Salesforce Inc (CRM) — Q4 2016 Earnings Call Transcript

Thanks so much, Ashley. Good afternoon, everyone, and thanks for joining us for our fiscal fourth quarter and full-year 2016 results conference call. Our fourth quarter results press release, SEC filings and a replay of today's call can be found on our IR website at www.salesforce.com/investor. With me on the call today is Marc Benioff, Chairman and CEO; Keith Block, Vice Chairman, President and COO; and Mark Hawkins, CFO. As a reminder, our commentary today will primarily be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release. Some of our comments today may also contain forward-looking statements, which are subject to risks, uncertainties and assumptions. Should any of these materialize or should any of our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of our risks, uncertainties, assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Forms 10-K and 10-Q. With that, let me turn the call over to Marc.

Okay. Thanks, John. And this is our biggest call ever; we've got over 500 people around the world who are dialed into the call. So, we know there's a lot of interest in the quarter and we made a decision; we're going to put aside the vast majority of our script so that we can get into Q&A as fast as possible with you. Look, my number one thing I want to tell you is, this is the absolute best quarter we have ever had. It's been just an incredible quarter, way beyond our expectations. It caps an incredible fiscal year for us. I'm sure that you saw that revenue for the quarter rose to $1.8 billion, and that's up 27%, which is really just amazing. Revenue for the full fiscal year was also up 27%, $6.7 billion. So you look at those things and you go, wow, I mean, that's a very fast growth rate for a company of our size and scale. For a top-10 enterprise software company, you all know the growth rates of Microsoft, Oracle, SAP are shrinking; negative growth rates in many cases, and here we are at a 27% growth rate in this enterprise applications market. And as Keith gets into it, you're going to hear that we believe that we're selling more enterprise apps than Oracle or SAP. Deferred revenue grew to nearly $4.3 billion, which was up 31%. Quarterly operating cash flow was nearly $460 million, up 38%. That number, of course, exceeded everyone's expectation and took us by surprise as well. And we are really proud of that number, $460 million quarterly operating cash flow in the quarter. Full-year operating cash flow was $1.6 billion, up 37%. And the dollar value of booked business on and off the balance sheet was $11 billion. That is obviously a huge number for us, something that we've never had before, and it's really a huge reflection of the amount of business that has been achieved in the fiscal year and specifically, in the quarter as well. We've got great momentum going into our first quarter. We're guiding to an incredible number here, $1.895 billion at the high end of our range. And for the full year, we're increasing our revenue guidance to $8.12 billion. So, we are really excited and aggressive in our guidance. And look, it was an amazing quarter. It was an amazing year. We are confident it's going to be an amazing first quarter. And no other enterprise software company of our size and scale is delivering at this level or as excited as we are, and no one else is as well positioned for this age of the customer that we are all moving into in this fourth industrial revolution. Before I hand the call now over to Keith, I just want to thank all of our customers, and I want to thank all of our partners, and I also want to congratulate all 20,000 of our employees on an amazing year. We are deeply, deeply, deeply grateful for everything that you do for us every day, and we don't forget that. Every single day with us at Salesforce starts with gratitude, and we know that this is a special time and we're grateful for all the hard work that everyone has put in. Also, I know you're going to want to catch us on our World Tour that's coming up, and big events are starting next month. You'll see us at CeBIT in Germany, and then Chicago, Boston, Melbourne, Amsterdam. We'll be in Washington, D.C. as well, so come to one of our events, and we've got a great new COO here at Salesforce as well. So, Keith, congratulations on your promotion. Well done.

