Salesforce Inc (CRM) — Q1 2022 Earnings Call Transcript

Thank you, Chantal. Hello, everyone, and thanks for joining us for our fiscal 2022 first quarter conference call. I'm Evan Goldstein, Senior Vice President of Investor Relations. Our 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. 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 to Marc.

Well, thank you so much, Evan, and thank you to everyone for being on the call today. I mean, it's just going to be a great call. I'll tell you, this is the best quarter Salesforce has ever had. It was just a phenomenal Q1. Everyone is so excited to do this call with you and to talk about it and also just to talk about so many of the things that are important to Salesforce because everyone knows business is the greatest platform for change. We do believe that you can do well and do good at the same time. Before we go into these incredible results, we just want to let everybody know that our hearts and prayers are with all of our Ohana and India. They're on our mind every day. We're so sorry for everything that they are going through. I am now here with Amy, Bret, Gavin, and Evan as well. I'll just tell you that we're all vaccinated. We're grateful that we can be together. We're grateful that we are in a moment where we've been able to do that. We just finished a two-day off-site with our top managers from around the world. This is our third off-site we've done. We've done about eight total management off-sites. Through the miracle of testing and now through the miracle of vaccinations, we are just grateful for that. We're definitely missing each other. It’s been great to be able to run our business in person, and we opened our offices. Amy and I were in our offices on Monday in San Francisco together on our Ohana floor. It just was an emotional moment to know that we're back and that our Ohana are back in the offices and that we are opening back up. This is just a critical time. So it's an amazing quarter. It's juxtaposed against the pandemic, which is not over everywhere, but it's starting to be over somewhere. Certainly in San Francisco, where we have 850,000 people, but we only had a couple of dozen infections per day last week. It’s a great moment. We are grateful for this incredible performance by our team. We are grateful for the phenomenal quarter, it far exceeded our expectations. I’ve just never seen a quarter like this. I mean, Gavin will go into the details. Bret will go into the details. It was just incredible. It was beyond our expectation. It’s not just the best first quarter we’ve ever had; I think it’s the best quarter we’ve ever had. We delivered $5.96 billion in revenue. It was up 23% year-over-year. Just the customer velocity, the pipelines, the growth of the company, the ability for the teams to interact and have a huge impact, it was just awesome. We delivered $3.2 billion in operating cash flow. As a percentage of our revenue, it’s just amazing what Salesforce could do today. Salesforce as a company, I said, doing well and doing good. I mean, here’s the doing well part: $3.2 billion in cash flow on $5.96 billion in revenue, and that’s up 74% year-over-year, reflecting the strong performance we’ve had since the impact of the pandemic began last year. Operating margin, again, and a huge call out here to Amy, and I’m going to talk more about Amy’s amazing performance for the company and how she’s rebuilt this incredible operating margin model and operating model. You can see it here, operating margin in the quarter was a healthy 20.2%. You look at the last four quarters, starting in Q2 of last year, Q3, Q4, and now Q1; our margin, our revenue, our cash flow is awesome. To see these changes that Amy has brought to the company has just inspired me. Now for fiscal 2022, I’m thrilled; we are raising our revenue guidance by $250 million to $26 billion. This is really one of the largest raises we’ve ever had. It represents 22% projected growth year-over-year. We are not just raising revenue. Again, thanks to Amy, we are raising our operating margin to 18%. That is amazing - incredible. In a few years, we’ll be doing $50 billion by fiscal year 2026. This is an incredible thing. We’re really seeing some momentum and some cadence that’s very powerful for the company. The quarter, once again, demonstrates the strength and durability of our business, the quality of our leadership team; you’re going to hear that today on the call, the relevance of our products, the incredible demand for digital transformation, ultimately about customer success. I’m excited to talk about some of these customers and their amazing success with our products, companies we know, like Honeywell and 3M and Sonos. The Sonos story is just fantastic, where they've had 84% growth when they went to consumer using our products. We are so grateful to them. Eight out of the top 10 deals included Tableau - what a successful story, that acquisition has been. This quarter is really just demonstrating that strength and durability of our business. We are the leader in the CRM market; we all know that. Everyone saw the IDC ranked Salesforce number one by market share in CRM, everyone knows the strategic nature of CRM. This is the eighth year in a row we’re number one in CRM, which is awesome. Salesforce has also received one of the very highest ratings from Gartner as a vendor. We tracked that information. It’s our customers talking to Gartner. We tracked it and saw this incredibly strong overall vendor rating that meant a lot to us. I’ll tell you something that means a lot to us too. We are about to pass SAP as the largest enterprise applications company in the world. I know you all track SAP and Salesforce. Not much has been said about SAP since they mostly exited the CRM market, but it’s awesome to see us number one in CRM and moving to be the number one enterprise software applications company in the world passing SAP. This is a moment. We can see it is imminent. The pending acquisition of Slack will help us tremendously. Bringing them together is so exciting. Once this merger is approved, we will build Slack and all of our products will become Slack first. This is going to make our customers more productive. We will work with software companies on building incredible new capabilities. We are really excited about creating this number one enterprise applications company. Customer success is one of our highest values: trust, customer success, innovation, the ease of use of our products, quality, and we just had amazing traction during the quarter across all parts of our business. We hit an all-time high and seven-figure-plus transactions; we had over 120% growth year-over-year in these large transactions. This shows the whole world is going digital, and customers need CRM and analytics to connect with their customers. Our successful integrations of ExactTarget, Tableau, and MuleSoft are driving incredible results for our customers and give us great confidence in this Slack acquisition. Tableau was part of eight of our top 10 deals, which shows the success of our integration with Customer 360. With Honeywell, we see innovation and their products. They have been manufacturing innovative products for more than 100 years, creating connected customer experience, breaking down silos for their 100,000 employees globally. With Sales Cloud, Honeywell is enabling its global sales team to manage thousands of customers and sellers from anywhere. Darius Adamczyk is an incredible CEO. He talked about this transformation of their global sales team at an event in DC. Tableau Dashboards at Honeywell provide sales teams with key insights to improve productivity. They’re even using our Trailhead to re-skill their sales team right in their flow of work. Service Cloud together with Field Service and Experience Cloud allows Honeywell to dispatch technicians for onsite product maintenance. We have had a trusted relationship with Dell Technologies and their amazing founder Michael Dell. Last year, Dell partnered with Salesforce Professional Services, implementing the world’s largest deployment in Sales Cloud. I just finished Michael Dell’s new book, called Play Nice but Win, and it inspired me. With Service Cloud, Dell is giving service agents a 360-degree view of every customer. Mike Roman at 3M is another amazing CEO we work with. Amidst COVID-19, 3M is using Customer 360 across 83 countries. They partnered with us to combat counterfeit masks, and with our assistance, they created a fraud reporting center using Service Cloud. Their dashboards with Tableau are providing business insights. We continue to see demand across the board, and we've been able to help companies like Rocket Mortgage simplify complex transactions, using Financial Services Cloud and Marketing Cloud. It’s been an unbelievable year, it’s been an unbelievable quarter. We saw those amazing stories. We can do well and do good. This is taking us forward incredibly. Now I am excited to announce that Dreamforce is coming back in person in 2021 to San Francisco, as well as simultaneously in New York, Paris, and London. It’s going to be a global event. I'll hope you will be there from September 21 to 23rd. It’s going to be the first global Dreamforce, and we will have thousands of attendees at every venue, along with tens of millions online. In the US, we’ll require attendees to be fully vaccinated. We are excited for the reopening of Dreamforce. Earlier this month we opened Salesforce Tower in San Francisco and London. It’s great to be back to work; we want to be pioneers in the return to the work environment. We built a company with a new culture; we want to be the number one enterprise applications company in the world.

