Salesforce Inc (CRM) — Q2 2021 Earnings Call Transcript

Thanks, Josh. Hello everyone, and thanks for joining us for our fiscal 2021 second quarter results conference call. I'm Evan Goldstein, Senior Vice President of Investor Relations. Our 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, Chair and CEO; Mark Hawkins, President and CFO; Bret Taylor, President and COO; Gavin Patterson, President and Chief Revenue Officer; and Amy Weaver, President and Chief Legal Officer. 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 contain forward-looking statements that are subject to risks, uncertainties and assumptions. In particular, our expectations on the impact of the COVID-19 pandemic on our business, results of operations and financial condition and that of our customers and partners are uncertain and subject to change. 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 is included in our SEC filings, including our most recent report on Form 10-K. With that, let me hand the call over to Marc.

Okay. Thanks so much Evan and we're thrilled to be on the call with you today, and this has been such a challenging time. Our hearts have been broken as we've heard so many stories of pain and distress across the world, and for us, this moment is actually quite humbling, quite bittersweet. It reminds us that at Salesforce this is a great platform for change, and that we're really here to be a great example of stakeholder capitalism to show how we're able to deliver a phenomenal return for our shareholders as well as for our stakeholders. And in many ways, this quarter really is a victory for stakeholder capitalism. It has been not only about our core values but also about our core products. It is about showing how our Customer 360 has been a platform for change for so many of our customers, and I'm going to talk about that briefly before I turn it over to Mark, but also our company has been a platform for change for the communities that have needed us most. And I am thrilled to deliver such a great return to our shareholders and also to our stakeholders. Looking at this quarter with more than $5.15 billion in revenue and our highest operating margin ever at 20%, or our operational excellence like the 63% increase in seven-figure deals from a year ago really indicates to us one thing: values bring value. It reminds me of a story that we started last quarter with AT&T. Now AT&T is an amazing company, a leader in the communications industry, and they have a tremendous visionary with Jeff McElfresh who is the CEO of AT&T Wireless. The interesting thing about AT&T is they have a huge vision; every customer touchpoint, whether in their stores, e-commerce, their app, or messages from them, they want to know you as a customer. They want to single source the truth. I was thrilled that this quarter we've deployed hundreds of stores and the first 35,000 users. But at this moment, we've had to go faster. We've had to deliver customer success faster and be there for our customers. I'm absolutely thrilled to deliver that success rate you can see. I also look at another incredible win in the quarter with PayPal. They are a tremendous organization that’s in the right place at the right time because we really need contact with payments. So to see them have such great success with our Sales Cloud and Service Cloud, seeing the SPO, they embrace us so deeply, and our vision, we're having a one-on-one relationship. The journey is powerful. Another incredible victory in the quarter has really been work.com. This is a product that I don’t think we've ever built faster, but never been more successful more rapidly. Many public sector organizations need contact tracing and shift scheduling, and work.com is deliverable. Look at the University of Kentucky, for example; it is a difficult situation for the University to bring students back using work.com. We also had significant success with customers such as TWC and VF Corp, and with public sectors like the Veterans Administration and the State of Rhode Island. We had victories internationally with Banco Bradesco, just had a great conversation with their CEO Octavio de Lazari, tremendous vision for the future of financial services. I'm especially proud that during this entire quarter we delivered an additional $20 million to San Francisco and Oakland public schools, bringing our total contributions to $118 million, addressing the need for distant learning. This shows that we can build a great company with strong core values and great products. Thank you to everyone who had such great success during the quarter: our customers, our employees, our partners, and all our key stakeholders. With that, I'd like to turn it over to Mark.

