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

Bill and Mike are here from Salesforce. Really appreciate you making the journey especially after a big day yesterday, and maybe we'll start there. I know everyone wants to get your impression. We had Carl, CEO, Workday here yesterday and it basically mirrored exactly everything you said last night on the call. In back office, they were seeing deals pushed out and no decisions and didn't feel like it was competitive. So we've got a matching back office and the matching front office.

I guess everyone's asking us this morning, like what do you -- what's going on? How do you parse this? I know the team gave a great explanation last night, but as you guys kind of reflect some have said, is it rates, is it the AI journey, we're just investigating. We don't have all the money to spend on maybe some of these other things we want to do. We've got to reserve that right to put it into AI. How do you put the pieces together?

Yes. Well, first off, thank you for having us. Like you said, it was a busy day yesterday. And as we went through the quarter and as we went through sort of the last 90 days or so, it's been a very sort of turn very quickly. I think in Q4, we saw a lot of optimism around sort of the spending environment, the execution that we saw, the rigor amongst our teams really to start seeding this future around a data and AI for front office computing as you're alluding to. And I think in this quarter, what we saw is a little bit just more measured sort of calculation from our customers. I spent a lot of time with customers and their resolve is they all know they would need to invest. They all know they need to sort of transform front office with AI in the mindset, they're just learning how. And I think there's -- that's creating a little bit of this flywheel of actually experimentation, this flywheel of kind of doing the first, second, maybe third proof points before they get to real scale. And as you look at our business specifically at Salesforce, there are incredible signs of optimism from that activity. The growth of Data Cloud for us as a first wave of sort of the AI motion is a real kind of sign of success here. And in consumer AI, you never really saw sort of this data movement because the consumer LLMs, largely took data that was in a public sense and sort of use it for training. Enterprises are very different, they need to kind of unearth this data, access this data, get this data ready for sort of the this, AI push. And that's kind of the sentiment that our customers are going through is that preparation for this big bow wave of opportunity.

Yes. Maybe the thing I would add to it, just to put a little finer tooth on -- or finer point on the latter half of Q1, yes, we had some slipped deals. Yes, we saw some customers take no decision, as Brian talked about on the call yesterday. But I think importantly to understand is that the buying signal is still there, it's not that deals are disappearing from the pipe. The pipeline is actually pretty healthy as we enter Q2. It really just is this dynamic where for whatever reason, kind of everything felt like it broke away in Q1 as opposed to in Q4, everything broke our way. And so is it temporal? We hope so. It's kind of what we're looking at. But it's not that customers are saying, "Hey, I'm done spending for the next 2 years." Like we're not -- that is not the conversation at all. I think it's super important to understand.

Did you observe anything different in behavior through the quarter, meaning like I know it's always can be back-end loaded in month 3. But was there anything that you saw that maybe was different in the linearity or...

I think the biggest thing that I see is customers are still sort of iterating their way through this world. Trying to understand the overall kind of impact of not just sort of AI and front office, but how does this now impact their investments in just data and data platforms, kind of investments with the hyperscalers and the ecosystem sort of around. And so I think there's a lot of -- a lot coming at our customers so they need to process, probably more so today than we even saw kind of 2, 3 years ago. And so customers are just needing more advice. And so back to your question, I think customers need more help on this journey. And that's kind of the role that we're gearing up to play is helping them sort of take this technology and apply it to sort of the line of business impact that we're having.

Yes. And in Q1, specifically, look, Q1 is always a little bit of an abnormal quarter for us because depending on how Q4 goes, you can end up having a slower start to the quarter, which is kind of what we had happen in February because we really did steam roll January, I think, as most saw on our results. And then you have to build it through the quarter. And then when you back end load the quarter and if things don't break your way, you can kind of get end up in the result that we ended up in yesterday.

My question to Benioff on the call last quarter was about, "hey, are you -- you're seeing green shoots from Q3, but you weren't ready to break out and then no one -- like basically sounded like you had to kind of hold them back a bit." And he said, "Well, we're not really turning the corner yet." So I guess the question is just everyone asked, did the pipeline just get so depleted that maybe you didn't leave enough for Q1 because you had such a great Q4, and we're going through that pipeline rebuild to your point? Is that...

