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

Excellent. Thank you so much for joining us. My name is Keith Weiss. I run the U.S. software research effort here at Morgan Stanley. And very pleased to have with us from Salesforce, President and CFO, Amy Weaver. Amy, thank you for joining us.

Great. Thanks, Keith. Great to be back again this year.

Excellent. Quick disclosure. For important research disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So with that out of the way, a lot to talk to on Salesforce. A lot to transpire since you were here last year. Maybe just to start out from like a high level to set the stage and talk a little bit about the demand environment. I think your most recently quarterly results impress people on 2 fronts, like 1 was the degree of discipline on operating margins and sort of I think those targets definitely surprised to the upside. But the other is, fundamentally, you guys did better than expected on the top line, the CRPO exceeded expectations. So can you talk to us a little bit about what you're seeing out there on the demand environment? And how it's kind of transpire through 2022? And what you're looking forward to into 2023?

Sure. I'd love to -- firstly, just talking before the microphones came on about the fact that we were here just a year ago and what a difference you make this an ascending year, not just for Salesforce, but for the tech industry. And we're definitely coming off 90 pretty intense days, but I just kind of be more excited about how we're positioned and looking forward to a really transformational year for Salesforce. Going back on growth, let's get back to the last summer. So last July is when we really started seeing a shift in how our customers were really buying from us. And I talked to kind of account executives after accounting executive, they said the same thing. They went away for 4th of July weekend, and they came back to the office and felt like they walked into an entirely different selling environment. Now I'm sure that the shift wasn't as dramatic as that in the economy. But our quarters tend to be very back-end loaded, July is our last month of the quarter. And so for us, it became very, very apparent in July. And what we saw were really 3 things. First, elongated sales cycles. The second was additional approvals. So even smaller deals need to go up to the Board of Directors at a customer before it could be signed off. And then also, particularly in the enterprise, we saw some deal compression. So that deal you've been working on for months, that was always a $10 million deal. Suddenly, the budget has shrunk to $10 million. So all those things were happening at the end of Q2. As we moved into Q3, if anything, I think it got marginally worse. All of these things -- the entire environment seem to deteriorate slightly. Q4, I expected it to continue deteriorating and it didn't. I feel like things really leveled out. They don't level out at a great new level, but they leveled out. And what I also saw is that we executed better. It was no longer a surprise that, that deal was going to take a little bit longer or that extra approvals were going to be necessary. We had adjusted and we're executing better against that environment.

Got it. Got it. And then if we look forward into 2020 or calendar '23, your FY '24, you talked about you feel Salesforce is really well positioned here. What is it sort of within -- sort of the market within sort of the solution portfolio that gets you excited about that positioning into what's still a pretty trepidatious demand environment.

Yes. There's a lot of things that make me excited about this next year and where I see it. Stepping back to look at our guidance for this year, where I see where we're going. I'm not assuming a material uptick in the near term in terms of the selling environment. But I'm also not assuming that it is going to deteriorate further. So it's somewhat steady state. But what I feel really good about is the position where Salesforce is, where we stay in the market, what we have to offer. So if you look at kind of traditional sales plays, we've always had our sales play where you're sell, what do you do if you're selling to the CEO? What do you do if you're selling to the CIO or the CMO? What the sales teams have realized right now, every deal, every sale, you're selling to the CFO. CFO is really behind this -- by the way, I love this. I think it's a great approach. And I wish -- I hope that this continues. But every CFO I talked to, including myself, wants the same thing. You're looking for efficiency, you're looking for automation, you're looking for consolidation of your vendors. And we provide all of that with Salesforce. This is exactly what our products are designed to do. And I think particularly, the consolidation point is important. We have this incredible suite of products, the whole customer 360. And companies can really consolidate with us. And that also has benefits for us with multi-cloud adoption. So when 1 of our customers goes from having a single cloud to 2 clouds, 3 clouds, it's not just a matter of adding more revenue. There's truly a multiplier effect. And so you go from 1 to 2, it is 7x more revenue, 12x, 200x more as you go all the way up the chain. And it's not just adding revenue. The more cloud, the more products you're buying from Salesforce the lower the attrition rate for us. And you get up to the top, the 7 clouds, they're not leaving because they're all in on Salesforce, and we're all in with that. So I think this multi-cloud experience is really our future.

