Salesforce Inc (CRM) — Q2 2019 Earnings Call Transcript

Thank you so much, Jerome. Good afternoon, everyone, and thanks for joining us for our fiscal second quarter 2019 results conference call. Our results press release, SEC filings, and a replay of today’s call can be found on our Investor Relations website at www.salesforce.com/investor. With me on the call today is Keith Block, co-CEO; Marc Benioff, Chairman and co-CEO; Mark Hawkins, President and CFO; and Bret Taylor, President and Chief Product Officer. As a reminder, our commentary today will be primarily 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 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 Form 10-Q. With that, let me turn the call over to you, Keith.

Thanks, John. Thanks everybody for joining us on the call today. It’s an exciting time in our industry, it’s an exciting time for our customers, and it’s an exciting time for Salesforce. And as you can see from our results, we continue to deliver incredible growth at scale. You saw it at the end of FY18, you saw it in Q1, and you see it again in Q2. We are seeing unprecedented levels of CEO engagement, driven by an appetite for real digital transformation. And at the same time, we are in the midst of an economic environment fueling innovation. And as a result, our customers are making major and sustained investments in growth, and Salesforce is at the forefront of their growth strategy. CRM has never been more strategic. It is the largest and fastest-growing category in enterprise software. Salesforce is the number one provider, and after 20 years, we continue to take share and separate from our competitors. In fact, we’re growing at nearly twice the rate of the market. This gives us tremendous confidence in our ability to reach $23 billion in revenue by FY22 faster than any enterprise software company in history. Our vision, our execution, and our relentless focus on customer success resulted once again in excellent performance across all clouds, all geographies, and all industries in Q2. Revenue for the quarter rose almost $3.3 billion, up 27%. Revenue under contract, which we now call remaining performance obligation, grew 36% to approximately $21 billion. Based on these strong results, we’re raising full-year revenue guidance by $50 million to $13.175 billion at the high end of the range for 25% growth this year. Clearly, we are set up for a strong second half. In Q2, Sales Cloud grew 13%, surpassing $1 billion in quarterly revenue for the first time. That is an incredible milestone. In the quarter, we expanded our relationship with a 100-year-old CPG company that’s undergoing a multiyear digital transformation. We’re leveraging Sales Cloud and Marketing Cloud, Service Cloud, and Einstein to accelerate decision-making and support customer-centric growth across their portfolio of brands. This is a great example of an iconic industry leader stepping into the future with Salesforce. Service Cloud grew 27% as more and more companies, including National Grid and Southwest Airlines, turn to Salesforce to power their next generation of customer engagement. Southwest, which has won awards for its customer service leadership, is extending Service Cloud and Einstein to 4,000 service representatives nationwide, enabling them to deliver smarter and more personalized customer experiences. Marketing and Commerce Cloud grew 37%. In Q2, we expanded with Kimberly-Clark, whose products are used every day by one quarter of the world’s population. We also deepened our relationship with Hulu, which is using Marketing Cloud, Service Cloud, and Einstein to personalize the viewer experience for more than 20 million subscribers. Finally, the Salesforce platform grew 32% in Q2, 54% including MuleSoft. Customers continue to embrace the platform and Heroku, the Lightning App Builder, to Shield, and make all of their apps smarter with Einstein. Now, this is our first full quarter with MuleSoft, which is off to a fast start. The MuleSoft Anypoint platform has become critical for digital transformation. It’s in every conversation we have with senior executives. In Q2, New York Life, the State of Colorado, and Schneider Electric selected MuleSoft to transform their enterprise. In our international business, we continued to deliver strong revenue growth across key regions: 32% in EMEA and 28% in APAC, all in constant currency. In EMEA, we strengthened our relationships with Rabobank Group. We also had a great Commerce Cloud win with leading Dutch retailer Ahold Delhaize. In APAC, we expanded with MUFG and Mitsui Sumitomo Insurance in Japan. In Australia, we expanded with the country’s largest telecommunications provider Telstra, and we formed an exciting new relationship in the public sector with the Australian Health Practitioner Regulation Agency. Now, turning to industries. We continue to see great momentum in this space. In healthcare, we launched Health Cloud for Payers to make it easier for insurance companies to effectively and efficiently connect with members and providers. We also significantly expanded with one of the largest private payers in the U.S., leveraging Health Cloud and Service Cloud to enhance their members’ experience and reduce the cost of care. In the quarter, IQVIA, a leading life sciences company, significantly expanded with Salesforce, leveraging Health Cloud and the Salesforce platform to build innovative solutions to address the clinical, commercial, and regulatory needs of their clients. In financial services, we expanded with a major banking institution and had a great financial services cloud win with one of the largest banks in the U.K. You may also remember that we had our most significant public sector win with the U.S. Department of Agriculture last quarter, and in Q2, the USDA significantly expanded again with Salesforce, rolling out Service Cloud and the Salesforce platform across their entire agency. Our partners are absolutely critical to the Salesforce growth strategy, bringing deep industry and domain expertise that extends our reach and helps drive our customers’ digital transformation. Our partners continue to strategically invest in their Salesforce practices. In fact, our top five SIs increased their total Salesforce certification by 50% in Q2. To keep partners running their businesses on Salesforce, we had significant expansion with Deloitte, and they are rolling out Salesforce to more than 300,000 employees. It was a fantastic quarter of execution across the entire Company, our clouds, our geographies, our industries. We’re absolutely well-positioned for the second half of the year. I celebrated my fifth anniversary at Salesforce in Q2. It has been an incredible five years, and I couldn’t be more excited to lead this Company with Marc for many years to come. I want to thank our customers, our partners, our employees, and our shareholders for their continued trust in us. Now, I’d like to turn the call over to Marc.

