Salesforce Inc (CRM) — Q3 2022 Earnings Call Transcript

Thank you, Jeff. Hello, everyone, and thanks for joining us for our fiscal '22 third 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 Co-CEO; Bret Taylor, Vice Chair and Co-CEO; Amy Weaver, Chief Financial Officer; and Gavin Patterson, 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 and 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, acquisition, 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 to Marc.

Thank you so much, Evan. I hope everyone on the call and your families had a wonderful Thanksgiving, and happy Hanukkah to those celebrating the festival of lights this week. This year, I am grateful for many things, especially for my good friend Bret Taylor. Congratulations on becoming the co-CEO of Salesforce. When I first met Bret at Google, he did an amazing job with Google Maps. He then started his own company, which Facebook acquired, and he became the CTO of Facebook. After leaving Facebook, he started another company that Salesforce was fortunate to acquire. Bret has had an incredible journey at Salesforce over the past 5 to 5.5 years, including his roles as Chief Operating Officer and now Co-CEO. We are incredibly thankful for his leadership, and it’s been exciting to watch him grow. It’s been quite a rollercoaster during the pandemic. The past six quarters have been unlike anything Salesforce has experienced, and the changes continue. We are adapting to life in the pandemic, yet Salesforce has never been more successful. Looking at the financial results, I believe you'd agree that this was an outstanding third quarter. Revenue for the quarter was $6.86 billion, a 27% increase year-over-year, driven by fantastic products and remarkable customer success. We’ve been recognized as the #1 CRM for the eighth consecutive year according to IDC, which is incredibly exciting. Our sales and service clouds have grown into significant individual businesses, each generating over $6 billion, surpassing many standalone cloud companies. The Sales Cloud saw particularly strong performance this quarter. Our operating margin was also impressive at 19.8%, exceeding my expectations. We achieved $404 million in operating cash flow, a 19% year-over-year increase. For fiscal year 2022, we are raising our revenue guidance to $26.4 billion at the high end, representing 24% projected growth year-over-year. Since initiating our revenue guidance in December of last year, we have increased it by $850 million, which is quite remarkable. We're also pleased to raise our full-year operating margin forecast to 18.6%. With a new team and structure in this evolving landscape, we have developed a new model that reflects in our exceptional operating margin performance for this year and our guidance for next year. As we shared during our Investor Day in September, we anticipate fiscal year 2023 revenue guidance of $31.8 billion at the high end and an operating margin of 20%. No other software company of our size and scale performs at this level, as we hear from other cloud CEOs daily. I couldn't be prouder of our Ohana. Salesforce is soon to enter the Fortune 100. Remarkably, we achieved the $20 billion revenue milestone in just 2 years, and now we’re aiming for $30 billion. It’s incredible to consider how quickly this growth is happening. The focus on customer success has been key. I look forward to sharing some great stories today, including those from LVMH, VMware, ADT, and many more customers. I even received an exciting story recently about a friend at an airline check-in counter who used Slack entirely for reservations and ticket bookings. It's a testament to our company's evolving success over nearly 25 years, and it’s been a fantastic quarter. Congratulations, Bret, and I'll hand it over to you.