Well, great. Thanks, Marc. And I hope everyone continues to be safe and well during this historic and challenging time. As Marc described, this was an exceptional quarter for Salesforce. Both the company and our customers navigated the crisis better than our guidance assumes. While our performance in Q2 leaves us optimistic about the future, it is important to note that we remain mindful of how the pandemic may continue to impact our customers and our community. Let me take you through some of the results for Q2, and I'll begin with the topline commentary. Revenue was $5.15 billion, representing 29% year-over-year growth. Q2 was the first time the company surpassed $5 billion in a single quarter. Our revenue performance continued to demonstrate strength across the portfolio. Sales Cloud grew 13%. Service Cloud grew 20%. Platform and Other grew 66% with Tableau contributing 41 points of that growth, and marketing and commerce grew 21%. Additionally, we had a strong year-over-year performance by region in constant currency. America grew 28%, with Tableau contributing 10 points to that growth, EMEA grew 38% with Tableau contributing 13 points to that growth, and Asia/Pac grew 23%. Before I detail the quarter's performance, please note that the following should be compared against the guidance assumptions provided on the Q1 earnings call. The outperformance in the quarter was driven by five factors: One, better new business generation; Two, higher license revenue driven by new business performance; Three, modestly better revenue attrition than expected; Four, certain performance obligations within last quarter's large teleconference actions; and Five, favorable foreign exchange. Our remaining performance obligation, representing all future revenue under contract, ended Q2 at approximately $30.6 billion, up 21% year-over-year. Current remaining performance obligation or CRPO, expected to be recognized as revenue in the next 12 months, was approximately $15.2 billion, up 26% year-over-year. CRPO benefited from new business outperformance, favorable foreign exchange, strong renewal performance, and last quarter's large telecom transaction. Q2 GAAP EPS was $2.85, and non-GAAP EPS was $1.44. The outperformance was driven by higher revenue as well as realized and unrealized gains under our strategic investment portfolio, notably due to nCino's IPO. These mark-to-market adjustments benefited GAAP EPS by about $0.55 and non-GAAP EPS by approximately $0.58. Additionally, GAAP EPS benefited by $2.17 as the company changed its international corporate structure, which included a consolidation of certain intangible properties, resulting in a $2 billion net tax benefit related to foreign deferred taxes. Note that this had no impact on non-GAAP EPS as the company utilizes a fixed long-term projected non-GAAP tax rate, generally excluding the effects of discrete events. Turning to cash flow, our operating cash flow was $429 million in Q2, down 3% year-over-year. CapEx for the quarter was $114 million, leading to a free cash flow defined as operating cash flow less CapEx of $315 million, up 22% year-over-year. Moving on to guidance for Q3 and fiscal 2021, coming off a strong future result, we are pleased to raise our full year fiscal 2021 revenue guidance to $20.7 billion to $20.8 billion, representing approximately 21% to 22% growth. This guidance includes approximately $100 million of revenue from our acquisition of Vlocity. For Q3, we expect our revenue to be $5.24 billion to $5.25 billion, representing approximately 16% growth. As a reminder, Q3 represents Tableau's third quarter in the company, and the year-over-year growth rate will be normalized. While the demand trends were strong in Q2, we remain mindful of how the pandemic may continue to affect our customers and community. Therefore, our guidance assumes that revenue attrition remains consistent with Q2's performance and assumes modest new business growth during the second half of fiscal 2021. We'll continue to take this quarter-by-quarter as the pandemic is not over, and we're only halfway through the fiscal year. From that perspective, we will continue to evolve and reimagine our business to enhance our relevance and deliver the highest level of customer success and innovation. Over the next 12 to 24 months, we realize it's important for us to make a strategic shift in investments today to better position ourselves for continued growth and customer success in this new all-digital, work-from-anywhere environment. We will allocate resources to prepare the company for growth in strategic areas, redirecting some resources to fuel growth in areas that are no longer aligned with business priority while deemphasizing them. Furthermore, we intend to accelerate spending in go-to-market and product originally planned for next year and pull that into the second half of this year. These planned growth investments will increase expenses in the second half. Incorporating these and updating our revenue guidance, we are pleased to raise our fiscal 2021 non-GAAP operating margin guidance for a year-over-year improvement of 75 basis points. We are updating our fiscal 2021 GAAP diluted EPS to be $3.12 to $3.14 while non-GAAP diluted EPS will be $3.72 to $3.74. For Q3, GAAP diluted EPS is expected to be $1.03 to $1.04 while non-GAAP diluted EPS will be $0.73 to $0.74. Our EPS guidance assumes no future contribution for mark-to-market accounting as required by ASU 2016-01. For operating cash flow, we are raising the fiscal 2021 guidance to 12% to 13% year-over-year growth. We continue to expect CapEx to be approximately 3% of revenue in fiscal 2021 and a free cash flow growth rate of approximately 15% to 16% for the fiscal year. Operating cash flow is expected to be impacted by incremental growth investments. We expect CRPO to grow approximately 19% year-over-year in the third quarter, and as a reminder, Q3 represents Tableau's fifth quarter in the company, so the year-over-year growth rate is now normalized. In closing, we delivered a landmark Q2 in the face of adversity and set ourselves up for a strong second half of fiscal 2021 and beyond. We are proud of our ability to lead through change and continue to serve our stakeholders around the world. I'd like to thank our employees, our customers, our partners, our community, and our shareholders for their continued support and wish each of you, your families, and your firms safety and wellness. With that, I'll open the call for questions.