Got it. And you thought I was kidding, but I really -- I'm going to ask you some AI questions as well because I think there's...

We're talking about this is always going to be a deep dive on AI...

All going to be AI. And in terms of that consolidation benefit, you talked about the financial implications, which are definitely positive, but there's technological benefit as well because AI is all about the data you have to kind of train the models and take these optimizations. The more of that business process, you get in the scope of Salesforce, this makes you guys better positioned to be able to be the ones who are providing the AI sort of...

Well, that's right. And we have 2 product areas that really fit with this via the play. The first is Genie that we announced at Dreamforce. So what Genie is, it's really a data pool and it is creating a data lake among all of the Salesforce products where you can get instant real-time actionable insights. This is not just Salesforce. You can also set this out with other data lakes such as Snowflake, you can bring in other product information. So the average company has nearly 1,000 different systems that they're running. I think it's like 978. And that is 978 siloed areas of information. If you can bring that all together, the differences in terms of actionable behavior is remarkable. And we're fairly early days with this. But I'll tell you, I have -- I've been with Salesforce for a little over 9 years. I have never seen our engineering team as excited about any feature, any breakthrough, any product, as they are about Genie. And we're starting to use it with some of our customers and an early -- a very early adopter, for example, is Ford Motor Company. And they're already big on Salesforce. So they've got this new electric Mustang. And they use our marketing, our commerce cloud, push out notifications so that people who are buying the car know when it's coming, they've got all the details. They're using Sales Cloud for their dealers to chase leads. They're using Service Cloud for their technicians. Well, now they've got this data cloud that is bringing in all of this information, so they're learning among these areas and pushing this out. And then you may have seen today, we have Trailhead DX going on. And TrailheadDX is our big developer conference that's going on just down the street here. We've announced Einstein GPT, and this is the first kind of generative AI for CRM. So if you imagine this data pool, this data like with Genie and then you add on top of it, these AI, it particularly generative AI capabilities, it's really an exciting moment for Salesforce.

Right. And what I thought was so interesting about that announcement was the way that you structure it, you keep it an open ecosystem, right? You have the Data Cloud from Salesforce, which is where you're getting your data. You have the applications which expose that generative AI and so to make it actionable, but you're able to plug in different engines. And the first engine in terms of the AI models open AI but there's definitely opportunities for more to come over time.

I think that's exactly right. We're really at early days, but I just love thing Salesforce to be out in the lead on that. And going back to the multi-cloud, it's really interesting because this all plays in with that, and it makes those multi-cloud experiences even more powerful. And it's 1 of the reasons I see multi-cloud is taking -- really getting a lot of traction right now. Every quarter, we look at our top 10 deals. So that's a very big deal if you were somehow working on what the top 10 deals. Just to make it into the top 10 for Q4, you had to have at least 5 clouds in there. And half of those -- so 5 of the top 10 had 7 or more clouds.

Got it. I want to shift gears a little bit and talk about some of the restructuring, some of the changes that are taking place. And maybe start with the changes that you guys are putting into place in terms of the sales organization. This is actually something you started talking about at Analyst Day about an ability to be more efficient with that selling. Can you walk us through kind of -- at Analyst Day, it was more sort of like aligning the sales efforts, the type of deal being done. It sounds like that's expanded a little bit more than you could be -- and Brian Millham was talking about this on the conference call that when you're going after those like big industry solutions and the multi-cloud deal, you could be more effective and more efficient in how you're going to market there. Can you talk to us about sort of how those go-to-market motions are changing?