Thank you very much, Marc. Listen, this was an amazing quarter. Our team, really the whole company, delivered the best quarter in my two years here at Salesforce. It was a breakthrough quarter. It certainly was a breakthrough year for us, and it translated into some amazing results in every region, every industry, and really accounted across companies of all sizes. We signed two of the largest deals that I've seen in my career. I mean absolutely fantastic. I mean, first we signed an exciting new nine-figure transaction with one of the world's most respected companies; and second, we signed the largest renewal in the history of the company; and, listen, they didn't just renew. They also significantly expanded their nine-figure relationship with us in Q4, and we are now their company-wide platform for innovation. I mean it's really amazing what the team has done and how these customers have embraced us. We also drove an all-time high in the number of large transactions this year, which is incredible – more than 600 seven-figure plus transactions in the quarter. And I'll tell you, Marc said it, I'll say it again, no one in enterprise software – no one in enterprise software is developing more strategic relationships right now than Salesforce. And, you know what, there's no better example of this than Unilever, which is one of the world's greatest consumer packaged goods companies. It's a great digital transformation story and a significant – significant expansion for us here in Q4. We've been delivering great levels of success with their consumer and marketing teams. We're now working across all business functions and Unilever plans to bring 95,000 of their employees onto the Salesforce platform. So, that means they are empowering their digital employee strategy to new levels of engagement. Now, Charles Schwab and another great brand is an exciting new relationship in the quarter. They'll be using Salesforce for their entire CRM platform. This is a great example of how Ignite, an industry team, have played a pivotal role with an important customer; as you all know, Ignite is part of our go-to-market motion. Also, I think we had mentioned in Q1, if you remember, we had told you about our largest Marketing Cloud win ever then we signed an even bigger one in Q3 and in Q4 we did it again. We talked ourselves and we entered into our largest Marketing Cloud relationship ever with a large social network. In fact, Marketing Cloud continues its success and increased the number of large Marketing Cloud transactions by more than 60% in the past year. Also one of the largest retailers in the world expanded with us in the quarter and selected Salesforce as their company-wide collaboration platform. And you know what, there are many, many, many more stories. These are some of the world's greatest brands, some of the greatest stories and we continue to deepen our strategic relationships with all of them. I mean, this is great momentum, it's incredible momentum and growth across all of our key industries, in all of our key markets. And I will say again, as Marc did, I'm very, very proud of the entire company for all of these accomplishments, all our outstanding results are just proof positive that our strategy is absolutely more than taking hold. I'd also like to thank our customers and our partners because they are helping us set the standard for this industry. So with that, I'll hand it over to Mark Hawkins.

Thanks, Keith. We had an incredible financial quarter, so let me start off with some highlights. In addition to the operating cash flow results, Marc mentioned, we continue to drive increased operating leverage. For the full-year, we increased our non-GAAP operating margin by 177 basis points, this is a great result as we continue to grow our top line. Our year-over-year growth was balanced across all of our clouds and all of our regions. Sales Cloud accelerated in the quarter with 12% growth. Service Cloud grew 35%. Marketing Cloud grew 31%. And Apps Cloud and Others grew 43%. In the regions, EMEA grew 33% and APAC continues to accelerate at 26% growth, both in constant currency. We also got off to a great start in Q4. That early quarter strength translated into strong billings and collections in the quarter and helped drive our cash flow in Q4. It also helped us drive our top line performance in Q4 and when you exclude the FX effect of $32 million, revenue was up 27% in constant currency. Supporting this great top line growth was our declining attrition rate, which remained below 9%. Our deferred revenue in the quarter reached an all-time high of $4.3 billion, this was up 31% in constant currency when excluding an FX effect of $48 million. We also continue to drive an increase in annual billings in the quarter with 88% of all our subscription and support related invoices issued with annual terms. This benefited year-over-year deferred revenue growth in the quarter by approximately three percentage points. Moving on to guidance, coming off of strong Q4 and with our proven business model, we are raising our FY 2017 revenue guidance to $8.12 billion at the high end of the range. We're also initiating FY 2017 non-GAAP EPS guidance of $0.99 to $1.01. In context, we expect to deliver 125 basis points to 150 basis points of non-GAAP operating margin improvement in FY 2017. And this is just coming off a year where we exceeded the high end of our FY 2016 operating margin guidance. As a result of this continued margin expansion, we expect to drive another full year of strong operating cash flow with year-over-year growth of 23% to 24%. For Q1, we're expecting revenue of $1.885 billion to $1.895 billion, non-GAAP EPS of $0.23 to $0.24, and year-over-year deferred revenue growth of 24% to 25%. A quick note on our Q1 guide; as all of you know, FY 2017 is a leap year. Given we recognize our revenue on a daily basis, there's an extra day of subscription revenue in the first quarter. This will benefit our first quarter revenue by approximately $20 million and will drive slightly higher non-GAAP EPS and will reduce our deferred revenue by the corresponding amount. This is simply a timing item that has no impact on the full FY 2017 fiscal year results, but this will have an impact on your quarterly and full-year comparisons in FY 2018. To close, we had an outstanding quarter and year, and we are well positioned for yet another great year in FY 2017. And at this time, I'd like to add my thanks to the entire Salesforce team for these great results. With that, I'd like to open up the call for questions.

