Salesforce Inc (CRM) — Q4 2021 Earnings Call Transcript

Thank you, Michelle. Hello, everyone, and thanks for joining us for our fiscal 2021 fourth quarter and full year 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; Amy Weaver, President and CFO; Bret Taylor, President and COO; and Gavin Patterson, President and Chief Revenue 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 around the impact of the COVID-19 pandemic on our business acquisitions, 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 may 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 to Marc.

Thank you very much, Evan, and thank you everyone for joining the call today. It's great to be here, and I hope everyone's families are safe and healthy. I’m here in the Bay Area with Amy Weaver, our Chief Financial Officer; Bret Taylor, our Chief Operating Officer; Gavin Patterson, our Chief Revenue Officer; and Evan and Mark Hawkins, our CFO Emeritus. It's nice to be together outside for this earnings call, a first for us, but it reflects the new normal we are navigating. We are witnessing the beginnings of a return to our offices and other aspects of life, such as dining out and attending events. However, despite the rollout of vaccines, we’re not yet back to normal. The pandemic has significantly altered our world and our operations. Our Salesforce futurist, Peter Schwartz, aptly noted that we're now in a new pandemic world. As we adapt, it's crucial that we can work, sell, service, market, collaborate, and analyze from anywhere. Salesforce was built for this environment, making us more relevant to our customers than ever before. In 22 years since Salesforce was founded, we're seeing a growing number of companies turning to us for success from anywhere. This past year has been remarkable; our revenue reached over $5.8 billion, a 20% increase year-over-year, and for fiscal year 2021, we saw revenue of $21.25 billion, up 24%. Based on these results, we are raising our fiscal year 2022 guidance to $25.75 billion, signaling a projected growth rate of 21%. Notably, no software company exceeding $20 billion in revenue has grown at this pace. We aim for $50 billion in revenue by fiscal year 2026, effectively doubling our current size, achieving this milestone faster than any other enterprise software company, making Salesforce the second largest independent software company globally. Our success is a testament to our employees, customers, and the collaborative technology ecosystem we've built. People often ask how we’ve thrived in these challenging times. The answer lies in our pivot to the work-from-anywhere model, guided by our core values, particularly trust, which is crucial during this period of eroding confidence in institutions. Our Customer 360 platform is essential in helping our customers navigate the pandemic and forge direct digital relationships. We've made remarkable strides in innovation with projects like our Vaccine Cloud and contact tracing capabilities, and we’re proud of how we’ve worked with communities, healthcare institutions, and vulnerable populations. We adapted our business model in response to the pandemic, enhancing our relevance and employee empowerment, which has subsequently increased participation and effectiveness. Our sales teams leveraged the Sales Cloud for over six million customer interactions, underscoring the importance of maintaining B2B relationships during these times. Meanwhile, our Marketing Cloud enabled us to scale our digital presence significantly, transforming events like Dreamforce into virtual experiences viewed by millions. In terms of service capabilities, our Service Cloud supported 4.8 billion interactions last quarter, assisting customers across various industries to ensure continued success remotely. Our acquisition of Slack has proven beneficial, yielding substantial improvements for our operations and customer service. We envision Slack as an integral part of our offerings, creating a seamless experience for collaboration and productivity. Our customers are leveraging Customer 360 effectively, generating millions of sales opportunities and marketing messages while utilizing the power of AI through Salesforce Einstein for vast daily predictions. Our growing customer base spans various sectors, all turning to us for trusted relationships and efficient operations. Through technology like Contact Tracing and Work.com, Salesforce has positioned itself at the forefront of the response to the pandemic. We’re helping various states and cities manage vaccine operations, showcasing our commitment to solving logistical challenges effectively. More than 50 health organizations are now using Salesforce to respond to COVID-19, including numerous states and cities across the United States. Our platform, Hyperforce, represents a new era of flexibility, allowing us to run on any hyperscaler for better data management and service. We are committed to supporting all stakeholders during the pandemic by providing healthcare support and resources for communities, along with efforts towards sustainability and reducing our carbon footprint. Salesforce’s progress illustrates our commitment to stakeholder capitalism and environmental responsibility. As we focus on a new business model, delivering success from anywhere and nurturing trusted customer relationships, we remain steadfast in our goals. I’m proud of our achievements in fiscal year 2021, and now I'll hand it over to our Chief Financial Officer, Amy Weaver.