All right. Thanks so much, Keith, and congratulations on your promotion as co-CEO. Well done. As you heard from Keith, it was another outstanding quarter here at Salesforce. Honestly, I feel things have never been better. I want to take a few moments to talk about the larger forces that are fueling and shaping the phenomenal growth of this Company and our industry. Our drive to $23 billion in revenue in fiscal year ‘22 and beyond is being driven by a technological revolution that’s fundamentally transforming our society, the Fourth Industrial Revolution. In terms of size, depth, capability, and speed, this revolution is altering the human experience in ways we’ve never experienced before. Our customers are going through an amazing digital transformation, each and every one of them; it’s starting and ending with their customer. As every company transforms their relationships with their customers using amazing technologies from artificial intelligence to the cloud itself, they are fundamentally changing how they sell, how they service, how they market, and how they innovate. They are connecting with their customers in a whole new way. They’re building incredible new intelligent 360-degree views of their customers and using extraordinary new tools for faster, more informed decisions through advanced analytics. At the heart of all this transformation is Salesforce. Our position as the number one sales, number one service, number one marketing, and number one CRM platform is enabling our customers to stay ahead and drive in this Fourth Industrial Revolution. More and more companies connecting everything and everyone realize that integration is vital to their success and to their digital transformation. They are turning to Salesforce MuleSoft, the number one Integration Cloud, to do it. Looking closely at one of the critical aspects of the Fourth Industrial Revolution is artificial intelligence, the power of machine learning, and especially deep learning to give computers the ability to learn from all kinds of data, providing our customers with the ability to learn about their customers and be far more personalized, efficient, and effective in their relationships. Salesforce Einstein, our own artificial intelligence platform, now provides our customers with over 3 billion predictions and insights every single day. That’s incredible. With the next generation of Salesforce Einstein that we introduced in the second quarter, Einstein Bots, made available on our Service Cloud. Our customers can now unlock even deeper customer insights, delivering a transformational customer experience, whether it’s with the service agent, a sales agent, or a bot itself. We’ve demonstrated our leadership in AI by open-sourcing our automatic machine learning library for structured data, which is the engine that helps power Salesforce Einstein. Our Salesforce research team introduced deep learning breakthroughs that allow, for the first time, a single model to master 10 different natural language processing tasks at once, significantly improving how machines understand the nuances of human language. That’s an incredible step forward for artificial intelligence. With our acquisition of Datorama, which also happened in the second quarter, we are now able to expand our Marketing Cloud and bring all of our customers’ marketing efforts to a single intelligent task forward so customers spend less time looking at spreadsheets and more time acting on the right insights to drive business decisions. In the second quarter, we extended our strategic alliance with Google to deepen the integration between our Salesforce Marketing Cloud and Google Analytics 360. We’re seeing amazing traction with customers experiencing the best of both worlds, Salesforce and Google together. Salesforce Commerce Cloud continues to be the fastest-growing enterprise commerce solution, delivering amazing results this quarter