Salesforce Inc (CRM) — Q1 2017 Earnings Call Transcript

Thanks so much, Victoria, and good afternoon, everyone. Thanks for joining us for our fiscal first quarter 2017 results conference call. Our first 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 today on the call 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. Also, some of our comments today may contain forward-looking statements, which are subject to risks, uncertainties, and assumptions. Should any of these materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of these risks, uncertainties, and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Forms 10-Q and 10-K. With that, let me turn the call over to Marc.

Well, thanks, John. I’m really excited to be here for the first quarter. We’ve got some great people here for the call, including Keith Block, our new Chief Operating Officer, and Mark Hawkins, our Chief Financial Officer. You’ve all seen the press release; we just had an amazing Q1. It’s the best Q1 we’ve ever seen, with incredible numbers including the cash flow number. Revenue for the first quarter grew nearly to $2 billion, up 28% in constant currency, just above our expectations. Deferred revenue also grew to more than $4 billion, up 32% in constant currency, that was also above our expectations. The dollar value of booked business, on and off the balance sheet, was $11.6 billion, also up 28% from a year ago. We improved our non-GAAP operating margin, which Mark is going to talk about, driving $1 billion in operating cash flow, representing a 43% increase from a year ago. I’m thrilled to announce we’re raising our full-year revenue guidance by $80 million; we feel really excited about this. The high-end of our range is $8.2 billion, and our current outlook puts us on track to realize our $10 billion dream very shortly. We’re well positioned for another great year. One reason we’re doing so well is Oracle and SAP are struggling in the cloud. They haven’t managed to transform as we have, and we continue to take market share from them and gain customers at record levels. Our growing customer base is connecting to an emerging generation of customers, where fast, easy, and mobile solutions are key. We’re excited about this generational shift happening in computing. We’re in the midst of a massive generational shift; a new generation of customers and consumers is clearly emerging that we refer to at Salesforce as C generation customers. These customers want it now, they want it fast, they want it easy, and they’re mobile, social, and always on. Our customers are working to connect with the C generation in new and exciting ways. You can see that shift as we head into large events like our World Tour Event in London tomorrow, where we expect 15,000 attendees—bigger than most company conferences. Next week, we’ll be in New York for the sold-out World Tour New York, and in San Francisco on June 7 and 8, we’re hosting our brand-new developer conference, Trailhead DX, which will also be broadcasted online. We are excited to engage with all Salesforce customers and developers attending. Lastly, we have Dreamforce coming from October 4 through 7, and I can say that it’s going to be our biggest and most exciting Dreamforce ever.

Thanks, Marc, and thank you everyone for joining us on this call. As you heard from Marc, we had an extremely fast start to the year, which is fantastic in itself, built on a fantastic Q4. We saw great execution across the board. We fine-tuned our go-to-market approach and aligned our operations to bring our resources closely to our customers, because at the end of the day, it’s all about driving success for those customers. All the investments we’ve made over the last three years, including innovation in our industries, building our partner ecosystem, and expanding internationally, are really paying off. We began fiscal 2017 with a record number of large transactions; more than any other first quarter in our history as a company. The value of these large transactions across our clouds continues to increase. We have built on our tremendous momentum from Q4 and closed another nine-figure transaction in the first quarter. This is a testament to the scale and depth of relationships that we’re building with our customers worldwide—across all shapes, sizes, geographies, and industries. In Q1, we signed a significant agreement with Amazon, making us their company-wide customer platform and expanding our relationship with them further. We plan to utilize more Amazon services in the future. We also had an expansion with Uber; they selected Salesforce to be their global customer success platform. Samsung decided to standardize its B2B business on Salesforce, allowing them to engage with their customers anytime from any place via their Galaxy phones. New York Life has chosen Salesforce to drive its digital transformation, planning to mobilize its field agents and enhance their customer service. In Europe, a leading robotics company fully adopted Salesforce to advance their digital transformation, completely replacing SAP solutions with our entire product suite and leveraging our IoT platform to connect their robotic devices and create new customer experiences. These examples illustrate that our customers are trusting us as their advisors for redefining their strategies and achieving success. I want to thank our customers for their continued trust, our great partner ecosystem for their ongoing investment in customer success, and everyone at Salesforce for their outstanding performance this quarter. Now I’d like to hand it over to Mark to discuss our financial execution.