Ashley, we'll take calls when you're ready.

Excellent. Thank you guys for taking the question, and very strong, very nice quarter. I guess the question I wanted to ask was the why – to Mr. Benioff, like you're saying not many companies at this scale actually see accelerating growth. Anything you can point just to, in terms of why you guys are seeing this now? What's really clicking in the business that will let you guys accelerate? And then maybe if I could squeeze in one for Mr. Hawkins, just in terms of as we're thinking about FY 2017, the business is getting increasingly seasonal, so in Q1 growth would be a little bit lower and more growth in the back half of the year. Given the current sort of economic environment, how do you garner confidence in the ability to sustain this 20%-plus growth for the full-year of FY 2017?

Well, our growth strategy is really built on having a full portfolio of products. I think you know about that in Sales, in Service, in Marketing, Community and Analytics, in Apps, in IoT, and as well as a full portfolio of geographies as well, doing business around the world like in the United States, in Japan, Europe, Australia, Canada; and in addition to doing business with enterprises and as well as small and medium businesses. And when that full portfolio accelerates, that is they all come in, in the quarter, which we really never expect, every product and every geography in both enterprise and SMB to come in, then you get this kind of accelerated revenue growth, which is what you see at this 27% number on both the year and the quarter. As I said in my opening remarks, it's the best quarter we've ever seen. We would never expect to see every product group and every geography and every sector of our business exceed our expectations. But that's what we saw in the fourth quarter and that creates this phenomenal momentum that we have now. And look at that number on and off the balance sheet, $11 billion, there's no greater predictor of our future success than this deferred revenue that we now have in place.

Great. Let me pick up the second half of that question that you directed. Just building on Marc's comments, I think you'd asked a little bit about the seasonality in FY 2017 starting with Q1. Back at our Analyst Day, Keith, I was referring to, we looked at this compounding effect and more and more of our renewals and business happening and showing up in Q4, showing up in the impact in DR and then having a quarter-on-quarter effect throughout the year. That compounding effect, in fact, is happening. We see that, and I affirm that, and you can see just a terrific Q4 result and a terrific DR performance. On the macro side, to Marc's point, when you have $11 billion of booked and billed and unbilled deferred revenue, that gives you a lot of confidence. When you see our big deals coming in, like Keith referenced, it gives you the confidence. When you see the business performing across geos, across clouds, that gives you the confidence that our book of business and what we're hearing from the customer had basically caused us to raise our guidance, and that's what we're seeing. Now we read the same newspapers as everybody else. We're not seeing an economic impact. We're seeing customers doing the kinds of things that we talked about earlier on the call. So, hopefully that helps.

Hey, guys. Thank you for taking my question, and apologize for the background noise here. Marc, I've not heard of nine-figure deals in technology. Can you talk about what exactly, Marc Benioff, that is, or Keith, can you talk about the dynamics here? Who did you displace? What is the scope of this implementation? What is this customer looking to do with Salesforce's portfolio of products, and could this be a – hopefully a leading forward indicator of what other customers could also adopt from the Salesforce product family? Thanks. Congrats.

Well, Kash, you make a very good point, which is, these are very unusual transactions and we never like to over-emphasize these transactions because they tend to be few and far between, because they are just exceptional in size, quality and depth. But we had an incredible renewal with one of the world's largest insurance companies, and we had an incredible new transaction with one of the world's largest professional services companies. And it really, I think, is a testament to some of the processes that Keith has put into place in regards to the enterprise and I'm going to let him speak to that. And I want to also make the comment that it's not just those two large transactions, but you heard what Keith had to say about the broad range of large transactions that were seven-digit and eight-digit deals as well. And, I'll just get back to my first comment, it was across all sectors of the business in product, in geography, and in enterprise and SMB. And, Keith, will you just address Kash's question specifically, in terms of what we're seeing and how we're able to create such large transactions?