Yes. I mean, hindsight is 2020, right? When we look back now in Q4, it's easy to look back and say, wow, we should have probably had more pipeline coming into Q1. We certainly -- if you want to use the word drain the pipe, we certainly closed a large number of deals in the latter part of Q4. Felt like we entered Q1 with okay levels of pipe, but now hindsight 2020, that clearly wasn't the case. And so we've been -- we've kind of doubled back, I would say, over the past month on ensuring that we are taking care of the blocking and tackling, taking care of the pipeline health, taking care of the ratios within the pipeline of -- pipeline opportunity to close ratios, things like that. So the 180-degree comment is kind of like we were obviously talking a lot about that before the call yesterday, knowing Marc had said that and kind of how we would help everyone understand where he was at. Again, Marc's comments tends to be CEO to CEO level conversation, and that gets to what I mentioned earlier, where buying signals are still there. Customers are still committed to Salesforce. So this isn't a dynamic where customers are saying, "Hey, I'm done. Cut me off." It's just more of a timing dynamic than anything.

And I think just building on sort of the other, maybe more of the fundamentals in the business, seats continue to grow for us. I mean there's been a lot of sort of kind of speculation about with AI, will there be a softness or slowdown in seats in say, our Service Cloud or seats in say our Sales Cloud. No actually, both of those businesses continue to expand their seats. As Marc sort of mentioned yesterday, not only are they expanding seats in terms of quantity of seats, we're actually now really, with our pricing and packaging reinvention, looking at ways to sort of create more value per seat and really taking share from maybe some of the other adjacent markets that we have kind of core products to do with better packaging opportunity. And the third axis, I think is really exciting, is within this sort of new foundation of packaging, we're also seeing a lot of consumption revenue, which becomes a new flywheel that as new seats get adopted and data gets adopted and AI gets adopted, more linearity around sort of growth will occur because you'll actually just see the sort of flywheel of usage turning to sort of revenue. So as Mike mentioned, Q4 for us was very much a locomotive. We actually did incredibly well in the execution. But now we're also sort of retooling for this next era with higher seats, higher utilization per seat and then higher consumption that will also sort of fuel growth for the future.

Brian alluded to some -- maybe they're buying teams or the org structure rather than a massive overhaul. But I think a lot of questions we got are what was the fine tune? I think you had some Slack integration. You had a few other things, but can you just run through just what that change in the sales team look like.

Yes. Look with our thesis around sort of a more durable sort of selling and go-to-market model, we've been doing some optimizations in our go-to-market structure really optimizing for a key line of business buyers, key buyers like the CIO office or the Chief Revenue Officer office or the Chief Marketing Officer office, really attached to our core clouds that are -- rather than having dedicated teams for every buyer, we actually have kind of clustered some teams together to really have higher efficiency, higher effectiveness in driving kind of more velocity there. So in Q1, this new buyer-led motion just got started. And so I think as we've retooled some of the areas, it's created more productivity for what comes next, but it's also created a little bit of just getting out of the gate, as Mike said, a little bit of slowness sort of getting kind of the rhythm started again.

Yes, maybe, well there are examples and then some data points. You mentioned Slack. So another good example is we collapsed our Slack sales team into our core sales motion. So instead of having, and I don't know the exact numbers, but 500 dedicated Slack sellers only focus on Slack. We now have all 10,000 of our account executives focused on the core bag plus selling Slack and so we've actually expanded the sales motion. We have our normal kind of attrition and performance management dynamics happening where any time you have that, it's actually healthy for the org longer term, caused a little bit of disruption near term, but you're going to move AEs around as a result of that. And so ironically, the funny thing about it, we brought it up yesterday because when reflecting on Q1, and we had a leadership team meeting a couple of weeks ago, where our top 40 execs got together, and we actually didn't talk about macro at all. The entire focus was on execution and what we need to do better. Talking about macro puts everyone into a victim mentality, and that's just not how we can operate. And so the real irony of the macro commentary and why we brought up go-to-market changes is that we actually have less change this year, numerically speaking than we did last year or the year before. However, in this macro environment, the dynamic that we're trying to figure out is maybe even a smaller number of changes were more pronounced from an impact standpoint just given what we're dealing with from a macro environment. And so obviously, they're all very subjective. And so if you're to say, "Hey, Mike, what's the mix between the two?" We certainly think macro is a bigger impacting item, but it's hard to decipher exactly what each one contributed, if you will.

The Europe climate, I know Workday mentioned the same thing, EMEA little soft and pockets of U.S., LatAm a little tight. So I guess just everyone's asking me, is it consistently matching what they're seeing in terms of the reason why things may be stalled out a bit? And again, I'll get beyond the quarter, I promise. I just I think everyone here wants to hear kind of do a postmortem. So...