Great, thank you so much gentlemen for taking the question. I appreciate it. I was just wondering, Marc or Mark, if you could show us a little bit how the progression of the quarter unfolded and just what you are hearing from customers now? Obviously, you did much better than what your guidance expected, but if you could put all this in the Einstein, how did it shape up versus what you thought? Thinking about how the slope in a quarter might have progressed? Thank you.

Thanks, Heather, for that question. We started this quarter with 54,000 remote employees working at home. We knew that we needed to make several changes. It was critical for us to reshape our company as this was a moment in time where we had to either keep things the way they were or shift. We made the decision to change. We shifted our operational values aggressively, and as we changed those operational values, we saw momentum build. We called that out at the beginning of the call after Q1, where we saw pipelines starting to increase with the second quarter and the third. By doubling down on our core operational values, we got much closer to our customers. We understood that if we were to succeed at this moment, we were going to have to be closer to our customers than ever before. As we made those adjustments, we saw speed increase right up to the end of the quarter. It has been powerful. This has been a challenging time for us, our families, and to see these results is incredible. Everything from the delivery of our teams to the technology teams has just done a fantastic job. Our engineering teams worked hard, especially with work.com, fulfilling amazing improvements for many businesses to get back to work safely. Now we help schools as well. This is about us paying attention to our core products and core values, which are the real accelerators. There are so many success stories, one notable being Gina Raimondo from the state of Rhode Island. She set a strong vision for making the state safe. We have to increase our testing and be mindful of safety. Our teams were able to deliver and assist her, along with 35 other states, during this pivotal time.

Yes Marc, you talked a lot about transformation. We're seeing that across our entire customer base. Our technologies are being adopted at incredible rates. For instance, in the past six months, we've seen a 600% increase in the use of messaging channels like text and WhatsApp. We also recorded an 89% year-over-year growth in our Commerce Cloud. A great example from that is Sonos, which had to pivot and go direct-to-consumer. They deployed our Marketing Cloud and Commerce Cloud, which resulted in a nearly 300% year-over-year increase in their direct-to-consumer revenue. Although this has been a challenging time for everyone, there are incredible opportunities for sustainable shifts in consumer behavior toward digital commerce and direct-to-consumer models. We are privileged to help our customers navigate this crisis, emphasizing agility as a key value representing our ability to empower all customers through Customer 360.

Gavin, we just had a tremendous meeting with Banco Bradesco and Octavio de Lazari. We’ve also met with several other significant customers. We’re seeing considerable transformation and desire for speed, particularly regarding their ESG commitments, aligning with our position of stakeholder capitalism. Gavin, can you offer some insights based on what you’re observing from our customers?

I’d call out a couple of things, Marc. One is that we've seen confidence build as we went through the quarter. In the early weeks of moving businesses remotely, once that shock passed, companies began to realize that digital transformation was imperative and could no longer be put off. Our sales leaders have been relevant to our customers during these challenging periods, helping them make swift decisions that typically take weeks or months. This demonstrates the value of being able to pivot quickly. We had a strong quarter, but with the context of uncertainty still looming, our offerings have never been more relevant.