for marquee clients like Adidas and L’Oréal. We extended our Commerce Cloud with another great acquisition, CloudCraze, the leader in B2B commerce, native on the Salesforce platform. This means our customers can provide the same commerce experiences for their B2B business buyers that they do for their B2C consumers, all from a single platform. The Fourth Industrial Revolution is well underway here at Salesforce. Everyone and everything is more connected than ever before. As part of this, we see an incredible community growing up around us and supporting each other to incredible new heights. These are our trailblazers, harnessing the power of our technology to transform not just their companies and industries, but their lives and careers. More than 1 million people have now used our free online Trailhead platform to learn Salesforce skills and elevate their careers and become Salesforce trailblazers. They have run more than 8.5 million batches, certifying their skills and positioning them for jobs in the digital economy. The Salesforce economy will now create 3.3 million new jobs by 2022. That’s amazing. This year’s Dreamforce, which is going to happen on September 25th, will be even more than highlighting our incredible technology; it’s a celebration of these trailblazers. Dreamforce is going to run from September 25th to September 28th in San Francisco. We’re bringing together thought leaders, industry pioneers, and more than 100,000 trailblazers for four high-energy days of learning, inspiration, and fun, and I’m sorry to say, it’s already sold out. Amazing, a first for Dreamforce. Finally, Salesforce is guided by our core values. Many of you know them; you’ve heard us talk about them. Our core values are trust, customer success, innovation, and the equality of every human being. Salesforce has always tried to use these values as a beacon of light for our industry. This started with our founding and our 1-1-1 model of giving back. Most recently, it has evolved with our deep work on equality. Discussions we have had with our Ohana over the past few weeks have raised larger questions about not just the Fourth Industrial Revolution and what’s happening, but also how our values apply to the use of Fourth Industrial Revolution technology. We’ve seen this discussion taking place at many companies, and we can see this happening today in the news cycle. It’s been amplified by the amazing recent progress in artificial intelligence, especially deep learning. Here at Salesforce, we have determined that the ethical and humane use of technology, especially within the context of the Fourth Industrial Revolution, must be clearly addressed, not only by us but by our entire industry. Our industry has reached an inflection point that must be supported by a strong set of guiding values. Technology is not inherently good or bad; it’s what we do with it that matters. That’s why we’re making the ethical and humane use of technology a strategic initiative at Salesforce. We have appointed a new officer for a new office on ethical and humane use. We will work with all our Ohana, including customers, employees, partners, as well as industry groups and experts to promote, publish, and implement industry standards, guidelines, and frameworks around the ethical and humane use of technology. This incredible aspect of the Fourth Industrial Revolution is the way forward not just for our industry, but for humanity. We must ensure that technology strengthens our societies rather than weakening them. Technology needs to improve the human condition, not undermine it. We’re looking forward to working with our Ohana and all of you in illuminating this important task together and continuing this critical discussion, especially here at Salesforce and at our upcoming Dreamforce conference. With that, I want to turn it over now to Mark Hawkins to discuss the financial details of the second quarter.