Thanks, Keith. As you've heard, we had a great start to the fiscal year with very strong results across the board. Total revenue was up 28% in constant currency, despite a year-over-year FX headwind of 29%. Sequentially, we saw a $4 million FX headwind. Sales Cloud accelerated in the quarter with 15% year-over-year growth. Service Cloud grew 32%, Marketing Cloud grew 29%, and Apps Cloud and other grew 45%. Regionally, EMEA grew 33% and APAC accelerated with 29% growth, both on a constant currency basis year-over-year. Dollar attrition for the first quarter remained below 9%. While we continue to deliver outstanding top-line performance, we also improved our bottom line. In the quarter, we delivered 283 basis points of year-over-year non-GAAP operating margin improvement, marking our eighth consecutive quarter of expansion, driving record operating cash flow of over $1 billion, up 43% from last year. Our first $1 billion cash flow quarter is an exciting milestone. These results reflect continued compounding of our invoicing in Q4, and to a lesser extent, the early adoption of ASU 2016-09, which benefited operating cash flow by approximately $25 million in Q1. Deferred revenue ended the quarter at over $4 billion, which was up 32% in constant currency, even after accounting for a year-over-year FX headwind of $10 million. We also continued to see an increase in annual billings, with 79% of all subscription and support-related invoices issued with annual terms, which contributed approximately one percentage point to year-over-year deferred revenue growth. Moving on to guidance, after our strong start in Q1, we are raising our FY 2017 revenue guidance to between $8.16 billion and $8.2 billion, and our FY 2017 non-GAAP diluted EPS guidance to between $1 and $1.02. We expect year-over-year operating cash flow growth of 25% to 26%. For Q2, we anticipate revenues between $2.005 billion and $2.015 billion, non-GAAP diluted EPS of $0.24 to $0.25, and year-over-year deferred revenue growth of 26% to 28%. Overall, we had an outstanding quarter, and we’re off to a great start for FY 2017. Thank you to the entire Salesforce team for these excellent results. I’d like to open the call for questions.

Good afternoon. Marc, your largest Revenue Cloud to Sales Cloud accelerated the best growth in over five quarters. Can you just highlight what’s driving that outperformance and you did have a small price increase; there have been questions among investors is that price hike having any impact in the short-term?

Yes, I think that we have really focused on how to accelerate the Sales Cloud. It’s a huge number in revenue, and the growth rate is incredible. The areas where the Sales Cloud has really accelerated are, number one, we’ve done a significant amount of innovation with the Sales Cloud, starting with Lightning. We completely rebuilt our core Salesforce platform, now called Lightning, and we’ve reconstructed how the Sales Cloud is manifested to our customers, especially regarding mobile technologies. If you go to the app store and download our Salesforce1 app, you’ll see millions using it to access Salesforce. We’ve also created amazing new capabilities for Sales Cloud, including our Pardot capability, which is a fantastic accelerator, as well as SteelBrick. These innovations have led to what I’d describe as a reboot of the Sales Cloud, reenergizing it and accelerating revenue growth, which we’re very excited about.

Hey, guys, thanks for taking my questions. Just two quick ones for me. First, when we look at the Force platform, it posted really healthy growth, the fastest growth again over five quarters. Can you provide some color on the mix of how much is coming from existing ISVs and customers expanding on the platform versus new customers choosing force.com? And regarding the IoT cloud, any color on adoption; it’s a huge market, but how do you see the growth trajectory for that business?

When you look at our platform and want to understand its growth, you need to look at the recent Gartner Magic Quadrant for mobile application development and deployment. We’re ranked as the leader in that space, as well as in many other analyses by independent agencies. There’s a segment of the developer population that we’re addressing, who want to rapidly build and deploy applications, especially in the mobile environment. Salesforce is the only company that allows rapid application development and deployment using Lightning across multiple devices. Our customers are excited about Lightning, as evidenced in our February 2 event, where Accenture demonstrated their internal use of this technology for tens of thousands of users, leading to accelerated application development capabilities.

Hey, guys. Congrats on the quarter. One question for Benioff, and one for Hawkins. One for you, Marc Benioff. The platform business seems to be growing, and I wonder if we're at the point where it could be larger than Sales Cloud? If so, how does it help your vertical strategy? And for you, Mr. Hawkins, you signed three significant deals in the nine-figure range. When will you invoice these, and when will they show up in deferred revenue?

The Sales Cloud is already one of the largest software products by revenue in the industry. To see this acceleration, this is the result of our focus on innovation and specialization, which Keith Block has been leading on our vertical strategy. Keith, can you speak on that?