Sure. Let's kind -- let me just back up a little bit on some of the short-term and long-term restructuring we're doing. And sales is very important, and it's probably our most important area in that, but it is broader. So just going back a little bit in time, 2 years ago, a little more than 2 years ago when I had been announced as CFO, but hadn't taken the role yet. I spent 2 months really just doing a listening tour with our shareholders. And when [ Alan ] just said, what's top of mind for you? What should be top of mind coming in for me? And I would summarize their advice to me as operating margin, operating margin, operating margin and then don't forget about dilution. And that's very much been the focus I've had coming in, in terms of what we need to do as a company. And at that point, we were at 17.7% operating margin. And we are just hoping to hold on to that for the year. We just announced we're buying Slack, which we knew it was going to be dilutive. But through some of the changes we're making, not only were we able to increase operating margin that year, but over the last 2 years, we've increased it by almost 500 basis points. And as we announced last week, we intend to bring that up at least another 450 basis points this year and even higher to about 30% in the following year. Now in terms of how we're going to do that, we started talking a lot at Investor Day. We need every part of the business to be involved, absolutely. But if you compare our expense structure to some of our peer companies, you'll see that there's 2 areas that really stand out. One is G&A. We're making a lot of changes to automate and drive down those costs, but the big one is sales and marketing. And that has to be front and center with everything we're doing. I cannot be happier about having Brian Millham in the role he's in. And I think you could hear the genuine excitement from him, both at Investor Day and on the earnings call about what he's doing to drive this. So it starts with efficiencies. It's restructuring he is doing. It's how you sell. It's got to be something that makes it accelerate both the top line and the bottom line. So it's the productivity and efficiency, and he is just diving in, in all ways.

Maybe to kind of refocus on sort of that operating margin sort of expansion trajectory on a go-forward basis. You made a very specific comment on the conference call that like 30% is not the ceiling, and there's more. I'm going to play devil's advocate a little bit. This was probably 7, 8 years ago, I remember a Salesforce Investor Day. I think it was [indiscernible] at the time doing his professor stick and talk to us about cost-to-book versus cost-to-serve...

I can picture the slide.

Exactly. And there's an efficient frontier at different rates of growth, you should have different margin profiles. And we utilize that a lot. We actually took that core sort of thought process and made into something we call SaaS X-ray. And at a slower growth rate, you should have higher margins is really the conclusion of that. How much of what we're seeing, like, how much of 30% is just, "Hey, listen, now we're guiding to 10% growth. You're not guiding to 20% growth." How much of that efficiency is just are growing slower? How much of it is you're actually driving further efficiencies in that cost-to-book versus cost-to-serve?

Okay. I think that's kind of the existential question that I've been asked over the last week. It's this idea that, okay, great operating margin. We love it. But are you trading off revenue? Is this a choice? Now I think as a company that is perfectly optimized, yes, at some point, you're going to hit a position where if you're taking away expenses, you're going to be taking away revenue if you're perfectly optimized. We're not perfectly optimized. And I don't know a company that is. And I believe that we have incredible opportunities to change our expense structure without taking away from our revenue growth. In fact, when I look at things that we can be doing, I think, focus on discipline, the focus on efficiency, the focus on automation, those should actually be accelerants to growth, not detriments.

Got it. Got it. Excellent. So in terms of like sort of the mechanics of the restructuring, the upfront portion that we've seen thus far is the headcount reductions -- it's unfortunate that any kind of a company has to kind of take down headcount, but it's often necessary to garner those efficiencies. Another part of the equation that you talked about restructuring expense against was the real estate portfolio. And it seems like that's more on the comp. That's something that takes long to come to provision. Can you talk to us about sort of where those opportunities exist? And when will we start to see that on the income statement? When would the -- like the real estate portion start to show up?

