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

Welcome to our next session. I'm really happy to have Gavin Patterson here from Salesforce. Gavin, thanks for joining us. We just established on different [ parts of the front ] that the connection still works. So Zoom is kind of working again today.

The -- Kevin -- Gavin, sorry. Let's start with like slightly bigger picture questions. Like you joined Salesforce not too long ago. You were running a very large successful U.K. company, so it's a good question to ask you. Like everyone that I talk to that used to work at Salesforce or works at Salesforce talks about that unique culture that is still there that Marc managed to kind of keep and foster. From your perspective, like what is it? Like it sounds almost too good to be true, but like what do you see here?

Well, I think the single most important source of competitive advantage in the company is the culture. I mean it's obviously the products, outstanding, generally market leader where -- in each of the markets they serve. There are some outstanding individuals within the company. It's an incredible sales machine, a sales distribution, direct sales force in particular, but if you were to ask me what is the single thing that sort of sets us apart, it is the culture. And Marc has managed to retain, I will describe, as a small company feel as the company has grown at an extraordinary clip. I mean it's $25 billion, $26 billion revenue growing 20%-plus a year for 20-odd years; and with real confidence, as we've given in guidance, to get to over $31 billion next year. So how has he done it? It's a very agile company. You have to be able to operate real time. The data is in front of you. It's like driving a car and you need to be able to think on your feet. And you'll be able to respond to different -- changing market conditions and be prepared to debate and move very quickly. It's still run on a functional basis. That means you can make decisions quickly and move money very quickly and allocate according to priorities without having to get into long debates as you move down divisional pyramids. And the values themselves, trust, customer success, innovation, equality, the 1-1-1 model in terms of business being a catalyst for good, these are deeply embedded in the organization, so it means that even if you are growing 20% a year in terms of head count, which is what we're doing, actually you can still keep that sense of belonging and sense of commonality with everybody who's in the business. So it is a pretty remarkable place in that respect.

Yes. That's interesting to hear. And I -- it's funny. Like I -- that was echoed by a good few people -- by a lot of people that I talked to, so it's really nice to see. The -- I wanted to move on a little bit. Like the one thing in terms of customer relationships that we heard over the last few years is that, as you became like a bigger item for a lot of customers, you become more important, your role has and the relationship has changed to become much more like a trusted adviser. You kind of earned the right to sit at the CEO or C-level tables kind of to help with customers and talk about the long-term strategy, et cetera. Can you speak to that? Have you noticed that in your time there?

Yes. And this is a very deliberate action. The history of the company and indeed its sort of bedrock is SMB and mid-market. And we continue to have a very strong business there, a really strong franchise, but in addition to that, we've moved, if you like, upmarket. I don't know whether that's a fair way of putting it but to bigger and bigger companies, increasingly multinational companies. And with that have -- has also come a change where we've added more and more clouds to what we call the Salesforce Customer 360. So we're able to give a holistic view of everything related to the customer for our clients, so with that, we've become strategically more important to our customers. And we found that increasingly not only does the CIO want to have a relationship but the CDO, Chief Data Officer, the key business heads. And particularly over the last couple of years with COVID, this has become a CEO priority. If you -- frankly, if you haven't got a digital strategy, you haven't got a strategy at all at the moment. It's that important, and that's been an opportunity for us that we've jumped straight in it. So if I look at the number of companies taking 4 or 5 clouds from us. That is increasing faster than our overall run rate. The number of customers who are spending $100 million a year with us is increasing quite significantly. We didn't have -- even probably 12, 18 months ago, we didn't have any customer doing that. And these are signals, if you like. These are indications of the importance that we've got. So whether it's with companies like AT&T; Disney; [ Verizon ]; all the big banks around the world, JPMorgan, Bank of America, Barclays. Standard Bank in the U.S. -- in Africa is a fantastic example of actually how we are sort of developing around the world. They're using us in, I think, 20-plus markets. And in APAC it's Telstra is just one example of this. So in each case, the relationship runs all the way through the organization, but it does include an ongoing dialogue between Marc or Bret or me with the CEO. And it's one of the things -- having been a CEO and knowing many of these people, having served them as -- with BT, it's an area I've been able to bring some particular expertise and value.

Yes. I remember like [ our last ] big renewal with you guys were -- that was CEO to CEO. And there was like a very different conversation then like years ago where you just kind of heckle about some extra product to add on at a certain price. [ Now it's so ] much more a bigger picture decision that were discussed here, from what I heard, yes. So yes. That's -- and how does -- and on that note then, if you get like a premium asset like a Slack, for example, and I guess, added to your portfolio of things that you [ can, cannot ] sell. What does it do to you in terms of like sales and conversation you can do? It seems like you can uplevel like that product like quite significantly overnight.