Thank you, Marc. As Marc said, we had another phenomenal quarter driven by our new operating model, our new management team, and a product portfolio that's just increasingly relevant to every company looking to thrive in this new world. Through this pandemic, our customer success has fueled our success. We have hired more than 30,000 people remotely. We've launched more products than we ever have before. And we've connected with more customers than we ever have before. We've also proven that we can come together safely in person. We just did Dreamforce in San Francisco a couple of months ago. We're doing Dreamforce in New York. It's amazing. All year long, Marc. And we also have opened 65 of our offices. And as I mentioned, Gavin and I took that trip to Europe, talked to over 60 customers. And really interesting to see a wide range of industries going through different issues, whether it's the supply chain or the Great Resignation. But there's one theme in all those conversations. Every customer reinforced that work is not somewhere you go, but something you do. Every single company I spoke with is building their digital headquarters because they know their teams need to be successful from their home or from this office in this new era of hybrid work. And Customer 360 and Slack are powering this transformation for companies in every industry, in every region of the world, and you can really see it in our results. In the quarter, we saw strong growth across regions: 23% in the Americas, 38% in EMEA, and 26% in APAC. And what really stands out to me, Marc, is the strength of our core organic CRM business. Sales Cloud is accelerating to 17% year-over-year growth, as Marc mentioned, now exceeding a $6 billion business just like Service Cloud. And Service Cloud, which is actually continuing to grow above 20% year-over-year. Yes, that's just awesome. Congratulations. That was just beyond my expectation. It really shows the strength in our core organic business, and it's just phenomenal to see this kind of growth at that kind of scale. And there's nothing like the start of the holiday shopping season. We started last week, to make me appreciate just how mission-critical our commerce and marketing clouds are on Black Friday and Cyber Monday. Cyber Week runs on Salesforce for the world's greatest retailers. What we saw was just incredible. So Commerce Cloud processed more than 100 million orders in November powering the shopping experiences for brands like Ralph Lauren, Puma, Crocs, LVMH. And get this, Marc, this year we have sent over 1 trillion messages from our Marketing Cloud. And in Cyber Week alone, we delivered 40 billion messages, up 34% year-over-year. And we were lapping the pandemic. Last year digital was the only way people were shopping, and we're growing 34% on top of that. Our message platform... Also, you have to give a call out here in reliability. Because both of us went through some very difficult moments in the weekend, getting calls from customers who are not using our Marketing Cloud but are good customers of ours. Because products that they chose from other vendors were not working on Black Friday and Cyber Monday and we're like, wow, we were just so grateful to all of our Ohana for the tremendous, tremendous performance they delivered over the weekend. Well, I just want to give a special thank you to every member of Salesforce, particularly the engineering team to get that kind of reliability when so much of our customers' business is happening over a day or a weekend, it's just crucial that these systems stay up. And I'm so proud of the team. And hopefully, some of those customers will become customers of Marketing Cloud next year. One thing I really want to comment is this move towards mobile commerce continued. Mobile push notifications sent for our Marketing Cloud grew over 94% year-over-year. Now we're just seeing the smartphone continue to transform commerce. All in, our Commerce and Marketing Clouds grew 25% year-over-year in our third quarter, continuing an amazing 20-month run as the global economy continues to digitize. I also want to talk about Slack. So Slack outperformed our expectations in the first full quarter as a part of the Salesforce family. The number of customers on Slack who spent over $100,000 was up 44% year-over-year. And adoption of Slack Connect was up an astonishing 176% year-over-year. Slack is not just a product; Slack is a network, and it's just incredible to see that growth. Slack also continues to innovate at an unbelievable pace. Slack Huddles, which is Slack's new real-time audio capability, is already used weekly by over 1/3 of Slack users. And Slack Clips, the new asynchronous video capability, are being played nearly 1 million times a week. And this month at Slack Frontiers, which I hope all of you have watched; and if you haven't, you can watch it online. Stewart and the team are now the next generation of Slack’s platform, and it's going to truly transform the way companies think about workflows and automation. Well, it's pretty cool. What an incredible new part of our portfolio. Slack has already transformed the way we work at Salesforce. Since we have deployed Slack internally, we sent 46% fewer emails. And in the last 30 days alone, our employees have sent nearly 60 million Slack messages and conducted 500,000 Slack Huddles. We run Salesforce on Slack. And every CEO and every Board I talk to is focused on how they can succeed in this era of flexible work. According to Slack's research, 93% of workers are looking for flexibility when they work, and 76% are looking for flexibility where they work. Companies need to connect their employees, their partners, their customers from anywhere because we all know we're not going to be in the office 5 days a week. Our offices aren't going away. It's just that your digital headquarters is going to be more important because it's truly the infrastructure that connects all of it, and especially in this new normal. And Slack and Customer 360 together are really powering this transformation. You can see in the results of the third quarter for Slack. Slack hit $280 million of revenue, $30 million ahead of guidance. Retailers like Saks and innovative companies like the Southeast Asian ridesharing and food delivery app, Grab, are relying on Slack every day to collaborate to automate workflows and to connect with their partners. And what's exciting to me, Marc, is the deep product innovations we're building between Slack and Customer 360 while already driving success for our customers. I had a great time working with VMware's new CEO, Raghu Raghuram, this quarter. And he's spun VMware out of Dell. And Raghu's team is already using Slack and Service Cloud for case forming to decrease the time to resolution for their customers. I could not be more excited for the momentum we see in the Slack business and in particular Slack's integration in the Salesforce. As Marc said, we're in a new world. We have a new operating model that's driving durable growth. And our team continues to deliver incredible success for our customers during these unprecedented times. Our core business is stronger than ever and is experiencing incredible growth at scale. Slack and Customer 360 have never been more relevant, and we're playing a pivotal role in supporting our customers' next phase of growth. And I'm excited to hand it over to Gavin to bring this to life and talk about what he's seeing with our customers around the globe.