Sure. So first, thank you for mentioning that. The headcount reductions really are -- they're difficult. They are tough situations. And I always think it's important to pause and recognize that. It becomes a little bit too easy sometimes to talk about these a spreadsheet exercises and forget that they're real humans who have been impacted in that. So very tough decisions but necessary, I think, in this case. On the real estate, a little less emotion involved in that. We did announce in January a pretty significant downside in our real estate. This is something we have been doing over the last 3 years. So over the last 3 years, we've actually written off quite a bit of real estate. You've seen that in our financials. There's also quite a bit that you haven't seen where we have opportunistically taken advantage of leases that came up or projects where we were able to usually walk away without charge. So we've been shrinking this for a while. This current write-off is focused mostly on consolidation within different cities. So we have a lot of cities around the world where when we bought MuleSoft or Tableau, they also had an office. So we may have kept for 1 reason or another. What we're trying to do right now is really get down to 1 office in each city. Not every study did the traffic patterns where people live, but in general, get down to 1. As you pointed out, real estate takes a while to roll through the system. So we're really going to be seeing the charges hit over the next 2 years. We'll be seeing increasing amounts of benefits though over the same time and probably over the next 5 to 6...

Okay. Perfect. So this is something that rolls out over an extended period...

It really does.

Creates additional leverage as we go along. One of the other elements of what you talked about on the conference call is addressing stock-based compensation. And you get -- and I think this is probably the first time, at least that I remember, you gave a goal in terms of where stock-based compensation is going to be -- so it's going to dip below 9% in the year ahead. But you also talked about more kind of structural changes on a go-forward basis on how you utilize stock-based compensation. Can you dig into that with us to help us understand kind of where that stock-based compensation is going to go over time? Because I mean, on my math, it gets you guys to a pretty interesting kind of GAAP earnings perspective and not too far off.

Well, I think it's really important that we talk about stock-based compensation that we're managing it. I spent quite a bit of time in Europe in January. And I'll tell you, I did not have a single meeting with investor where they did not bring up stock-based compensation, just taken as a matter of course, there that they're going to add that right back in. And we need to treat those in expense, we need to manage it like an expense. So we have usually been to low double digits for stock-based compensation. Last year, I think we finished 10.5%. We are guiding that we will get that down somewhere below 9% this next year. Now it's tough to make significant changes in stock-based compensation in a single year just because of the accounting and how it rolls out over time. We are getting quite a bit of benefit from M&A that's rolling off. So when you buy up and coming tech companies, you get their stock plans and staff growing up and coming companies kind of hand out options more like chiclets. So we're seeing that kind of burn off in our system. But we're also looking at how do we take a really thoughtful look at our equity plan. At the same time, realizing we want -- still competition for talent. We want to retain people. So it has to be very careful. You'll see more about this in our proxy. I want to get too far ahead of our compensation committee, but we're looking at a number of different ways that we can attack it both from the M&A side and from the annual ground.

Right. But I guess the bottom line is it's not just a -- we're not doing M&A and that structurally lowers it -- it's not just -- we're not hiring as aggressively, but there's structural...

Correct.

I think that's important. And remind me, I think you talked about it at the Analyst Day in terms of dilution target, and that still kind of sustains that under 3% dilution from stock-based compensation.

Yes. Well, let's stop on that front on that because what I announced on this call is that we expect to fully offset [ delivery ]. So in August, for the first time in the company's 23-year history, our Board authorized a stock repurchase of $10 billion. And we jumped in, we bought that $4 billion already in the last 2 quarters. And the Board just raised the authorization to $20 billion. So with this new authorization, with the pace that we're currently on, I expect to fully offset all SBC going forward.

Got it. One of the other things you talked about in terms of the share repurchase. At the Analyst Day, I think you talked about a target of using 30% to 40% of your free cash flow for share repurchases. I think you've been exceeding that thus far out of the gate. So kudos for exceeding your target. Does that target change on a go-forward basis?

We have not officially changed that target. That really is what I expect on average over time. last year, we used more than 60% of our free cash flow, in fact close to 70%. This year, to offset, we will certainly be well above that target that I said.