Well, I think it's one of the things that Salesforce have done really well over the -- as they've grown over the last 5, 10 years, maintaining really good organic growth but with -- adding to that with inorganic growth and smart acquisitions. So MuleSoft, Tableau and now Slack. And MuleSoft, which is the sort of longest of that, those acquisitions, I think, bought in 2017, 4 and a bit years later is -- I think it's gone from $250 million to $1.5 billion in sales and in revenue. And it's of strategic importance to us. It's the -- if you like, it's the glue that holds all the clouds together and allows us to sit on top of legacy systems and allow customers to get quick time to value. And I think Slack is going to be equally -- if not strategically more important than that. It's a remarkable product. [ I've bored ] people with it. I've only seen a product like this twice in my career, and I'm no spring chicken. It completely changes the way you work with each other, engage with data. And it just -- you're far more effective. You do things in a fraction of the time and it's far more engaging. And when I talk to customers about that, their eyes light up, and -- but you need to explain what it does and how you organize around channels and how you've got this fantastic exchange of apps that plug straight into it because, after 35 years of using e-mail, you have to forget all that and work a different way. So it's probably the highlight of almost every CEO conversation or CDO conversation I'm having at the moment because, changing the way we work, having a digital HQ and being able to work from anywhere is the topic of the day. It's the topic of the year. And if there's one thing we're taking away from COVID, it's that actually we're not going back to the way we worked in the past. So it's the timing is perfect.

[indiscernible] -- sorry to interrupt you there. The -- I mean, do you see that upleveling already [ in ] what was your first experience with Slack? Because like I covered Slack as a company -- and a very, very good product, but they were kind of running into that issue of like departments liked to use it. Like IT departments were using it and they loved it, but then you enter the center. "And yes, we just got a Teams contract." Like yes, I don't know. "It sounds good." Now you guys can really change the whole dynamic there because you earned that right to be there and have a completely different discussion. Do you see that starting to come through?

Yes, I do, but a couple of points to make. I think we complement each other in terms of competencies. Slack is -- comes out of the consumer space. Or let me put it this way: The founders were consumer Internet guys, so it's beautifully designed. It's very intuitive to use. There's an elegance to it. There's a self-service component to it that we're going to learn from and reapply across the whole of the business. What we bring to the party is we've got a 10,000-person army of direct sellers with direct relationships with customers right the way across from mid-market through to the biggest organizations around the world, so we can take the conversation to places that Slack have not previously been able to get to. I think the second thing I would say is I don't frame this as a Teams-versus-Slack debate. We do have customers who are only Teams and have not taken -- or sorry, who -- they're only Slack and haven't taken Teams, but the way I see it is it's they do different things, ultimately. And what you can do with Slack, particularly engaging around channels -- so in particular, things like closing deals. We closed the deal to buy Slack on Slack. It just...

You'd expect that, wouldn't you?

But it's just -- it's much more effective. You remove all the sort of duplication and noise. You can move much quicker because everything is organized in a channel. You can work with your internal customers and colleagues but also bring in third parties, so in this case, investment bankers, lawyers, PR consultants, et cetera. Because all the data is continually refreshed and you look at it on an asynchronous basis, it just moves faster. So there are certain use cases that work extremely well with that, closing deals. Customer service works extremely well. So it's -- it isn't always a case of swapping out Teams and getting into a debate about that. I think ultimately they've got different forms of functionality and can coexist.

Yes, yes, yes. Okay, makes a lot of sense. And then Gavin, you talked a little bit about Mule earlier. The -- we -- the last few years, we've just only heard like how we were scaling, [ how it's ] helping you. And there are some really impressive numbers out there. Like, last quarter, it was the first time you mentioned something that we -- in that scaling, I have to rethink a little bit what I'm doing here. Can you -- I don't know how much you can say, but any hints on what's -- what you're doing there?

Mule is a fantastic business. I think I can say this because I wasn't here. It's an inspired acquisition. It's fundamental to the Customer 360. It's the -- as I've mentioned earlier, it's the technology that pulls all the clouds together, on one hand; and allows you to get -- go work with legacy systems, legacy databases, on the other, and scrape the data out of your existing technology stack. So it's strategically important. It's fundamental in that respect. It's been growing at a crazy rate, yes, over the last few years. It's true to say we're going through a bit of a rough patch. It's not completely unexpected, I'll say. We made some changes to the operation to align territories and sales teams so that we could turn up to the customer more consistently and be able to give a single view to the customer. I think it's fair to say that, coupled with, trying to grow the sales teams at a very, very high rate, we ran into -- we've run into a few challenges. I am very confident we will work through them in the next couple of quarters. And as I say, my -- I can't underline enough how important MuleSoft is to our overall story and our overall proposition. So these things happen. You run a business for 5 years. It's pretty unusual that you don't have a quarter or 2 where you have to sort of course correct, but there's nothing fundamental wrong here. It's a great business and will grow significantly from here.