Thanks, Marc, and I agree. It's a little surprising to be doing my first call outdoors. But at least, it's brisk, this is great. So I'm thrilled to be here today in this new role. I've really enjoyed the opportunity to meet with and learn from many of our shareholders during the transition period, and I'm looking forward to getting to know more of the investment community during fiscal 2022. As Marc described, we closed out our fiscal 2021 with another quarter of outstanding growth at scale and solid bottom line execution. Let me take you through some of the results for Q4 and fiscal 2021. I'll begin with top line commentary. Total revenue for the fourth quarter was $5.82 billion, up 20% year-over-year, or 19% in constant currency. For the full fiscal 2021, revenue was $21.25 billion, up 24% year-over-year in both dollars and constant currency. This was a well-rounded performance across geographies and service product offerings. Revenue attrition in Q4 was between 9% and 9.5%, which was slightly favorable versus our Q3 guidance assumption. Our continued focus on customer success has resulted in attrition rates better than we had assumed each quarter since the onset of the pandemic. However, our Q4 attrition rate is still higher than where we finished a year ago. Our remaining performance obligation, representing all future revenue under contract, ended Q4 at approximately $36.1 billion, up 17% year-over-year. Current remaining performance obligation, or CRPO, which represents all future revenue under contract that is expected to be recognized as revenue in the next 12 months, was approximately $18 billion, up 20% or 18% in constant currency. Turning to operating margin, Q4 non-GAAP operating margin was 17.5%. This includes a $184 million real estate impairment charge. As a reminder, our guidance for Q4 had assumed $80 million to $100 million in real estate charges. During the quarter, we identified further opportunities to consolidate and sublease across our global portfolio, including in some of our hub locations. For the full year, we delivered non-GAAP operating margin of 17.7%, up 90 basis points year-over-year. The upside from our guidance was largely driven by revenue outperformance and partially offset by the incremental real estate charges that I just referenced. Q4 GAAP EPS was $0.28 and non-GAAP EPS was $1.04. The outperformance in the quarter was primarily due to higher revenue, as well as realized and unrealized gains on our strategic investment portfolio. These mark-to-market adjustments benefited GAAP EPS by approximately $0.21 and non-GAAP EPS by approximately $0.22. Turning to cash flow, operating cash flow in the fourth quarter was $2.2 billion, up 33% year-over-year. For the full year, we delivered $4.8 billion of operating cash flow, up 11% over last year. This number was slightly lower than our guidance for the year, which was driven by the growth investments discussed in previous calls as well as by timing of collections at the end of the quarter. CapEx for the quarter was $149 million, leading to free cash flow of $2 billion, up 35% year-over-year. Now turning to guidance for Q1 and fiscal 2022. As a result of our Q4 performance, we are raising our Q1 revenue guidance by $170 million to $5.875 billion to $5.885 billion, or approximately 21% growth year-over-year. This includes a $40 million contribution from Acumen Solutions due to an earlier acquisition closing date of February 1st. Additionally, please note that MuleSoft will contribute to higher sequential revenue than historical norms in Q1 due to certain contracts that closed in Q4 but have start dates beginning in Q1. We are also raising our fiscal 2022 revenue guidance by $200 million to $25.65 billion to $25.75 billion, or approximately 21% growth year-over-year. This includes $190 million from Acumen and subject to closing $600 million from Slack. For Q1, we expect to deliver CRPO growth of approximately 19%. We expect non-GAAP operating margin for fiscal 2022 of 17.7%, or flat year-over-year. We're pleased to keep the margins flat despite an expected 160 basis points headwind from Slack and Acumen, continued investments in our core business and the anticipated gradual increase of travel in the second half of fiscal 2022. I do want to call out that the real estate consolidation mentioned earlier will have a positive impact on the longer-term P&L. But at this point, we do not see a material benefit in fiscal 2022. We expect GAAP diluted EPS for fiscal 2022 of negative $0.44 to negative $0.42 and non-GAAP diluted EPS of $3.39 to $3.41. We expect recent M&A will be a $0.53 headwind to non-GAAP diluted EPS. Please recall that our OIE and EPS guidance assume no contribution from mark-to-market accounting as required by ASU 2016-01. We expect fiscal 2022 operating cash flow growth of 10% to 11% year-over-year. Note that this includes the expected dilutive cash flow impact of Slack and Acumen, which we expect to represent a headwind to our year-over-year growth of approximately nine points. We continue to expect CapEx to be approximately 3% of revenue in fiscal '22, resulting in a free cash flow growth rate of approximately 10% to 11% for the fiscal year. Excluding the anticipated impact of M&A noted above, this rate would be 21% and 22%. To close, in a year far different from what we ever could have expected, Salesforce delivered durable topline growth, non-GAAP operating margin expansion, and took important steps on our path to $50 billion, by reimagining our business and setting ourselves up for success from anywhere. I'm extremely proud of the way that our employees navigated the challenges of fiscal 2021 with grace, resilience, and an unwavering commitment to our values and to our customers. Finally, I'd like to thank our employees, our customers, our partners, our community, and especially our shareholders for their continued support. And with that, Michelle, let's open up the call for questions.