Thank you, Marc. As you’ve heard, we delivered a strong second quarter result across all our products and regions. Second quarter revenue grew 27% in dollars and constant currency. While there was no significant year-over-year FX impact to revenue, sequentially we saw a $38 million revenue headwind due to FX. MuleSoft contributed $122 million to total revenue, net of purchase accounting adjustments. This was higher than we anticipated due to a higher mix of license revenue in the quarter. We’re very pleased with MuleSoft’s performance. Dollar attrition exited the second quarter below 10%. Second quarter GAAP EPS was $0.39, and non-GAAP EPS was $0.71. Mark-to-market accounting for a strategic investment portfolio, as required by ASU 2016-01, benefitted the GAAP EPS by approximately $0.18 and non-GAAP EPS by approximately $0.14 in the quarter. GAAP EPS also benefited by approximately $0.18 related to the partial release of our tax valuation allowance as a result of the MuleSoft acquisition. Operating cash flow was $458 million, up 38% over the last year, driven by the overall strength we saw in the quarter, improving profitability, and strong cash collections in Q2. Free cash flow, defined as operating cash flow less CapEx, was $288 million in the second quarter, up 42% over last year. Unearned revenue ended the quarter at nearly $5.9 billion, up 24% in both dollars and constant currency. There was no significant year-over-year impact on unearned revenue due to FX, but we did see a sequential FX headwind of approximately $66 million to unearned revenue in Q2. MuleSoft contributed approximately $77 million to unearned revenue in the quarter. In Q1, we started disclosing a new metric called remaining transaction price as part of our adoption of ASU 606. To conform with emerging industry standard language, we have changed our terminology for remaining transaction price to remaining performance obligation. At the end of the second quarter, our total remaining performance obligation was $21 billion, up 36% over last year. This metric represents all future revenues under contract. The current remaining performance obligation expected to be recognized as revenue in the next 12 months was $9.8 billion, up 27% year-over-year. Keep in mind the current portion of this metric is not impacted by invoicing duration unlike unearned revenue. Moving onto guidance, I’ll briefly touch on the FX environment. We experienced a sequential FX headwind to revenues and we continue to see movements in rates. In context, we are now anticipating an FX headwind to revenue of approximately $75 million to $100 million for the remainder of the year. Despite this FX headwind, we are raising our full-year 2019 revenue guidance by $50 million to $13.125 billion to $13.175 billion, or 25% year-over-year growth including MuleSoft. Speaking of MuleSoft, let me quickly touch on the revenue for the remainder of the year. We are very pleased with the performance of MuleSoft in the second quarter. That said, as significant portions of MuleSoft’s revenue are recognized upfront as license revenue under ASU 606 and as we have limited history in forecasting under this model, we are not updating our guidance for MuleSoft contribution to revenue. However, we will continue to provide our quarterly revenue contribution for the remainder of fiscal 2019. Turning to operating margin, based on our strong performance in the quarter, we are raising our FY19 non-GAAP operating margin improvement range to 25 to 50 basis points for a full fiscal year non-GAAP operating margin of 16.75% to 17%. We are raising our FY19 GAAP diluted EPS guidance to $0.97 to $0.99 and non-GAAP diluted EPS guidance to $2.50 to $2.52. This guidance implies non-GAAP OIE of approximately $250 million for the full year. Keep in mind this guidance does not consider any possible future impact from mark-to-market adjustments related to ASU 2016-01, which may cause EPS volatility based on market conditions. We are raising our full-year fiscal 2019 operating cash flow growth guidance to 15% to 16% year-over-year. We now expect full-year CapEx to be 4% to 5% of revenue compared to our prior guidance of approximately 5%. For Q3, we expect revenue of $3.355 billion to $3.365 billion, GAAP diluted EPS of $0.01 to $0.02, and non-GAAP diluted EPS of $0.49 to $0.50. We expect year-over-year unearned revenue growth of approximately 20% in Q3 including MuleSoft. Our Q3 UR growth rate reflects significant FX headwinds to unearned revenue year-over-year in addition to the continued deepening of our quarter-on-quarter seasonality of UR. As a reminder, we will only provide unearned revenue guidance one more time on the third quarter call, at which point we plan to stop providing this guidance, as you will have more history with the remaining performance obligation metrics. As you update your models for the back half of the year, keep in mind that Dreamforce is in Q3 this year and was in Q4 last year. The associated costs will occur a bit earlier in FY19. To close, we delivered a strong second quarter, closing out a great first half of the year, positioning ourselves well for the back half of FY19 as we head into Dreamforce. We continue to execute on our strategy of delivering durable growth at scale with some leverage and are on track for our FY22 target of $23 billion. I look forward to seeing many of you at our Annual Investor Day on Wednesday, September 26th. Thank you to our employees, customers, partners, and shareholders for your continued support. I’d like to open up the call for questions.