Yeah. Thanks, Marc. So look, first of all, I would say that this has absolutely been an outstanding set of execution across the board, in all market segments. The broader market and the enterprise space has obviously been a focus and emphasis area for us over the past few years. If I were to characterize these two transactions in particular, I would tell you that they are CEO-level sales. We are in the boardroom. And we find ourselves in a position where customers, as Marc had indicated earlier, are looking for our help bringing them into the age of the customer. They're looking to embrace the concept and notion of digital transformation. They view us as the market leader and really the only company that is uniquely positioned to provide them with that transformation, or that level of transformation. And this is what's happening in these very large deals; it's happening in every deal, where these customers are viewing us as a trusted advisor. And that is becoming the norm. And this is something that has been happening for some period of time, and we continue to see it as we move forward.

Great. Thank you. I was wondering, Marc Benioff, if you could talk to us a little bit about your vision for Analytics, I know the product is relatively new. I guess I'm just wondering, out of Dreamforce, if you could give us an update on the types of customer conversations you're having in regards to Analytics? And if you were to look out kind of three years to five years, how do you think about – there's obviously multiple different vendors right now that can do Analytics on top of the Salesforce platform. How do you think of your own offering kind of replacing those people that are piggybacking on top of CRM deployments today? Thank you.

Well, Heather, I think it's a great question and really a huge focus here at Salesforce. Of course, Analytics applications have been an incredible part of the CRM market for a long time, and there are many vendors who offer Analytics applications on our platform. When we first introduced our Wave capability, which was just a little over a year ago, we didn't introduce applications. We introduced a platform. We introduced the ability to build Analytics applications using our Wave platform. And we said that this strategy was going to be quite differentiated from others, because we were going to be platform first, we were going to build an ecosystem, and then we would later build these applications and then we would later build all of these capabilities from the platform into all of our products and into all of our ISV capabilities as well. And that's where we are today. I think that there isn't a customer or demonstration or new sale that's happening, where this Analytics capability is not a huge part of what we offer the customer. This is analytics-as-a-service. This is scalability, this runs on your phone, on your tablet. This runs on your desktop. This runs on your watch. This is a multi-tenant, fully scalable system. It has all the characteristics of every other Salesforce product that you know and love. It's deeply integrated into our core platform, which is Lightning. And Wave is amazing. The growth is terrific. We're going to – I believe start to see incredible breakout this fiscal year that we're starting now. And we're just finishing our fiscal year kickoff the last two days here in San Francisco. And Wave was a huge part of the emphasis of what we're going to do this year. So, you're going to see a lot of that product. We're very excited about its capabilities. It's an incredible platform.

Great. I have a couple quick ones. First, these nine-figure deals, how many years are these contracts over? And then secondly, with you becoming a strategic vendor, does your relationship with the IT department within these companies change? Thanks.

Okay. So hi. This is Keith. So, obviously, we don't get into the term and length of these contracts, but you can imagine that if you're going to make a significant investment of nine-figures, that's probably a long-term relationship that you're talking about. And that again has been a focus area, I mentioned earlier, these are CEO-level conversations. We're in the boardroom, presenting to their boards and we're talking about transformation, which I think is something that is top of mind for all of these customers. As far as IT is concerned, you always have to talk about, and with IT, but these are transformational sales. These are conversations around growth, which is the top of mind for all Senior Executives and CEOs for sure; but, listen, in these large enterprises, the CIO is important. And by the way, we are a great platform. And CIOs and technologies are always interested in great platforms. And, again, that message certainly resonates.

And I'll tell you that there's definitely a transformation going on at Salesforce and Keith and I've had a lot of conversations about this. We've talked about it on previous calls. I would say this transformation has accelerated. And then Keith, how many sales calls, you were at Oracle for how long?

26 years.