Thank you, Gavin, and welcome officially to the team. I know you’ve been with us for about a year, but now you’re officially on board as our Chief Revenue Officer, and we couldn’t be more thrilled. Amy, we also saw considerable action in the public sector. I mentioned a few stories, but there are so many successes. Could you highlight what we saw in the public sector during the quarter?

It wouldn't be a call if I didn't forget to unmute myself at some point! The public sector has seen great success in both the first and second quarters, and the trust and collaboration have kept building. I want to acknowledge Dave Ray and his entire team for their proactive support. We have seen teams mobilizing in several states where they reached out for assistance, and within hours, Dave assembled a team of professionals to help. It showed the values of Salesforce and our commitment to collaborating and partnering with governments globally.

Hey, guys. Thank you for taking my questions. I hope you’re all safe and well, and congratulations on an absolutely stunning quarter. Marc, many of the inquiries we receive are around improvements in the week-by-week confidence you outlined. Could you share insights on your pipeline and your confidence in converting that pipeline, especially as selling has shifted to a more digital paradigm? Given the relevance you're seeing, could we see meaningful acceleration in 2021, or are we too far away from the end of this crisis?

This is a great question. This is perhaps my fourth crisis as the CEO of Salesforce. Each crisis is different, but one commonality is that each brings us to the future faster. It appears to be what's happening here. This pandemic has transformed our business practices, and as a company, we've had to adapt and engage in new ways. Despite grief over missing events like Dreamforce, we have found new methods to connect with customers. The digital transformation for companies is imperative, and we continue to lead in that space with offerings like work.com and Salesforce Anywhere. We're committed to helping our customers succeed in this new environment, which we know will be different from before. Our team is also focused on focusing efforts on core products and values, which is key for navigating this time. Understanding how businesses are transforming and ensuring we are responsive to that need is critical.

Hi, thanks for taking my question and congrats on the awesome quarter. The raise in your full-year operating margin improvement guidance of 75 basis points is solid, especially as you are pulling forward some expenses to fuel growth. Could you break down the components driving that guidance, such as savings or further down the line, and quantify the pull-forward of expenses?

Yes, thank you Taylor for the question. We were very pleased to raise our margin guidance by 75 basis points, especially in light of our further investments to perpetuate long-term success for our customers and stakeholders, but we're not prepared to quantify specifics. We're focusing on growth areas, particularly in products and go-to-market strategies. Of course, we are experiencing some benefits as well, but our profit margin is ultimately a strategic choice for us. We aim to maintain a balance between growth and profits, and we're pleased with our results while pushing for continuous optimization.

Hey, thanks. It was a good quarter and congrats on really strong results. Focusing on Service Cloud, it continues to demonstrate robust growth. Could you discuss some of the dynamics you're seeing in the Service Cloud, and how sustainable do you think this growth is?

Sure, let me discuss that at a high level and then ask Bret to dive deeper. You're correct, Service Cloud is seeing substantial growth at around 20%, and its revenue is now larger than Sales Cloud. The engineering team has done a fantastic job building out the Service Cloud with an incredible velocity that has added significant value. The usage of messaging channels grew over 600%, and for us, it's about creating a Customer 360 that integrates sales and service. Many companies handle customer service as a silo, but our vision integrates everything, enhancing customer experience. This strategy contributed to victories such as with PayPal where Sales Cloud, Service Cloud, and our analytic capabilities worked in concert to deliver exceptional results together. Bret, would you like to share more details?

Yes, Marc, you summarize it well. Our customers are coming to us to build a Customer 360 which acts as a single source of truth for seamless customer experiences. The recent deals, such as with PayPal, illustrate the importance of the Customer 360 value proposition. We're seeing similar success with other organizations, emphasizing the importance of transformation, agility, and customer-centricity. Our solutions are empowering businesses to navigate the operational challenges they face.

Hi, thanks. I have a question about Commerce Cloud. I understand that customers partially pay based on GMV, and they need to renew as volumes increase. Could you help us understand the impact of Commerce Cloud this quarter and how it drives holistic sales across your portfolio?

