maybe just talk about just the durability and your view and confidence that you can continue to march towards this ambitious fiscal '26 targets?

Well, when I think it's taking about Sales Cloud, so tying to Mark Hawkins, and he told me that the very first question he was ever asked by an analyst when you joined Salesforce was whether Sales Cloud was going to go down to single digits. And he told me that he actually pointed that out to Graham Smith, the CFO before him, and Graham said that, that had been the second or third question he ever got as CFO. So this is -- there's been rumors of Sales Cloud's device has been greatly overblown over the years. But I love the fact that not only is it not going down, but it's accelerating and increasing. I think there's a lot of pride we take in Sales Cloud has being our original flagship product. Now in terms of what's driving that growth, I think it's a number of things. First, I really think it's organic innovation. This is not the same product, obviously, that came out 22 years ago. It's also not the same product it was a year ago or 2 years ago. There's a constant focus on this organic innovation, it is making the product as relevant as it can be, and as useful as it can be to our customers. I think the pandemic really drove that home and showed just how powerful the connections are that you make through Sales Cloud, and how it can continue to help companies to meet their customers' needs and be there for them. So I'm excited on where it's going. I think it's going strong, and that's going to continue.

That's great. Lucky for you, you don't get the Sales Cloud deceleration questions. You get all the margin questions now.

Maybe there's a trade-off here.

[indiscernible] here instead. So Slack is also coming up on a year, at least in terms of when that was announced as well. And I think -- I mean, we have some initial observations. I think one thing that we are personally excited about is just the potential for a more prescriptive selling motion behind Slack, I covered Slack as a stand-alone business. And it was still scaling and now you're one of the largest go-to-market engines on the planet that has the product behind it as well. But you've obviously had a lot of conversations around it internally. And I'm just curious what initial observations feedback if there is any from the field, from customers that you're willing to share today. I'm sure everyone's all here is, just to understand that perspective as well.

Sure. So Slack had a terrific quarter. And they are continuing to outperform our already very high expectations in all areas, including on the top line, which is fantastic. So we announced Slack that we're going to acquire Slack almost exactly a year ago, same day, I was announced as CFO. But we did not ask to close the acquisition until very tail end of July this year. So we've really only had them in the family officially for 1 full quarter. But it was a great quarter. They were off to a great start. One of the things that I was really struck by is we put a lot of focus internally on what our top 10 deals are at the company. And I was really excited to see we already had Slack --in a component of Slack in 4 out of our top 10 deals, which I thought considering this was their first quarter was really remarkable. And it really shows, I think, the excitement that our customers have for Slack and also the excitement of our sales team for having an opportunity to work with Slack and get that out there.

I mean the other question you probably feel it a few times is just there's a balance here with Salesforce. You've provided the track record at the onset of the Investor Day. The track record is compelling in terms of M&A. I think you referenced it, Bret referenced it as a strategic asset. Clearly, there have been advantages in coupling some of those technologies with Salesforce. When you think about M&A, investors always have the question to, "Hey, maybe what's next or how do you evaluate it?" And so in characterizing that conversation where you currently sit, what would you say just to the question of M&A and your appetite or just sort of the framework or approach currently?

So when we think about M&A, I think when people are asking, they're really asking, are you going to do another really big deal? You're going to acquire another public company another Slack, another MuleSoft. And right now, that is certainly not our focus. I want to be very careful because we are opportunistic. You never know when some amazing companies is going to come up that only trades once, and you're going to want to jump on that. That said, we are really focused on Slack and Integration, and I don't see large scale, M&A in the near term. I do see a continued drumbeat, which we've done, kind of smaller tuck-in acquisitions. We find that those could be very helpful, whether it's for a specific product or whether it is a great acquisition of talent, but that's a very, very different situation than the large-scale M&A, which I just don't see in our short-term future.

Yes. That's helpful. Salesforce has always had great culture. It's -- at the event, at the event in San Francisco, it was [indiscernible], not employees in the same way. How do you -- so how does Salesforce, what are the things that you've seen, how does Salesforce keep the close net employee culture? I think it's still pretty clear that your employees love working there, and there's a lot of enthusiasm still for what you're building. But how do you make that work in a remote first world? Anything that you've learned? And does that tie into the margin discussion at all just in terms of efficiencies or some of the things you can do from the CFO side?