26 years. I was at Oracle for 13 years. I never made a sales call on a CEO, while I was at Oracle. I mean, there were some business development things, but never CEO buying products and being that kind of Chief Digital Officer himself or herself. Was that your experience as well?

Yeah, absolutely, the world just turned. And certainly as we talked about earlier, CEOs are all about transformation. And in many ways they had become the Chief Transformation Officers for these companies, so they are personally involved. They are personally engaged and they want to talk to us. And they're very interested again in us playing the role of the trusted advisor, they're interested in our thought leadership, as you know. And listen, in the last three weeks, I've had more conversations with CEOs around transformation than in my entire career over 30-plus years.

Yeah, and I look at the large transactions we did with the largest banks in the world, largest insurance companies in the world, largest media companies in the world, the largest technology companies in the world, which was marked throughout this whole quarter, every single transaction was done with the Chief Executive Officer. And those happened at the World Economic Forum, those happened in their offices, those happened in our offices, those happened at trade shows, but I'll tell you that Keith and I just can probably rattle off dozens of CEOs that we are having to constantly interact with and collaborate with in creating these transactions. And I think it's really unusual and I think that's why we are really selling more enterprise software than Oracle or SAP in the applications area, wouldn't you say, Keith at this point?

There's no question that we are outpacing the competition in terms of enterprise application sales; there is no question. We continue to take share, and that's both market share and mind share. You and I were having a conversation just the other day about one of the world's largest financial services institution and kind of in the old world, what level we would be able to call on. And in this new world, because we were with them at the World Economic Forum, we're talking to the CEO. And their CIO and Head of Operations, that person would never have met with us before and all of a sudden they're with us all the time. In fact, we have a quote from our kickoff – we just finished our kickoff from the CEO of this particular institution saying that they view Salesforce as one of their most critical strategic partners.

And, Keith, wouldn't you say that that's really about our company being able to transform our role to becoming a trusted advisor especially in regards to these customer relationships with these companies? Isn't that what's going on?

Absolutely. And we're bringing a point of view around the industry. And one of the things, as you know that we focused on is these specific industry messages and the points of view and that resonates. When you're talking to the CEO, of course, I'm sitting next to one right now, Mr. Marc Benioff, and he wants to know the point of view in a particular industry. And those messages are absolutely resonating. And they want to make quick decisions, they want to solve business problems and they want to transform. And this is all about transformation.

Keith, there seems like there's another level of it, which a lot of them really grill us on our own business, because they're moving to subscription-based services themselves, they want to be a cloud company. They want to have Internet of Things capabilities, they want to be more connected to their customers, they want to understand how we're achieving this growth, because many of these companies want to achieve these same growth levels. How does it impact conversations?

Well, it's interesting, you brought it up. There are two types of conversations that we typically find ourselves involved with. And again, this is at the C-level. And in the boardroom, number one is, you can always ask these companies, why aren't you thinking about yourself as a cloud company? Why aren't you thinking about changing your business model? And you can see the expression on their faces, because they're embracing that notion of transformation.

Yeah.

So, that is certainly one.

Nobody wants to be Uber-ized out of the world. That's on the mind of every person out there who is a CEO.

Absolutely. If you think about what's going on with the marketplace about this perfect storm of convergence of cloud and mobile and social and data science and IoT, all coming together, that creates incredible opportunities. It's a different world. And no CEO wants to be Uber-ized just like 15 years, 20 years ago, nobody wanted to be Amazon, if you were in the retail space.

Right. And that's all about customer experience.

Thanks so much, Ashley. And I'd like to thank everyone again for joining us on the call today. You can catch up with us next week. We'll be at several technology conferences, including...

And also, I'm about to go on Mad Money with Jim Cramer in a few minutes. I'm about to go next door to the studios, so you'll see me at Mad Money on CNBC, and I think Jim's show, which I think actually just started.

Yeah, well, we'll see you there, Marc. And then, as I said, we'll be at several tech conferences next week. Morgan Stanley, Pacific Crest, JMP Securities. As Marc mentioned earlier, catch us at one of our World Tours. If not, we'll update you on our next quarter call in May. Thanks so much.