Thank you, Marc, and good afternoon everyone. Performance in Q1 was impressive across all financial metrics, with record levels of Q1 new business performance and strength across all products, regions, and customer sizes. Importantly, we were able to achieve growth while also delivering profitability. Let me take you through some of the results for Q1 fiscal '22. Total revenue for the first quarter was $5.96 billion, up 23% year-over-year, or 20% in constant currency. The strong new business pipeline we discussed last quarter enabled us to deliver these results. Our two-year new business CAGR illustrates the continued strength in the business. We had a record number of Q1 seven-figure deals. These deals were also multi-cloud transformations, with, on average, more than four clouds included in each. Our vertical strategy continues to align our products to strategic industries. We saw strengths in the public sector, which accelerates as governments around the world turn to Salesforce Solutions. Service Cloud demonstrated another quarter of incredible growth at scale, with Q1 revenue of $1.5 billion growing 20% year-over-year, and Tableau continues to perform well. We are pleased with the integration progress in Q1; Tableau was part of eight out of our top 10 deals for the company, and in more than 60% of our seven-figure-plus deals. Revenue attrition in Q1 was between 9% and 9.5%. We continued to be pleased with the progress made. Our remaining performance obligation, representing all future revenue under contract, ended Q1 at approximately $35 billion, up 19% year-over-year. Current remaining performance obligations represent all future revenue under contract expected to be recognized as revenue in the next 12 months, was approximately $17.8 billion, up 23% year-over-year or 20% in constant currency. Q1 non-GAAP operating margin was 20.2%, largely driven by revenue outperformance and incremental expense efficiency. Q1 GAAP EPS was $0.50, and non-GAAP EPS was $1.21. Operating cash flow in the first quarter was $3.2 billion, up 74% year-over-year. As a reminder, cash flow seasonality was impacted by our decision to provide temporary financial flexibility to some of our customers during the pandemic. We expect cash flows seasonality to skew higher in Q1 and Q4. CapEx for the quarter was $171 million, leading to free cash flow of $3.1 billion, up 99% year-over-year. I want to update you on the status of the Slack transaction; we remain on track to close in Q2. As we refined our Q2 and full year guidance, we also refined our expectation on the Slack closing date, which we now expect to be near the very end of the quarter. All guidance assumptions involving changes surrounding Slack are timing-driven. We expect Q2 revenue of $6.22 billion to $6.23 billion, or approximately 21% growth year-over-year. This guidance assumes no contribution from Slack. For Q2, we expect to deliver CRPO growth of approximately 20%. This guidance assumes approximately three points of growth from Slack. We expect Q2 GAAP loss per share of negative $0.10 to negative $0.09, and non-GAAP earnings per share of $0.91 to $0.92, which now includes a $0.09 impact from Slack, driven primarily by OIE and transaction and integration costs. Moving to fiscal '22 update: As a result of our Q1 performance, we are raising our fiscal '22 revenue guidance by $250 million to $25.9 billion to $26 billion or approximately 22% growth year-over-year. We are raising our fiscal '22 non-GAAP operating margin to 18%, an expansion of 30 basis points year-over-year. We are raising fiscal '22 GAAP diluted EPS to $0.22 to $0.24 and non-GAAP diluted EPS to $3.79 to $3.81. We expect recent M&A to represent an approximately $0.53 headwind to non-GAAP diluted EPS. We are raising fiscal '22 operating cash flow guidance by two points, expecting 12% to 13% growth year-over-year. The increase from our previous guide is primarily driven by revenue performance. The diluted cash flow impact of Slack now represents a headwind to our year-over-year growth of approximately eight points. To close, our impressive start to fiscal ‘22 positions us well for the rest of the year. It has been a pleasure to meet many of our shareholders over the past few months. Thank you for your continued support of Salesforce. Let’s open up the call for questions.