Thanks, Jerome. You can queue up the Q&A for us, please.

Hey, thank you for taking my question. Keith, congrats there. I wanted to touch on a broader question here, given the Integration Cloud. Sort of starting to see a lot of this integration with ERP and into back office systems with MuleSoft. And you sort of verticalized the front end, Financial Cloud, Health Cloud, etc. How are you thinking about tying that back end then? Is there sort of an idea of a supply chain cloud or something along those lines? Do you think about potential new verticals? How do you sort of capture some of the value of the data that you’re integrating with the ERP? I’d love to get a sense of how you guys are thinking about that.

Yes. Hi. This is Bret Taylor. It’s a really great question. I think one of the best opportunities we have from MuleSoft and our Integration Cloud is aligning it with our vertical solutions. If you look at what we’re doing with financial services and healthcare, it’s really about transforming the customer experience in the industry. We can’t do it unless we unlock the data in these legacy systems, whether it’s electronic medical records or the significant investments that the financial industry has made in their back office systems. When we think about the opportunity from MuleSoft, it’s really about aligning it with our overall value proposition, transforming customer experiences, and upleveling the conversation of integration from an IT tactical decision to a strategic decision about how to transform the customer experience. That’s the opportunity that we see over and over again. We’re talking about integrating with our customers. It’s not just the problem for the CIO; it’s a problem for the CEO, and that’s the opportunity of integrating this value proposition.

Just to emphasize this point. This morning I received an email from the CEO of one of the largest banks in EMEA who wants to bring their entire executive team over to talk about what integration with MuleSoft could do to unlock their data. So, it’s a perfect proof point of exactly what Bret is talking about. There is a huge opportunity in this space.

Can you just tell us how the integration is going?

We’re thrilled with the integration. As you know, it’s just our first quarter. We’ve done many acquisitions here. I would say that this is probably the smoothest integration that we have. The integration with the field, the product teams, the marketing organizations across the board, all the lines of businesses has been fantastic. You can’t have a conversation right now with a customer without talking about MuleSoft. Everybody wants to talk about the importance of integration as it relates to digital transformation. So, we’re very, very optimistic.

Bret, you said kind of the acceleration of the public cloud combined with customers' major investments in their own data centers is driving this Integration Cloud, or what do you see as the core driver?

There are so many trends happening simultaneously that are driving this investment and integration. We have customers who want to transform the customer experience, and they’re also lifting and shifting their infrastructure from their own on-premise data centers to the cloud. Every customer I talk to is at scale public cloud, private cloud, on-prem, sometimes even mainframe systems. They can’t wait for all that technological change to shift before transforming their customer experience. That’s the promise of MuleSoft; we can actually transform it now. The conversations that Keith mentioned are happening right now as all these trends are driving integration, upleveling the discussion to a strategic level.

Thanks very much, and congrats on the quarter. I’ll add my congrats to Keith on his new appointment. I guess, my one question and follow-up is for Mark Hawkins. I guess, just my question was around some of your comments on deep learning and AI. I was curious how often Einstein is coming up in engagements you’re having with CEOs. Is having an AI platform becoming really table stakes to participate in this digital transformation discussion? And then, just a quick clarification for Mark Hawkins. Mark, I assume the guidance you gave, I guess the FX headwind was incremental relative to what you were thinking earlier, meaning it’s become a bigger headline since we talked to you three months ago? Thanks.