Yes. No, okay, that's great to hear. And Gavin, let's shift gear a little bit. I need to ask you a question that was with me for a while. Like what the heck are you doing on the Sales Cloud? Because that was to -- it was supposed to be like the most mature cloud. And I remember like, a couple of years ago, the growth rates kind of went to high single digits. And we talked about like, well, it's a big cloud. [ We've sold ] this for a long, long time. Penetration is high. And now if I look at the results, the last few quarters, it keeps accelerating. And last quarter, it was kind of record growth for a long, long time there, so what's going on there? Like how do you achieve that?

Well, it's -- so now it's a $6 billion cloud. It's growing at 17%. I expect that to tick upwards from here. It's performing really, really well. What we identified probably 12 months ago was we have to change tack. Sales Cloud is often the first cloud that new customers, new logos take with us. And allowing it to -- or not acting as that growth rate was slowing down was just not acceptable anymore, so we made changes in the way we operated at a distribution level in terms of challenging the belief, first of all, that it was saturated because it's got very high market shares in -- particularly in the U.S. And some of our sellers said, "I can't sell any more." That was a -- frankly, an accepted customer belief that was not true, and so we challenged that. We made sure that we had more relevant sales plays for some of the customers that perhaps we tried years ago and weren't ready for digitalization. We've gone back [ around ] them and found that actually many of those are ready now, so I think it's about making sure you're relevant, making sure you've got great sales plays, making sure you're incentivizing people in the right way and getting some conviction and momentum back into the sales force. And then we followed through by innovating on Sales Cloud. We've got a very dynamic product leader who's, I think, brought new energy to the product road map. And it's given us -- this isn't just a 1- or 2-quarter change. I can look into the future. And I'm not going to make any predictions in terms of numbers, but I'll say this: I'm confident this trend goes on.

And how much of that -- like that's the -- one of the things we're discussing with investors is like how much of that success is the -- that the pandemic has opened people's eyes towards, as you said, digital transformation? And now we have, call it -- is it pent-up demand or like just a different thinking about it and hence the better numbers there? Is that, was that a factor?

I -- look. I think it is a factor. I made the statement at the beginning and it's one I've made many times before. If you didn't have a digital strategy over the last 18 months, you didn't have a strategy. And so companies that were sort of probably walking slowly or not even walking at all towards digitalization have woken up, and they're moving quickly. They're moving decisively. And conversations that were previously buried in the organization are now taking part at the top of the organization. And so Sales Cloud is right at the center of that, Service Cloud similarly critically important. These are both $6 billion businesses and with very strong product -- customer references and strong product road maps. So I think customers have recognized that actually with COVID they've got to digitalize the business faster, or their organization, because we're not going back to the world we've come from. It's going to look very different. It already looks very different with a different set of competitors, and -- but the one thing you've got to do is you've got to be -- you've got to have a digitalized business. And there's no denying that.

And the -- if you think about it, the -- like the environment is changing a little bit because people realize they need to change. Do you think this is like "a couple of quarter" events where people come out and then it kind of all fizzles out as you get busier somewhere else? Or do you think we have like an -- we're kind of on a multi-quarter journey here of the world changing?

No. It -- this isn't a sort of flash in the pan.

Yes.

Yet if you look back, I'm sure there was some of it, not just in our business, in others, which was sort of related directly to COVID, but if I look now, demand is strong. It's robust. It's the new normal, I will say, so it's not -- we're not sort of -- I'm not seeing any let-up in that, but if I look at our pipeline, it's really strong. And we started this quarter well, yes. And so I've got a great deal of confidence about the performance and that it's going to be maintained into next year and beyond. Digitalization has been going on for 25 years, maybe even longer. It's not run its course. There isn't a business I've come across or an organization that can't go further than its -- than they have to date -- and new applications, new technology is coming all the time. It's a very dynamic market.

And that was like you must have been really shocked. I mean if I looked at the share price reaction in the last results. [ And we got ] your comments. Like it's strong as ever. Pipeline is really strong. And then we saw the share price reaction, but I won't have you comment on that one, but it must have been like a shock because it doesn't seem to make sense. I mean it looks, from what we hear as well, really great out there. Last couple of minutes: I want to change gear a little bit in terms of more changes to the organization and then, well, impact to profitability for you guys as well. Like, in the pandemic, we needed to learn to sell differently. We -- it started with cold calling, et cetera over Zoom rather than visiting the clients, et cetera. What were lessons you learned in the pandemic in terms of sales and how sales were operating? And what can you keep going forward versus what has to come back?

Bear with me.