The acceleration in Sales Cloud is a result of our continuous innovation and a refocus on our vertical specialization. We announced the availability of Financial Services Cloud and Health Cloud in Q1 and saw several customers sign up. We’re gaining momentum with our industry-focused strategy, which is supported by our strong technology.

On your second question about the three nine-figure deals, we’re pleased with these. They are multiyear deals, so the first year will get billed and show up in our deferred revenue, while the multiyear aspect won’t show up until it’s billed. Our billed and unbilled book of business together totals $11.6 billion, growing at 27% year-on-year.

Hi, great. I had a question for Marc Benioff and then a question for Keith. Marc; you've had this $10 billion goal for quite some time. It looks like you'll hit it soon. As you look ahead, what's the next big goal for the company? Then for Keith, how do you size the potential for these nine-figure deals in your customer base?

Yes, Heather, the $10 billion mark is exciting, making Salesforce part of an exclusive group in enterprise software. As we move forward, we see artificial intelligence as a major trend that will drive growth in our industry. We’re already integrating AI and machine learning into our products like SalesforceIQ, which enhances user productivity. We’ll continue to transform into an AI-first company.

On your question about the size of these large deals, they indicate deepening relationships with customers, complemented by our balanced portfolio across market segments from SMB to enterprise. We’re seeing increasing interest from enterprises looking to engage in digital transformation with our solutions.

Hi. Thank you for taking my question and congratulations on a really extraordinary quarter. I have a couple for you. Where will you be expanding your usage of AWS beyond Heroku and the components of IoT? What’s driving that decision? Also, how do you think about the size of the Sales Cloud market given the number of custom-built in-house solutions that still exist? And can you provide any updates on wave analytics?

We love our relationship with Amazon. They are a large user of Salesforce, and we aim to further expand that strategically. We’ve made significant transactions with Amazon and view them as partners in our evolution. We're actively exploring ways to leverage AWS across Salesforce further, including in our IoT cloud and additional marketing capabilities.

Regarding Wave, we’re seeing solid growth and momentum. Many large customers are successfully utilizing Wave, and our team led by Bob Stutz is innovative and pushing for further advancements in future versions. The market is responding well to the analytics capabilities we’re delivering.

I’d like to drill down on the Sales Cloud question again. You saw the accelerated growth but if we look at it by segment, are you seeing improved growth at lower layers in mid-market and smaller businesses?

Yes, we are seeing growth across segments because we’ve not given up on Sales Cloud. We’ve focused on innovation and have rebuilt our offerings with Lightning, Salesforce1, and numerous other enhancements. With continued innovations and expansions, customer demand has surged. Our product is positioned to address various market needs.

Marc is correct—not only did we accelerate this quarter, but this is now the fourth consecutive quarter of accelerating Sales Cloud growth. This indicates we’re gaining market share, not just financially, but also with product innovation and customer engagement, impacting all segments positively.

Exactly. The agenda of every CEO is about growth, creating shareholder value, and this is why they align with our Sales Cloud. They recognize our solutions can help expand their businesses and engage their customers effectively, which plays directly into our success in growing sales.

Indeed, while competition exists in the service space, we’re leading in innovation, outpacing others in customer engagement and satisfaction metrics. We’ve converted our technology into a competitive advantage, evident in our recent Gartner Magic Quadrant positioning.

Thanks for taking my question and congrats on the great quarter. Can you talk about linearity in the quarter and how it relates to recent market trends?

This has been a focus area for us. We’ve concentrated on extending our partner ecosystems, speaking in the language of industries and focusing on international resources. The results show our persistent effort to deepen customer relationships and drive strategic growth across the board.

I want to talk about the Marketing Cloud's recent performance and outlook. How is cross-selling into the Sales Cloud base impacting results?

We’re seeing great traction in Marketing Cloud, especially after our recent Connections event with many top executives praising our vision and product integration. We continue to strengthen Marketing Cloud, making it a natural complement to Sales Cloud and Service Cloud, enhancing overall customer engagement.

Additionally, we’re landing significant deals in the Marketing Cloud, reinforcing our position and proving our effectiveness in cross-selling products within our cloud ecosystem.

Thanks for taking my question. Keith, you’ve been seeing strong performance in the enterprise segment. Can you discuss what's driving this engagement and how sustainable it is moving forward?

The engagement we’re witnessing is a culmination of 17 years of building an incredible company around strong customer relationships, innovative products, and an ecosystem that supports enterprise needs. Our focus on industries and digital transformation has proven essential in gaining traction within this market.