Thanks, Bret, and I'd like to add my congratulations on your promotion. So as Marc and Bret said, we are in a new world. And I've seen it through the eyes of our customers, which I've recently been visiting in New York, San Francisco, Frankfurt, Paris, Amsterdam, Zurich, the Middle East, and of course, London. I am very excited by the early results of how our new operating model is playing out. The strength of our core business is incredible. And the power of Salesforce Customer 360 and Slack together is creating the Digital HQ that is enabling our customers to get back to growth. And as Bret said, Salesforce has never been more relevant. In the quarter, we saw strong growth in every region, especially in the Americas. We grew relationships with Amazon, Builders FirstSource, IQVIA, Sunbelt Rentals, Tapestry, and so many more. In EMEA, we deepened relationships with incredible brands like Fennia, Primark, and Puma. And in APAC, we had significant wins with FOXTEL, Fujitsu, Hitachi, and the New Zealand Ministry of Health. Now we all know the incredible security company, ADT. They're using Salesforce Customer 360 to unify their entire customer experience, empowering 4,000 customer service agents and 7,000 field service agents with a complete view of their customers, which is driving operational efficiencies as well as growth. And as Bret said, we expanded our partnership with VMware, which has been a Salesforce customer since 2008. This quarter, they kicked off a pilot of Slack plus Service Cloud to accelerate customer support. They also partnered with Tableau to extend data and analytics across their entire business, enabling the presentation of deep analytics to help innovate even faster. LVMH continues to expand with Salesforce to deliver luxury goods from anywhere. Globally, 40,000 retail associates and customer service agents use Salesforce to deliver personalized retail journeys for their customers. And our win with the Boohoo Group, which is a leading UK-based online fashion retailer, uses our technology to deliver their incredible online shopping experience. With Commerce Cloud, Boohoo is now expanding shopping by social media, marketplaces as they look to build for the future. And the State of Nevada's Department of Motor Vehicles is another great story in the quarter. They selected Salesforce as the platform to power its digital transformation across its entire business. This will mean a whole new experience for residents renewing drivers’ licenses, credentialing, titling, and registering vehicles and so much more. And this is another great example of digital transformation powered by Salesforce, of course, another great reason to move to Las Vegas. These are all great organizations that have pivoted their business to navigate this new world and deliver customer success from anywhere. They're relying on us more than ever and inspiring us to leverage the power of our Salesforce Customer 360, Slack, and so much more to continue to fuel that business. And finally, a word on Q4. I'm really encouraged about how we started the quarter. Demand and pipeline looks strong, and we're looking forward to a great finish to what has been an exceptional year. I want to thank our incredible team for continuing to do such a great job in the massive global change. The work they do and the technology they deliver powers our customers' success, and we couldn't be more grateful. Amy, over to you to share the financial details of our quarter.