Thank you. I have to say I love to do outdoor conference call. I think you all heard seagull or a crow in the background at some point, so loved that innovation. My question is where are you in the demand cycle for Einstein and the AI technologies? You've had such a long head start there with that vision and you've been embedding it into your cloud, but it seems like right now is the moment that most companies are finally really prioritizing AI as a top initiative this year. So, I'm wondering if you're sensing any kind of inflection there with companies being recharged and more ambitious goals for Einstein and the data layer.

I'm going to let Bret Taylor take this over, but before he does, I just want to say that I'm so excited with how Einstein has been received by our customers and also how we have deeply integrated it into all of our clouds. It's definitely a critical-enabling technology that has made everybody just a lot more productive, and I've been surprised while other companies have divested some aspects of artificial intelligence. We continue to see Einstein become the critical enabling capability and differentiation that we can offer key clouds, especially what we've seen with commerce. So, I hope that Bret can further illuminate that.

Yes, it's a great question, and I definitely view this year and this new pandemic world as an inflection point for the adoption of Einstein. Broadly, I think we're seeing incredible secular trends towards digital. Yes, I've heard a lot of CEOs just talk about essentially we did in a year what might have taken a decade before in terms of adoption of digital technology, and when all of your customer and your partner and your employee interactions are digital, artificial intelligence and Einstein can make every single one of those engagements more personal. To put some numbers on it, I'll just take Service Cloud as an example. Our digital service capability has grown at unprecedented rates this year, and with the adoption of things like chatbots powered by Einstein, we saw 91% quarter-over-quarter growth in chatbots alone. Our Marketing Cloud, which is just every single one of those interactions, is personalized. If you looked at Cyber Week this past quarter, mobile push notifications were up 131% year-over-year. SMS was up 171% year-over-year. You're seeing just unprecedented adoption of digital, and the thing Marc covered in his opening remarks I think is really important, and a big part of our thesis as a company is we're not going back. The people who have experienced all these digital trends whether it's buy online curbside pickup, that direct-to-consumer trend in the consumer-packaged goods industry, the move to telemedicine, one of the customers Marc mentioned, Humana. One of the things they're doing with our platform is Humana Care Support, which is this digital interaction between its members and the care teams, its provider communities. All of these trends are here to stay. When we think about Einstein, we think about our platform broadly. We really think that we're looking over the next five years, how can we help every single one of our customers across all these industries gain success from anywhere, and Einstein is a huge part of that vision.

Excellent. Thanks so much, and congrats on all the success. My question is for Marc and/or Gavin. How do you think about the potential for acceleration coming out of a recession? Does your current pipeline look like it can support it and are you properly staffed up to capture the opportunity ahead?

Sure. Thanks for the question. The pipeline is very strong, and we saw that built throughout the year; coming into Q4, we continue to see it build. That's in spite of having no face-to-face events during the year. It's all been done digitally. As Marc said in his opening remarks, Dreamforce to you, where we delivered the whole thing digitally was a huge success giving us access to decision-makers and allowing us to strengthen that pipeline. Let me reassure you, we are building the capability in terms of the sales force. You'd be delighted to hear that we're investing significantly in terms of our direct sales force to take advantage of that demand, and I'm very confident we'll be able to meet it. I think you're hearing today a message from us all that the business is strong, the pipeline is strong, and we've got confidence going into the year.

Hi. Thank you. Marc, this one might be for you or maybe Gavin, but we've touched on how much the world has changed over the past year with the pandemic. I would love to hear how the complexity of your deals with your customers have changed over the past year, particularly as it relates to things like deal cycles, deal size, multi-product adoption, and perhaps customer focus on time to value, and how are you adjusting to address those changes?

I'm going to let Gavin take this, but I'm going to take it at the high-order bit on. I've been surprised how many sales calls we've been able to make this year, and if I could rewind history over the last 22 years, I would have enforced a much more significant digital discipline for our sales organization. When we look back at all of the time and energy we spent physically getting on airplanes, getting in cars, going to people's offices, having a breakfast or a lunch or a dinner, waiting to try to get up and make a C-level sales call, when you look today at the level of access that you have in organizations to conduct B2B sales, I mean it's all the capability when you're digitally enabled, you can go anywhere just much, much faster, and that's a key reason why with Dreamforce not only did we have a very successful Dreamforce from our park, but we then told each of our sales executives all over the world that they were going to have to do that. Same presentation, but highly customized, with highly customized demonstrations for each and every one of our customers, which we then did. Customers warmly received that with large groups of their employees. It's really an example of you can do a lot more to build pipeline, have direct access, and deliver highly customized selling at a level of velocity that I don't think previously was possible. Gavin, do you want to comment on that as well?