Hi, thank you very much. Congratulations to the team. My first question is for Amy. Amy, nice work on the margins, and clearly, Marc talked about how you're reimagining the company from a fundamental level. Can you just talk about what are the things that you're working on that would give you the right balance between growth, which is great, and the margin expansion? And if I could sneak in one for Marc, if you look at the future of work, what is the position for salesforce.com as you look at that future? How is Salesforce positioned to take advantage of what you believe to be the future of working and whatever that is, the way we work in the future? Thank you.

Hi, Kash. Thanks for the question. So when I look at the balance between growth and profitability, I want to be clear that growth remains our #1 priority. Investing into growth, especially in this demand environment, is the best thing we can do for the company. That said, I believe in a focus on discipline, thus making a stronger and more durable company. In the long run, we need to deliver both.

Well, Kash, I really appreciate your question. We have a tremendous vision for the future of work at Salesforce, our own business, and that includes home and in-office workers. Bret has created an incredible vision for the future, and it’s a foundational technology platform that is needed to bring all this together. Each of our clouds becoming Slack first will be a huge accelerator. I think, Bret, would you just kind of tell us what is the future of work?

It's a great question. It's also on the mind of every CEO in our customers. The trends of this past year are significant. For example, Honeywell shifted 7,000 salespeople from in-person to virtual customer meetings. Customer meetings aren't going back to conference rooms only; they will remain in a digital environment. The contact centers that move from buildings to the cloud, thanks to Service Cloud, won’t return to physical locations. The digital HQ from Slack will connect employees, partners, and customers, and we think this represents an incredible opportunity and is truly the operating system for growth for every company embracing this new way of working.

Thank you for taking my question. It's great to hear about the in-person Dreamforce. Looking forward to that reunion. Maybe for Marc or Bret, Salesforce has the broadest portfolio of different cloud applications today. I hope you can parse out what customers are asking for which cloud application could see the highest uptick in interest. Tableau seems significant, but what cloud applications are ramping in this post-vaccine era?

Thank you for the question. The strength is really across the portfolio. Those seven-figure deals averaged over four of our clouds. We’re selling Customer 360 solutions to transform customer experience. We see amazing growth in marketing and e-commerce. In Sales Cloud, we're seeing 5 million opportunities created every day, almost a 20% increase over last quarter. MuleSoft is doing 4.86 billion integration transactions every day, up 28% quarter-over-quarter. Customers are realizing they must move to digital customer transformations, and our portfolio supports that vision.

Thank you for the questions; a great start to the year. For Marc, there is some debate around the degree of digital transformations accelerating. Other companies have had a mixed Q1. Given your performance, can you tell us about customer investments and the pipeline for these big strategic deals? For Amy, you’ve raised the operating margin guide from 17.5% to above. Is that due to expenses pushed out or are you finding more efficiencies in the business?

I am excited about Amy's new model; she has reimagined the business. We have seen customer demand like never before. During this Q1, we saw emergency deployments for multiple projects. Customers want instant time to value. We have never seen growth like this. While demand exists in every market, we have seen a robust pipeline. The demand going forward is extremely strong.

Thanks, Marc. It’s been an incredible quarter and three words come to mind: relevance, investment, execution. Our business has thrived due to strong new business, and we’re seeing no weaknesses across our global organization. The recovery from the pandemic is not at the same stage in every market, but we see strength across the board. The pipeline is robust. The business is pumping.

The velocity of our distribution organization is incredible. Gavin has done an amazing job reshaping the sales organization. The execution in Q1 was phenomenal, and we will continue to grow. This is a transformational moment for the company, and I am proud of what we achieved together with our talented leaders.

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 next quarter. Thank you.

See you at Dreamforce, everyone. Bye-bye.