Thank you, Gavin, and hello, everyone. As we discussed two months ago at our Analyst Day, we are in a new world, and we demonstrated our ability to execute in this environment again in Q3. We met key metrics with strong top and bottom lines, along with strong cash flows. Our focus remains on disciplined and profitable growth. Q3 also marked a milestone as it was our first full quarter with Slack. The early results from Slack reinforce our confidence in its strategic importance. Now, let me walk you through some results for Q3 fiscal '22, starting with top line commentary. Total revenue for the third quarter reached $6.86 billion, which includes $280 million from Slack. This reflects a 27% year-over-year increase, or 26% in constant currency. The strong demand environment and robust new business pipeline we've noted in previous earnings calls allowed us to exceed top line expectations once again. Some key highlights from the quarter include Sales Cloud, launched 22 years ago, now reaching a $6 billion run rate business and growing 17%. Sales Cloud joins Service Cloud, which became a $6 billion business just two quarters ago, and Service Cloud continues to grow over 20% at scale. These two significant businesses growing in double digits demonstrate the strength of our core. Our Americas business is performing very well, with a healthy demand outlook. New business in North America was especially strong, our largest market for over 20 years. As noted, Slack continues to outperform expectations with strong customer acquisition, particularly in the enterprise sector. The number of paid customers spending over $100,000 annually increased by 44% year-over-year. Slack Connect adoption is also robust, as evidenced by a record number of connected endpoints, up 176% year-over-year. We also introduced Slack to new customers, with four of our top ten deals this quarter featuring new Slack wins. We observed strong growth in our multi-cloud deals, with customers increasingly looking for more comprehensive solutions. In Q3, deals containing five or more clouds grew by 33% year-over-year. However, we faced some challenges with our MuleSoft business, which is experiencing rapid growth but also scaling difficulties. We are confident about the changes we've implemented moving forward. A significant portion of MuleSoft's revenue is recognized in period, impacting our second-half revenue disproportionately. MuleSoft remains vital to our Customer 360, enabling our customers to integrate their data and systems. Starting this quarter, with Slack incorporated into our financial results, we are providing updated revenue disclosures by service offering. From now on, Slack will be reported under Platform and Other. Additionally, we are creating a new revenue category, Data, which will encompass MuleSoft and Tableau, including Tableau CRM, previously reported under Platform and Other. This change will enhance transparency in our results. A historical reclassification using this new revenue breakdown is available in our earnings deck published alongside the press release. We are making significant progress on attrition, with revenue attrition dropping below 8% for the first time in our history. Q3 attrition was between 7.5% and 8%, an improvement from the previous quarter's 8% to 8.5%. Our remaining performance obligation, representing all future revenue under contract, ended Q3 at approximately $36.3 billion, an increase of 20% year-over-year. Current remaining performance obligation, which reflects all future revenue under contract expected to be recognized as revenue in the next 12 months, stood at about $18.8 billion, up 23% year-over-year in constant currency, with Slack contributing 4 points of that growth. Regarding our operating margin, Q3 non-GAAP operating margin was 19.8%, benefiting from revenue outperformance, efficiencies from a work-from-anywhere model, and a focus on disciplined spending. Q3 GAAP EPS was $0.47, while non-GAAP EPS was $1.27. The quarter's outperformance stemmed mainly from stronger revenue and expense efficiencies, as well as gains from our strategic investment portfolio. These adjustments positively impacted GAAP EPS by about $0.27 and non-GAAP EPS by approximately $0.28. In terms of cash flow, operating cash flow in Q3 reached $404 million, up 19% year-over-year. CapEx for the quarter was $166 million, leading to free cash flow of $238 million, an increase of 11% year-over-year. Looking ahead, we expect Q4 revenue between $7.224 billion and $7.234 billion, reflecting approximately 24% year-over-year growth, including a $285 million contribution from Slack. For the full year, we are raising our fiscal '22 revenue guidance by $50 million, bringing it to a range of $26.3 billion to $26.4 billion, marking a total increase of $100 million since Q2. Our guidance now includes a $565 million contribution from Slack for the fiscal year, up $35 million from previous estimates, with the guidance still accounting for $200 million from Acumen. For Q4, we're forecasting CRPO growth of around 19%, including 4 points from Slack. We are mindful of the strengthening U.S. dollar in our foreign operations, which may affect our financials as we approach what is typically our largest quarter. We expect Q4 GAAP EPS to range from negative $0.24 to negative $0.23 and non-GAAP EPS to be between $0.72 and $0.73. For the full year, this translates to GAAP EPS guidance of $1.28 to $1.29, and non-GAAP EPS guidance of $4.68 to $4.69. Recent M&A is expected to create an approximate headwind of $0.49 to non-GAAP diluted EPS. Our operating margin guidance for fiscal '22 is being raised to 18.6%, with an expansion of 90 basis points year-over-year, due to refined assumptions concerning Slack and Acumen. We continue to factor in expense seasonality, particularly in Q4, as we invest in our workforce and growth opportunities as well as travel and entertainment expectations. We're also increasing fiscal '22 operating cash flow guidance by four points, now anticipating 18% to 19% growth year-over-year, primarily driven by strong revenue performance and lower headwinds from M&A. The dilutive impact of Slack and Acumen is now expected to reduce our year-over-year growth by about 5 points. Excluding the anticipated M&A effects, operating cash flow growth would be around 23% to 24%. We expect CapEx to account for about 3% of revenue in fiscal '22, resulting in a projected free cash flow growth rate of approximately 19% to 20% for the fiscal year, which would rise to 25% to 26% excluding M&A impacts. As mentioned two months ago, it's crucial to maintain conscious decision-making across all areas of the company, enabling us to build a more resilient organization as we approach $50 billion. Fiscal '22 illustrates our ability to achieve profitable growth in this new environment. Regarding fiscal '23, we are pleased to provide our initial revenue and non-GAAP operating margin guidance during our Investor Day. Today, we're initiating Q1 fiscal '23 revenue guidance of $7.215 billion to $7.25 billion, representing about 21% to 22% year-over-year growth. As Gavin noted, we're off to a strong start in Q4, and we will share our complete fiscal '23 guidance alongside our Q4 earnings in February. To conclude, our business is performing well, and we continue to see record revenue and operating margin levels. Our flagship product, Sales Cloud, has seen its third consecutive quarter of acceleration, and we now have two $6 billion businesses in sales and service. Slack is exceeding expectations, and the integration is progressing well. We are well positioned with our extensive product portfolio and global reach to serve all our customers, with our products being more relevant than ever. On a personal note, I want to congratulate Marc and Bret on their Co-CEO partnership. I am thrilled for both of them and even more excited for Salesforce. Jeff, I’ll hand it back to you to open the floor for questions.