What I would say is the digital imperative is now a CEO priority. That's the overriding theme that we've seen over the last nine months. Previously, it might have been delegated down into the business, but it has become so important and so urgent that the CEO wants to take direct control over it. And that has been something we've been able to take advantage of. Coupled with the fact that video allows us to see and make us faster and more frequently, it means that the pipeline has been very strong. Big deals have happened. The run rate business, the volume side of the business continues to be strong as well. Important that both these muscles continue to operate within our business model. So, it's a very well-rounded performance in that respect. You've rightly identified. Time-to-value is, I think, probably even more important now for decision-makers. The more we can ensure that standard Salesforce solutions are deployed and configured in a standard way to ensure that we can get fast deployment, I think is really, really important. So, we're agile we're getting the right sort of conversations and the pipeline is strong across the board.

Yes, thanks very much. Maybe this one's for Bret. Bret, you all named David Schmaier, Chief Product Officer and President this quarter. I was just wondering if you could talk a little bit about sort of what you're thinking in terms of going more vertical from a product sort of development perspective in terms of his appointment. Maybe Gavin, how does that match up with how you're thinking about trying to maybe double down on certain verticals where you can go deeper with customers and sort of from an industry perspective because that seems to be one of your strengths is being able to sort of go deep in certain industries. Can you talk about that a little bit?

Yes, it's a great question. I'm so grateful to have David at this company. I was joking with Marc the other day that David Schmaier has forgotten more about CRM than most people know. He's been in this industry for decades and is truly an expert. Our strength as a company is that we are experts in our lines of business. We want to help people sell from anywhere, service from anywhere, market from anywhere, do digital marketing from anywhere. We're increasingly experts in industries. Now thanks to both our organic strategy and our acquisition of Vlocity, we're at 12 industries that we serve across so many strategic verticals for our customers. You heard our focus which is really helping our customers in this all-digital work anywhere world find success from anywhere. So much of that is really industry-specific. Every industry is going through a very accelerated digital transformation. In consumer goods, as Marc said, it's about creating direct trusted customer relationships, which is a completely new digital motion that requires new expertise, new software, and candidly just a new business model. In areas like health care, you've seen the impact this year. Retail, obviously, Cyber Week has accelerated again by almost a decade's worth of acceleration this year. When I think about our ability to really provide success from anywhere, it's really building in those industry-specific processes so they work out of the box. Grateful for David's leadership and really grateful for the alignment between our product strategy and our distribution and sales strategy that this vertical effort gives us.

Wonderful. Thank you for taking my question. Marc I guess I'll direct this to you, but probably a good opportunity for Gavin to chime in as well from the field. It seems like every year, you get to the fourth quarter and the big deals, the ELAs, the big digital transformation. A lot of those do show up in the fourth quarter. I would imagine over the last several years the nature of those transformations have changed. Given this has been such a wild and unusual year would love to hear what you're hearing from the field like customers are talking about that's different in the way that they're going about their digital transformations. Perhaps it's more MuleSoft, more Tableau, or maybe even talking about messaging and engagement. I know it's an open-ended question, but some more anecdotal evidence from the field on big deals would be great. Thank you.

Well, I'm going to have Bret and also Gavin come in here and talk about this because they've really had the opportunity to work on so many transactions together. One of the major transformations that's happened this year and I think you can really see it and it appears into the numbers is when we actually sell to our customers we're selling our Customer 360 platform. We have Sales Cloud. You're right. We have Service Cloud. We have Marketing Cloud. We have Commerce Cloud. We have this amazing Tableau. It's an incredible multibillion-dollar analytics cloud. We have this amazing MuleSoft integration cloud billion-dollar integration cloud and a reskilling platform, our services business and our partnerships and the full ecosystem of solutions. When customers are coming and working with us and if I'm working with a CEO a fellow CEO of maybe one of these very large companies, they're not as interested in some discrete cloud. I think you can probably appreciate that they are really interested in deploying our platform. We have a lot of different words to describe these different parts of our code. The reality is they really just want us to make them successful. When we look at some of the very large implementations that we've done this year, we're quick to say 'We fully implemented all of these AT&T retail stores with our Sales Cloud' but when you talk to Jeff McElfresh who we featured at Dreamforce, he's the CEO of AT&T Wireless, mostly he just wants to know that he's more productive, more competitive, more innovative and that he is able to have better customer relationships and that all his employees are aligned. That's what we're really starting to sell. It's a powerful transformation of our company. It really started when we had the successful acquisition of Tableau. It started to get customers to look at us just much more strategically. It was that we onboarded this incredibly successful analytics business with what we did. The pandemic transformed us to the platform for success from anywhere. Yes, we're going to let them sell from anywhere, or service from anywhere, or market from anywhere, but we're going to let them be successful from anywhere and that is really our platform. We used to call it the Customer Success platform. Now we really should be calling it the Success from Anywhere platform. Anyway, I'm going to have Bret and Gavin chime in here because I think that you're touching on probably one of the most powerful transformational moments for Salesforce. It's one of the main reasons that we've entered into an agreement to acquire Slack because it's an enablement of success from anywhere.