Yes, we saw over 100% year-over-year GMV growth this past quarter, reflecting the broad digitization of commerce. Our Commerce Cloud is distinct in that it handles both B2C and B2B commerce, and it enables a seamless integration across various customer channels. For instance, we are now integrating our Commerce Cloud with order management systems and our Service Cloud for complete, end-to-end customer experiences. This transformation is more critical now than ever, enabling our customers to respond to evolving market demands effectively.

Hi, thank you very much. It’s spellbinding to see organic growth rates and margin expansion, with many leading indicators as well. My question, Marc, you expressed excitement about Tableau's potential impact. Could you explain how Tableau can contribute to both Customer 360 and digital transformation looking ahead to 2021 and 2022?

I really appreciate that question. We're fortunate to have acquired Tableau last year. It’s one of the world’s leading enterprise software companies. Tableau’s ability to allow companies to visualize and understand data is extraordinary. Many companies have decided to go with Tableau as their analytics platform since it's user-friendly. Moreover, it holds tremendous potential for integration with Salesforce's Customer 360, enhancing overall business ability to utilize data effectively. You'll see innovation unfold with Tableau's offerings, as it contributes to digital transformation at a substantial level, working deeply within organizations to enhance their operations. Mark, could you elaborate further on its financial contributions?

Yes, Marc. We share the excitement about Tableau —it's a great product for our customers. We had a fantastic quarter with Tableau's overperformance. Their term license offering had several long multi-year agreements, which favored our revenue recognition. This trend speaks volumes about how customers want to invest in long-term solutions, further contributing to our top line. What is heartening is the integration of Tableau with our digital transformation efforts, positively impacting our customer relationship and acquisition strategies.

Also, I want to highlight the role of MuleSoft, another transformative acquisition for our Customer 360. It integrates legacy systems, which strengthens our offerings. Our solutions now hold the promise of empowering a level of seamless needs for organizations that has made a tremendous impact. Exciting opportunities lie ahead for us.

Absolutely, Marc. MuleSoft's abilities continue to surpass expectations. We're seeing heightened excitement from customers wanting to embrace a Customer 360—to achieve unified, comprehensive interactions across their systems. The demand increases indicates our relevance is continuously growing.

Hey, thanks for squeezing me in and congrats as well. My question for Marc and Gavin is about customer engagement in this new environment. Could you share insights on deal sizes and what you're targeting? Additionally, with Dreamforce moving online, how are you adapting your lead generation strategies?

Bret, would you like to address that?

Sure. We’re embracing the changes in how we deliver and communicate with our customers. Our emphasis is on fostering authentic engagement, and while our historic events like Dreamforce are missed, we're finding new opportunities through online channels. The digital transformation urgency has never been clearer, and we’ve been working toward meeting our customers where they are. We're confident our offerings align with these emerging needs.

Great, thank you so much for taking my questions. Marc, how do you feel about M&A today, especially with the activity surrounding TikTok? Do you think acquisition appetites are picking up again, or perhaps the IPO market? Regarding your quarter results, could this enhanced margin be a new normal given the emphasis on work from home? I also wanted to commend you for your generous approach to employees and rewarding stakeholders.

Thank you for your questions. Regarding M&A dynamics, it feels quite uncertain. We're incredibly lucky to have acquired MuleSoft and Tableau last year before this uncertainty arose. For now, we're focusing on our operations and investments, maintaining a beginner's attitude. Our commitment is to execute excellently. Regarding margins, we are continuously optimizing for growth and profitability, and while we aim to improve operational efficiencies, we assess that balance regularly. The strength of our business model allows for beneficial decisions for our customers and shareholders.

Indeed, we always strive to manage growth and profitability while continuously reassessing our strategies. Our goal is to ensure we take advantage of opportunities while maintaining our focus on delivering value.

Thank you for joining us on the call today. If you have any follow-up questions, please email us at investor@salesforce.com. I look forward to speaking with you on our Q3 results. Thank you.