Yes, yes, yes. Well, that's -- at least it's not AWS down. So that's kind of really healthy. And it's not on my side. I had it in the last one, where my telephone started ringing next to me. Welcome to the Zoom world. So you can see now this is real, Zoom, from their perspective...

[ Sorry about that ]...

No worries. That's -- like that's the Zoom world. I had -- in my last call, I had -- my phone started ringing. I couldn't turn it off -- and stuff like that. Welcome to the new world, but the question was what you learned from sales, like sales, how it's done [ differently ].

Yes. Look. This was a business that was built on face-to-face selling and direct selling and big conferences. And I think what we discovered, that actually when none of that was possible, we could pivot to a completely digital selling experience. And we became even more effective. So we got to see more decision-makers. We got faster time to value. And we were able to close more business, so I think there are many things from that period that we're going to retain. I don't see us reverting all the way back to 100% face-to-face selling. I think a large chunk of it will be video, but what I've learned as I've got out more in the last quarter is there are many meetings that can only be done in person, and you get more from them. So ultimately I think it will be a blend. I think we'll be thoughtful about how we mix a mixture of a digital world and a face-to-face world. And I think it can only be good for business. I think the other thing is we're learning to supplement our direct model by strengthening our indirect model, our partner ecosystem and our digital channel. Relatively little business goes through pure digital selling, Internet selling, and ultimately that is an opportunity for us, so that's another area you'll see us increase going forwards. It's how do we put through some of the smaller deals directly through the Internet.

Yes and again more momentum there, okay. And in the last couple of minutes, I want to talk more about operations and more of the internal view. Like, the last couple of quarters, we heard a lot more about like a -- with Amy now as the -- and the CFO role, about a stronger focus, about more discipline, et cetera. Like -- or discipline. Have you seen -- is that kind of -- how does it play out for you? Like is it just more general rethinking and the pandemic also helped there? Like what are you seeing there?

Look. It's -- I think it's a natural motion, a natural direction certainly. And it's a habit that I've had for 30-odd years. I'm not used to businesses that are not focused on growing top line and bottom line simultaneously. And so I think it is something that we've got strong alignment across all the key functions of the business and as a leadership team, so there's no ambiguity. There's no conflicting agenda, number one. Number two is I think it is what you'd normally expect from a business that's essentially got the structural economics that we have. It's [ generally ] expanding the margin as you sell more of that product is completely reasonable. So from my perspective, I'm confident that we can do both things at the same time, continue to grow at the sort of rates you've seen, moving towards that $50 billion target that we've talked about, but at the same time [ generally ] expanding the margin, doing so in a consistent and measured way but not sacrificing growth to do it. And it's -- I think you've seen in the last few quarters that we've made, I think, the first steps in that direction.

Yes. And the -- I mean historically the -- at the Analyst Days, we always have the presentations from the CFO and team about strong unit economics and how it made sense to keep adding sales capacity to do that. Given now what you mentioned around the opportunity around self serve or self buying, et cetera, has that changed? Or how do you -- how should we think about that in the new -- in a post-pandemic world?

Look. The unit economics of the business are excellent for the direct, indirect and digital channels. So to me it's about finding the right channel for the customer, opening up parts of the market that are only accessible through indirect access, finding the right combination with some of our partners to really leverage their relationships when sometimes ours aren't as developed. So it's -- in terms of unit economics, I think they're all good, but it's about expanding reach and coverage fundamentally to -- from my perspective.

Yes, yes. And then last question for me, and then I need to let you go, is like, given both of our backgrounds in Europe, like what do you see about the Salesforce opportunity outside of the U.S.? Like I'm German, as you can hear from the accent. Like for a long time -- words like, "Can you trust the cloud?" There were like [ old sessions ] about cloud, et cetera. That seems to be changing. That must be exciting for you as an opportunity for growth as well.

Yes. I think that what's great about where we are at the moment is the growth rate in the U.S. is increasing and demand is really strong. At the same time, our international business or non-U.S. business is growing really well as well, so we've got balanced geographic growth. And one of the key enablers, I think, is being able to use Hyperforce. So our ability to deploy local instances of Salesforce using our relationship with AWS. This is a big deal. And as you all know, in many of the European markets, they want local data sources and they want local support around those data sources. And that is a big enabler for us, not just with banks and governments but consumer goods companies, insurance companies. It is a theme that is a major, I'd say top 3, theme in Europe alone. I see the same in ANZ. So what's [indiscernible] our offer is Bret had the vision a few years ago to go to third-party cloud. And that gives us huge flexibility as well as great economics about where we deploy so we can deploy where our customers want us to be.

Okay, perfect. Gavin, that's a great closing statement as well. And it was really exciting to talk to you and connect to you. It looks like it's going all really well, so congratulations again. And all the best. And thanks for joining us here today. Thank you.

Thanks, Raimo.

Thank you.