Got it. Got it. Perfect. And then on the other side of kind of the capital allocation. On the conference call, you guys talked about disbanding the M&A committee on the Board. That sounds pretty drastic. I'll be honest, I don't quite sure what that means, but it seems like you're not going to be able to do M&A on a go-forward bit. Can you talk to us about sort of the reality of what it means to disband a M&A committee.

Sure. I think -- I will share with them that you thought it was drastic. I think they will enjoy that.

Disbanding...

Disbanding. Actually, [indiscernible] people listening to that kind of with [indiscernible] and they thought that we are disbanding our entire M&A team at Salesforce, which I think came as a shock to our M&A team at Salesforce. But no, what we've done is Salesforce like many companies spend at different committees of the Board based on issues that you regularly have coming up that you want a committee to do a deep dive on before it goes to the Board. So when I first joined the company, there was an IT committee because we were involved in a lot of IT issues. That was disbanded. We had a real estate committee for years when we were very involved in building out our real estate around the world with some very significant towers. That's since been disbanded, and then is kind of the same way. We had been doing M&A at a very regular pace where you really needed that going on. This does not mean that we cannot do M&A in the future. If we do think that you spin up an ad hoc party or a committee, but there's no need to have something where it's meeting on a quarterly basis. We just don't think that, that's a good use of the time.

So it's really a signal of priority, like have a committee that comes around for a priority and now M&A is just very low enough on the priority that is not necessary to have that. Got it. I want to shift gears a little bit to market dynamics and kind of what's going on in the market for Salesforce. We talked a lot about industry cloud. We've talked about multi-cloud solutions. And I think in a lot of investor minds, it seems like the focus of a Salesforce has kind of really upmarket is just the enterprise. Where does the mid-market stand in here? Is it still a focal point for Salesforce, is still an opportunity for Salesforce on a go-forward basis?

Mid-market is what we call CMB or commercial business at Salesforce. And I always feel like it lines at being a little bit like the forgotten stepchild. Enterprise gets all the big flashy deals, and we talked about it on the earnings call, SMB, they're usually shout out to something going on SMB. No 1 ever talks about commercial, and that is really a very powerful and important engine for Salesforce. It always has been. And these are the customers some will always be commercial. Many of those are the customers who go on to be our enterprise clients. So a very important focus, and that hasn't shifted.

Got it. Is there a difference in like the go-to-market or the distribution strategy for going to CMB. The CMB base versus kind of the motion that you have in place for the enterprises?

Yes, there are slight differences. So with our sales team, we have different regional -- slightly different regional nuances. We had different ways of selling to very small businesses versus enterprise. Mid-market as you imagine, somewhere there in the middle, but every time we try to tweak how we go, so that we're doing it the most appropriate way to sell to that customer and approaching them how they want to be.

Got it. Got it. It's something of a pointed question, but on are those -- it's kind of my job. So when I talk to investors, the 30% operating margins and 30% plus operating margin in and themselves are very interesting. What would make it even more interesting is if Salesforce came back to being a market grower. And when we look at your end market, 13% to 15%, depending on you've got sort of the IDC or the Gartner data. And what people look at on the other side, is there anything structurally that's changed in Salesforce that's not going to let them get back to that growth? So I'm going to ask you that question. And like the 2 structural impacts is, one, competition. Any change in the competitive environment that you think is going to make it difficult for you guys to what has been a market share gaining story basically over the past 20 years to sustain that on a go-forward basis?

So short answer, no, I don't see any huge structural difference. When I look at competition, the competition that worries me the most in this market is competing against doing nothing. So you're competing against customers deciding not to do a deal at all, to delay a deal or to try to build something in-house. And that's a form of competition that we don't talk about as much. It's not tracked as well. You don't have people ask about it on earnings calls, but when the markets go down, that's what you're really competing against. And that's something that we have to figure out the right plays on, and it tends to also clear out...