Thanks so much for that question. It’s been quite a few years now since we made a strategic decision here that artificial intelligence had to be a core part of the Salesforce platform. Of course, we’re seeing so many exciting technologies emerge, and we knew that AI had to become a part of our platform on our journey over the last 20 years. I think AI was probably the most daunting because there are many aspects of artificial intelligence. Through a lot of core native development, through acquiring companies, and refining incredible talent, we’ve built a phenomenal platform with Salesforce Einstein. I don’t think there is a more successful business implementation of artificial intelligence than Einstein. Not just core in our platform but also now in all our core clouds. You can see how Sales Cloud Einstein or Service Cloud Einstein or even Marketing Cloud helps transform the customer experience. The most powerful is our Commerce Cloud. When we actually turn Einstein on in the Commerce Cloud, and customers have the option to do that, they see double-digit revenue growth above what they were experiencing on the Commerce Cloud. It goes to show how the ability to take this powerful next-generation technology can have dramatic business outcomes. We’re deeply committed to artificial intelligence. We’re also deeply committed to the ethical and humane use of that technology. We all realize that AI is developing faster and going farther than any of us realized. Salesforce, I believe, is the premier provider of artificial intelligence in business and enterprise applications, and we still feel a deep responsibility to help guide that capability.

Kirk, you are correct. Yes, this is bigger since we talked prior, and despite the FX headwind that we see affecting us in the second half, we’re raising our revenue, our operating margin, and our cash flow.

Maybe just a broader question for Marc Benioff. Look, there are thousands of companies out there. As you and I both know, most of them hit a wall, and oftentimes the stumbling block is a CEO who doesn't change with the company. So Marc, maybe this will be a better question over a beer or whatever. But you and I have met a bunch of private companies, but it would be super helpful if you passed on one or two key things that you've done to scale as a CEO, because you've seen it that CEOs hold on too tight, they don’t do it that or the other, but that would be actually another swansong question, but I was just curious. Thanks.

That's a great question. Here with me is Monica Langley, and we are currently working on a new book that we are very excited about. One of the central chapters addresses your question. I truly believe in maintaining a beginner's mind. With everything happening in the industry, the world, and our company, it's crucial to set aside time for mindfulness. Each day, I clear my mind and ask myself about my direction. We also encourage our management team to do the same. We recently concluded a significant management conference focused on our desires, which can lead to transformation. My advice to other entrepreneurs is to take care of themselves and keep that beginner's mindset.

In one year.

I just had a question, Keith, for you. Now that you have MuleSoft in for a little bit, what has been the feedback from the Salesforce? Because I am sure where you could say MuleSoft is a little bit more of a technical sale, but you guys also talked about that the whole discussion is coming a lot more strategic. How has your sales force being able to take on MuleSoft and integrate it into the overall offering? Thank you.

I would just characterize it this way: nearly universal euphoria. If you think about the conversation we have at the CEO level, these are all about digital transformation. The whole concept of integration completes the thought and the promise of digital transformation again, by unlocking the data from these legacy systems. MuleSoft already has a very capable and high-performing sales organization, which we continue to invest in. We’ve had a very tight alignment and enablement with the core Salesforce sales organization, which has just created a lot of traction. The dialogue that we're having with our customers is that this is a missing piece of the puzzle. We listen to our customers; that’s why we made this acquisition, because we knew exactly how important this would be to complete that digital transformation. The integration is going very, very well; the traction is there; the alignment is there; the synergies are there; the enablement is there. Customers want this message; they want the story; they want the solution.

Bret, are you surprised by the acceptance rate with the integration cloud? I know you have a lot of surprises planned for Dreamforce around that as well. But is this a shock?