Okay. Yes I'll add a couple of anecdotes. All the big customer names that Marc mentioned in the opening are all multi-cloud transformational deals that really are about the entire Customer 360. I mentioned, Align before. That's Marketing Cloud, Sales Cloud, and our platform. I was just having a conversation with their Chief Digital Officer, Sree Kolli just yesterday. It's really inspiring because they're using Salesforce to help improve their customer relationships, drive revenue growth, and deliver better experiences. We're seeing that across the board. The companies that realize that they need to fundamentally change the way they engage their customers are the ones that are succeeding, and we're here to help them do it.

Yes. Look I think most of the points have been hit, but from my perspective CEOs C-suite conversations around solutions fundamentally, they're not about products anymore. They're looking for multi-cloud solutions based on a Customer 360, Single Source of Truth, single view of the customer. To the earlier discussion, we're getting into more conversations with customers around outcome-based initiatives. Where they want our services businesses to be involved as part of the design and there's a real focus on the outcomes and how we can underpin those. We're getting into more complex discussions, which is positively changing the nature of our business.

Thank you. Marc, I'd like to ask a bigger picture question. Your portfolio of Cloud Engage customers offer workspaces for employees and enable business introspection with Tableau and Einstein. Now with Slack you could potentially integrate third-party apps and automate API-driven work across this ecosystem. How do you think about the future of work and Salesforce's role in enabling humans to focus on more meaningful and value-add work?

Well, I think this is really where we're going. I don't know if you watched my presentation from Singapore, but I went to Singapore with Bret and we did our company kickoff there. We were in person with customers and our employees there, really looking at the future work. The pandemic is very much something that in many ways is behind them. Their businesses, offices, hotels, are open. They're still wearing masks in meetings, but they have very low virus rates. When you look at what's happening there and how they've restructured, how often employees are coming into the office versus before this is the world that we're about to get into. Bret, what was your reaction?

I think it's a really wonderful point. The future right now, we're at an inflection point where every executive including Marc, including me has this once-in-a-lifetime opportunity to transform the way their companies work. If you had told me 1.5 years ago that we would execute this entire year without being in an office, without getting on an airplane, I would have said it was impossible. But we did do it and we did it without any notice. Every executive in every company including ours is asking the question what is the company we want to be on the other side of it? What sales meetings are we going to get on an airplane for? Is that contact center that used to be a building that is now something that exists in the cloud, are we going to go back to the building or just embrace the cloud? It's an interesting time to think about what the future work looks like. It's part of what drew us to Slack and that company's vision for the future because it's not just the digital translation of the way we used to work. It's truly a vision for a new way to work. There's incredible appetite for that from our customer base.

Yes. Thanks for taking my question. I guess Bret, maybe it's for you. I remember asking at the Analyst Day about CDP and your efforts there. I think you had said something about how you have some large strategic opportunities you were working on. I'm kind of curious what kind of benefit did you see from the CDP product in 4Q and how much it drove Marketing Cloud? How big could this business be in FY 2022?

Yes. I'm extremely excited about our customer data platform. Our brand name for that we call Customer 360 Audiences. A couple of details: Marc mentioned Hyperforce. This is the architecture that's enabling our customer data platform. Not just in our Marketing Cloud and not just for marketers, but enabling B2C scale across our entire platform. CRM for a long time was for B2B sellers. Now, every single company of any scale and every single department wants a single source of truth for their customer data. They want to create segments, integrate all their data from legacy data sources and proprietary data sources. They want to activate that across every channel, digital channels, in-person channels. Customer 360 Audience is generally available. We saw strong performance in its first few quarters as being available to customers. We view it as foundational for our Marketing Cloud in the coming years.

Thank you all for joining us on our Q4 FY 2021 earnings call. If you have any questions, please e-mail us at investor@salesforce.com and we look forward to seeing you at our Q1 call. Thank you.