Got it. The other side of the equation that investors worry about is kind of saturation in your end markets. Salesforce has been the market share leader in overall CRM. In some areas like Salesforce automation, you have a mid-30 share. And there's a cyclical and a secular concern. There's a cyclical concern that there's a lot of investment in front office during COVID, but even like the years prior to COVID and maybe we've reached to a point where your customers just need to digest that they consumed a lot of front office, and now they have to try to make sure they're making the best use of it. Do you see any -- does that range through to you at all that there's any kind of digestion period that you...

I hear that a lot. A lot of questions about on Salesforce is everywhere. You must be in every Fortune 500 company. And I think there's some truth to that. I think we may actually be in every 500 -- Fortune 500 company or close to it. That's actually a good thing because it means we have got a toehold and that's where we go back and on the multi-cloud. So maybe they have a lot of Sales Cloud, that's our opportunity to go in with capital. It's our opportunity to go in with Genie with Service Cloud, with marketing. So I feel really good about that multi-cloud in our more saturated markets. We also have all of international. And I felt the view international as an important accelerant to our revenue over the future years, largely because there's just so much white space.

Got it. So plenty of opportunity still ahead. I just want to take a moment to see if there's any questions from the audience before I go on with my questions.

This delay that has been going on about going to the CFO level. But at the same time, we see the economy is not slowing down. So what's your sense at what point if the economy doesn't slow down, does the CFO level, say, but we cannot delay the spend anymore and we just need to catch up?

I think that's always the debate. I think that this has been such an unpredictable macroeconomic situation. No 1 has seen anything quite like it. We have high inflation, and yet we have still a booming job market. The biggest problem is actually hiring is in the middle of layoffs. We have a situation where foreign exchange isn't acting the way that it traditionally does. It's very hard any CFO in any company to make a lot of predictions based on history in terms of what's going on or how long this is going to last. I think that the situation with CFOs and the power that have on deals, maybe I'm saying that selfishly is here to stay. I think that it's very important that they will stay involved -- but I do think that there is -- people are getting impatient. People do want to jump that in. They do want to do the longer-term projects. And I think there is a realization that there is a new normal and we've got to adjust to that, and that includes making commitments to spend.

Excellent question. Any additional questions? I want to talk about Slack a little bit and kind of where we are with that. And to be perfectly honest, that was not an acquisition that investors are really favorable on. And I think there's still work to be done in terms of selling them on that value proposition. Can you talk to us about why you guys are still confident that Slack is a good fit for Salesforce and it's going to -- that investment will yield basically.

And so actually, I'm very excited about Slack. Slack's an incredible product and it really becomes kind of this engagement layer. From the entire company, all of your employees, all of your application base, you can extend it now through Slack Connect to outside and third parties, which makes it even more powerful. And 1 of the reasons I think it's so powerful is customers love it. I mean there is -- people have this very -- there's attachment to Slack that you don't see to e-mails or other communication systems. And it's interesting, IBM is a big Slack customer. They've gone wall-to-wall with Slack. And I was just shocked I was looking at some usage statistics the other day. On an average day at IBM, employees sent 9.2 million Slack messages. And even their CEO uses Slack, for his monthly Ask me Anything session. And they actually just signed it for Slack Connect as they can now do this with their customers as well. So I think this opportunity to really get into companies in this wall-to-wall way is incredible. The other thing that makes me very excited about Salesforce is our sales force, I am very excited about Salesforce, about Slack as well, is the new leadership. So in December, Lidiane Jones became the CEO of Slack. And Lidiane, long-time experience, a tech executive. She had about a dozen years at Microsoft. She then went to Sonos, came to Salesforce 4, 5 years ago. She is now the CEO there. And not only is she an incredible tech leader, but she's bringing this Salesforce DNA together with Slack. And I think that this is going to help us continue to integrate more deeply. I think it's going to move us forward faster in technology, and it really gives me a lot of optimism for Slack in the future.

Outstanding. Unfortunately, that brings us to the end of our allotted time slot. But Amy, thank you so much for joining us.

Great to be here.