It's not a shock. For me, when I look at our product portfolio, I don't view it as separate products or separate clouds. I see it as stages of customer lifecycle and touchpoints. We’re really trying to integrate and transform customer experience. Automation and AI are in every conversation because every company wants a more predictive, smarter, personalized experience with their customers. Every customer wants that integrated experience that pulls together all the different departments and legacy systems, providing an integrated view of the customer. We want every single person addressing the customer to have a single view. That’s fundamentally what MuleSoft and our integration routes provide, and it's relevant in every single customer conversation.

I was wondering if we could dig into Marketing Cloud. We've seen a couple of quarters of acceleration there. Marc Benioff, on the last call, you alluded to benefits that you expected to see from GDPR. Are we starting to see those benefits roll through, or is it too early for that and other things? And then, if I could sneak in a second question, what was the rationale behind open-sourcing parts of the Einstein Data Framework? What benefits are you expecting to see from that?

I spoke with over a hundred leading European CEOs last week, and in every discussion, there was a strong desire for them to develop a deeper connection with their customers. This is particularly evident among consumer companies. Brands like Louis Vuitton, Adidas, L’Oréal, and Puma are creating personalized experiences to establish one-on-one relationships with their customers. This trend spans beyond commerce into areas like marketing, service, sales, and the use of intelligence to enhance personalization. Every company, whether focused on B2B or B2C, is pursuing this, which is fueling remarkable growth, especially in marketing. Email plays a key role in this, and we send more business emails in a highly personalized and intelligent manner than anyone else. Our recent acquisition of Datorama aligns with this objective, as it employs artificial intelligence to seamlessly integrate various marketing automation tools. We aim to quickly integrate Datorama into our system to further improve our Marketing Cloud features. As for our choice to open source certain parts of our AI, we believe in giving back to the open-source community, having gained significantly from it ourselves, and this philosophy is central to Salesforce.

Marc Benioff, I just had a question about MuleSoft. You've obviously had great success from founding the company almost 20 years ago. But how do you see MuleSoft, if at all, helping to modernize your own internal IT and your clouds? Are there new offerings as a result of that that you envision you might be able to offer to customers as you do this? My follow-up is just related to your comments on the IT spending environment this year. Any reads from customers as you look ahead to next year?

I can tell you that I’ve never seen such a robust spending environment. CEOs are spending aggressively, benefiting significantly from tax cuts and deregulation focused especially in the United States. It doesn’t matter whether it’s an American or European or Asian CEO. I can tell you that across the board, I don’t know one CEO who is not spending aggressively at levels I've never seen before. They are positioning their companies for the future. It’s an incredible time, and I remain deeply impressed by this trend. Of course, we have tremendous offerings for them as well. In regard to our partnership with MuleSoft, as you know, we’ve invested in the company from the beginning and have followed its success closely. Last year, I kept hearing that integration was rising on customers’ priority lists because public clouds are becoming dominant. We are witnessing extraordinary growth from customers like Amazon and Google, our largest clients. As clients shift to these public cloud environments, integration is more crucial than ever because they have data in multiple locations—internal data centers, various public clouds, and new SaaS vendors. All these factors are creating unprecedented integration challenges. Fortunately, MuleSoft offers a radically new API-driven approach to integration that addresses this need effectively.

If you think about the fourth industrial revolution, it is all about the pace of technology change increasing more rapidly than ever seen. When I talk to CISOs and CIOs, they are focused on agility, how can we move as a business faster and keep pace with changing expectations from consumers. The API economy is critical; it's about breaking your company into services and creating APIs so you can empower business units to move faster. This offers a significant opportunity as the integration aligns perfectly with the concept of agility during the Fourth Industrial Revolution.

Well, we’ve had a lot of acquisitions, as you know. All previous acquisitions have been great, but MuleSoft is particularly exciting, especially given the massive need for agile capabilities. In the fourth industrial revolution, businesses have to reinvent themselves. Driving business models requires accessing the oceans of data present. You can take either an offensive or defensive strategy as a CEO; something must be done! The conversations have been outstanding! I get very excited talking to customers about the integration with MuleSoft because this is an opportunity that will drive their transformation. It’s different from other acquisitions; we're off to a great start and you've seen amazing early results.