Well, a few things on that. First, I do think Salesforce has an amazing culture. And I think it's what draws people to the company. I think it's what keeps people at the company, particularly these days, where there's so many choices and there's such a hot market. And I think it's really that constant focus on what the core values are that the company as the trust, the customer success, the innovation, the equality. And as we've gone through the pandemic, we've really tried to double down on those messages and make sure that whatever we're doing, we're still being true to that culture. Now I think that you've really got to be intentional, though, with the pandemic. You don't have these easy ways to run into people. We're getting people back into the office, but certainly not nothing like what it was prior to the pandemic. I think one of the most effective way is actually been Slack. We talked about companies needing a digital headquarters. And that's really what Slack is. And as we look to the future, people are going to go back to offices. There is clearly going to be offices in our future. But is everyone going to be there all the time? Are people going to be remote? Are they traveling? Plenty of our customers have gone to on-remote. You need something that is going to provide that cohesion that is going to bring people together as a constant at all times. And I think Slack has really provided that we became really big Slack customers actually before buying Slack. And getting on to that and immediately seeing the connections people were building, I thought was a real jump-start also on our culture and keeping us together this past year.

That's great. One of the other topics you said FX is the topic that a lot of CFOs have in their mind. I think the other one is just talent and "war for talent" there is an employee empowerment paradigm that's kind of taking shape, and I think -- in sales and engineering count, it's a different market than it's ever been. And so for Salesforce, you're obviously focused on near-term, longer-term goals and some ability to retain those is tied to just your ability to stay on pay for plans there as well. So how would you sort of assess yourself thus far? And what's the message from Salesforce on just your ability to kind of stay in front of those dynamics?

Yes, it's interesting. It is a very, very hot labor market. I'm not sure if I've ever seen one that is as competitive. During the course of my current, I'm not sure I've ever seen one that is quite as competitive as it is right now. And Marc said something interesting the other day, we were talking about recruiting. And he said, we also need to re-recruit our own employees. Every day, you have got to be focused on who we have internally. There's nothing more important than keeping the talent that you have. And it's easier, it's more effective, it's the better approach. And I think that you've got to be conscious of that. You have got to be reaching out to your employees, and you've got to be showing them that this is the best place that they can be and showing them that they have a future and that they have a career. And at Salesforce, I think one of the real benefits of having a company that's so global and so large is you can really show people incredible number of different careers that they can have in very different experiences without ever leaving. And that's a big focus that I've tried to make and kind of recruiting our own teams is the focus for all of us.

Yes. That's a message for everyone to make sure you call your teammates and stay in front of them in this environment. So we -- I knew the time will go quickly. We probably have time for one more. And I'm going to leave it to you and we'll kind of leave somewhat similar to where we started. You're in an important seasonal Q4, you have targets for fiscal '23 and targets for fiscal '22 and beyond. So as far as takeaways for investors, key items that you're focused on and just the milestones that we can watch to evaluate you, as you're making progress to those things, what would be the message from your side there?

Sure. I think the #1 takeaway is really the strength of our core business. As I look to the long-term, you want to make sure that the key functions that are really the engine behind your business are strong. And that's what I really see right now is the Sales Cloud. It is the incredibly strong retention we're seeing in our core products, is the strength we were seeing in North America in this past quarter. These are the things that are going to really pull us into the future, and it's something I'm really excited about. I also really keep an eye on Slack. I think Slack was the right product at the right time. We really couldn't have asked for anything better. And I think what it's going to do is really bring everything together. So as we go into the future, I think it's going to make every one of our products which are all very, very strong right now. I think it's going to make every one of those better and help customers both with reaching out to their own customers, but also with those important employee connections that you have been emphasizing as well. I think it brings them together as well.

Excellent. Amy, this was fantastic. We very much appreciate you tuning in from. It looks like kind of the top of the Salesforce Tower, but it might not be. But great to have you regardless. Hopefully, next time we get to do it in person. But this was great. And certainly appreciate your time.

Great. Thanks so much, Michael. Great to see you.

Likewise.