I would say uniformly, globally speaking, the role of AI and sort of the rate of pace of which AI is impacting businesses is just as uncertain in EMEA as it is in -- or the Americas region. I think that different companies in different industries are seeing sort of the pace and sort of the rate of impact going faster than others. I think technology is a market that tends to move fastest, but because of sort of the sheer amount of technology that's in technology, there's a lot of sort of experimentation going on right now to really look at the longer-term effects that are there. We are seeing some good sort of utilization of kind of AI specifically in places like financial services. No surprise, they have incredible data about their customers, but they need to turn that data into sort of more outcome. And companies like Rocket Mortgage, you mentioned Slack, which is a great example. Rocket Mortgage now is using Slack plus our core sales and service plus our Marketing Cloud to really transform sort of their customer acquisition arm. And I think this is a big opportunity for Salesforce on what comes next. So much has been written about AI as a big productivity savings. I think that companies like Rocket are proving that AI can be a great growth opportunity. And that kind of moment where AI becomes a growth driver, I think, is really where we're putting a lot of energy to help our customers get there.

The biggest question we get is AI, when does it come into apps because it's all in infrastructure right now? When does it come, in your opinion? Is it late '24 and '25? How would you characterize?

I think open the aperture just a little bit around AI and enterprise applications, we're already seeing it here today with the rise of our Data Cloud. Our Data Cloud is again, sort of -- like I said, we never experienced it in consumer because you didn't really see the data world have to become ready for that. For enterprises the shape and complexion of their data looks very, very different. And data cloud's growth is the first wave of opportunity for where we're seeing this AI materiality start to take shape. And I definitely think that is creating, not just sort of the rise of Data Cloud, but it's also creating growth opportunities for us to use things like our Einstein 1 edition in our core products to actually raise the level of value that every user has in our offering as well. So I think it's here, and I think it is starting to really have an impact, first with data, then you'll see it sort of roll through our Service Cloud, our Sales Cloud, et cetera.

And you mentioned pretty good...

To be clear, not this calendar year. We think on the app layer that Bill is referring to, we think that's probably a next year dynamic where we'll start to see it materialize. Data Cloud being the leading indicator as where we'll see it more near term.

And you mentioned some good attach in Data Cloud. Can you just maybe expand on that goodness?

Yes. I think -- well, it's always measured in customers. We added like 1,000 companies using Data Cloud this quarter, 250 petabytes of data now on the platform is sort of to give you a sense of how much materiality of data is sort of processing through it. And the more that we see this attached into our sales and service base, it creates a sort of innovation opportunity to not just make those businesses dependent only on seat growth, but also now consumption sort of related to them. So I think it has been a big quarter of getting data mobilized. Just this week in Chicago, we have 5,000 of our technical specialists going through sort of enable it right now. This will become sort of a big, big opportunity for the next sets of quarters for how this way it sort of gets materialized.

You know the sales and service market well. Everyone ask you've been running at a really good clip for a long time, and there's always this question, is there -- what's left? Where do you see the opportunity? Can you talk to -- why the 2 biggest clouds are still doing as well as they are?

Well, yes, I think you -- I think I get this question every conference I go to about like how do we maintain the growth rate at those size. And you look no further than sort of our own lives as consumers and how much we're interacting with brands now as the biggest reasons why service continues to grow. Since the end of the pandemic, service volumes have gone up 25% every year just because companies started to have more end points that they can engage with customers with, of which we're kind of powering a lot of that for companies. So I think that from a growth posture for service for the future, it will continue to come as a result of just consumer sentiment of being able to access brands. And so you'll see as more sort of interaction volume goes, there's more ability for us to automate those interactions, there's more of an ability for us to bring AI to those interactions, and there's really a higher efficiency bar that every organization wants to do within their sort of service teams, which gives us an opportunity to attach more products to the customers that we've already served. So on the basis of Service Cloud growth, I see sort of big horizons of opportunity ahead because just the sheer volume of our actions that are there. Sales is a little bit different. Sales -- from a sales market perspective, you're seeing a lot of sort of -- especially in America and North America, a lot of sort of micro vendors that have kind of different moments of specialization around sort of the sellers, seller journey, seller efficiency markets. And you're going to see some consolidation there. And in fact, where -- we know that like 92% of sales buyers today want to do some degree of consolidation around their sales technology stack. And they want to consolidate that with a more efficient kind of choice of one vendor to power that. And that's, ultimately, I think one of the biggest opportunities that we have in Sales Cloud is winning share from sort of these adjacent markets that we've maybe dabbled in to now really go and continue to grow that bit even further. So I think both of them have like great room to run, a little bit different growth stories for both. One will just come as a result of kind of more explosion of interaction volume, the other is going to come at really firm just kind of expanding into more TAM that surrounds our core.