Keith, congrats to you on your nice performance. Mark Hawkins, I wanted to ask you, MuleSoft contributed $200 million to the total RPO balance. Could you ballpark what it would have contributed to the current RPO balance if there was anything material? For Keith and possibly Brett, we have been hearing some feedback about underappreciated emerging jewels in the product portfolio, particularly around commerce with CloudCraze and CPQ with SteelBrick. Some partners mention that they've seen a focus on sales, service, and marketing, and now there’s a fourth pillar in these areas. Are you seeing opportunities for those products to exceed expectations?

In terms of RPO, you're absolutely right; in aggregate, there was $200 million contributed by MuleSoft to our total deal. I can share that about $100 million of that is reflected in the current RPO and the remaining will be considered non-current. So that gives you a bit more granularity on that.

The success of our Sales Cloud, Service Cloud, and Marketing Cloud is quite impressive. The growth of Sales Cloud is now over a $1 billion run rate, which is unprecedented in the marketplace. Service Cloud and Marketing Cloud also show significant success. This all speaks to our culture of innovation—both organic and through acquisitions—and our partnerships with the large ecosystem is a major growth lever. I appreciate that our partners are investing in innovations. Our partner certifications are up 50% year-over-year, demonstrating their confidence in our solutions.

Thanks so much, and my congratulations as well to Keith on the new appointment. Keith, you mentioned Einstein in various descriptions of wins this quarter with CPG and airlines. How quickly is that evolving? Are you feeling confident that Einstein represents an incremental monetization opportunity for the company?

Einstein is an incredible product, and we are just at the beginning. It is an outstanding piece of innovation, and we’ve invested a great amount of time and effort into it. The team has done an unbelievable job, and it is part of every dialogue with customers, no matter the industry or company size. What I love most about Einstein is that it is applied intelligence. Many people talk about artificial intelligence without real definitions, but ours is tangible and results-oriented. It applies to fantastic use cases, which enhance our conversations' relevance. Customers gain more value from existing products. So yes, we are seeing opportunities for increased deal sizes and deeper relationships, with a long growth trajectory ahead.

My question is for Keith. Keith, it sounds like the vertical businesses are doing very well, and Salesforce hasn't been shy about taking stands on just causes beyond business. I’d like to ask about the public sector; it sounds like it's been performing very well. Have you seen any recent impacts on that business due to recent corporate activism by Salesforce?

The public sector is one of our strongest verticals. It continues to grow robustly, whether with the U.S. or U.K. government or any government globally. They're tasked with providing a higher level of service to their citizens while modernizing their legacy systems. This is where Salesforce comes in to help them engage with citizens in extraordinary ways, and that fuels our growth. That business remains very robust, and we support these organizations in fulfilling their missions.

Just one question; you guys have tapped the idea of durable growth over time. I’m curious about the platform business. If you back out MuleSoft, the platform business is growing over 35%. What’s been driving that growth? Is it just custom-built extensions off your core cloud apps or ISV traction? I would like to know more about the strength of your platform business. Thank you.

I’ll answer this, and Marc, if you want to add anything, feel free. Our core platform business is remarkably strong, driven by capabilities around growth like Shield, analytics, and others. We have focused efforts on expanding this area, and we've executed incredibly well. I believe you're going to see continued expansion of this area.

I totally agree with that. It's exciting to witness that growth within our addition. You will see astonishing new extensions at Dreamforce. We'll keep that under wraps for now, but I am sure you’ll be as excited as I am. We announced our lead band for Dreamforce, which is Metallica, along with many other amazing entertainment plans and speakers. Some surprises are coming leading up to September 25th. This Dreamforce will be one you will never forget, and I look forward to seeing all of you there.

Great. Thanks so much everyone for joining us today. If you have any further questions regarding our second quarter results, please feel free to email us at investor@salesforce.com. Otherwise, we look forward to seeing many of you at our Annual Investor Day on September 26th. Thank you.