Congrats on a good quarter and to Bret on being named Co-CEO. I actually have 2 questions, maybe one for Marc and for Amy. And for Marc, on the Co-CEO structure, how do you envision breaking down CEO responsibilities amongst yourselves? And maybe what did you learn in the past about having co-CEOs that will make this structure even better than it was last time around? And then perhaps for Amy, Amy, the guidance that you've given us for CRPO in Q4 seems to imply a meaningful deceleration. What factors contribute to this? Is there anything anomalous to call out perhaps in addition to FX? And is there anything at all that impacts the confidence level that you have in your forecast?

Well first of all, congratulations again, Bret. It's super exciting. And you're right. Salesforce has had an evolving leadership structure several times, and we have also had tremendous success previously with the co-CEO structure. And of course, probably those folks who've benefited the most were really our shareholders and all of our stakeholders. As we've seen as we've changed these structures, it has actually been an acceleration on the company. So I'm very excited about the Co-CEO structure. These jobs are big jobs, and being able to have a partner that you can share with makes it a lot easier. And when Keith decided to retire, I was back in this job. It was very lonely. And now to have a partner with Bret, I couldn't be more excited.

Great. On CRPO, business is strong. We've raised FY '22 revenue by $300 million 3 months ago, another $60 million just 2 months ago, and now another $50 million today. And this is even with some of the headwinds I described from Mule; and as you noted, some uncertainty on FX. So overall, I believe our CRPO guidance is in line with our guided revenue growth rate for the quarter and for the year we believe is appropriate. And of course, as we said, Q4 is our largest new business quarter.

Congrats, Bret, to the expanded role. And congrats on a great quarter from me as well. Can I ask around Slack? One of the main exciting points around Slack with the shared channel. And especially if you think about it on the sales side, that should be kind of really interesting. Can you talk to that, what you're seeing there in the market and the feedback you get from customers? And a follow-up question for Amy. If I look, you beat the operating margins this quarter. Can you just talk a little bit about the linearity of spending in Q4? Because this sort of was so much better, so you must be spending or hiring quite a bit in Q4?

Yes, thank you for your question about Slack. And you're right, the shared channels, which the brand name is called Slack Connect, is just one of the most differentiated and exciting parts of Slack as a platform, particularly if you think about the opportunity to integrate Slack with Customer 360. Because as I said, Slack is not just a platform for communicating with fellow employees; it's a platform to engage with your partners, with your customers and integrate with every single application at your company. I think the best measure of it in this quarter, I mentioned it in my script, was Slack Connect was up an astonishing 176% year-over-year in the quarter. And I think behind that it was really exciting and Stewart articulated so well. There's a really strong network effect when multiple companies and multiple partners are using this service; it makes the service more valuable. We use Slack Connect with our customers now. And I think probably the best example of this past week was Cyber Week. So many of the retailers that I worked with use Slack as their command center for Cyber Week. They would have Salesforce in there. They would have the agencies running their campaigns, their merchandisers. All of these folks are coordinated to drive as much GMV growth as they can in a short period of time. Slack was really at the center of that, and as you said, really about a shared channel with multiple stakeholders. So it's a big part of our product strategy, and it's a big part of the strategy for Slack to continue to grow. Candidly, I don't think there's an enterprise product like this in the marketplace. It really has network effects from company to company, and we're really excited about it.

I'm happy to address your question about operating margins. Overall, I am very pleased with our operating margin trajectory for FY '22. We began the year with guidance at 17.7% and have consistently raised it, now reaching 18.6% for the full year. Our focus is on achieving operating margin for the entire year rather than for specific quarters. That said, we have just come off a strong quarter for operating margins. There is some seasonality to our margins, and in Q4, we anticipate making additional investments in our work and growth, along with a slight increase in travel and expenses. This will lead to a quarter-over-quarter decline in operating margin. However, we are truly excited about the full year and proud to guide towards 18.6%.

Just given Gavin's comments on Q4 demand and pipeline strength, many are asking given the bookings growth was 23%, the 19% guide for Q4, why such a sharp deceleration? Anything that we should consider as it relates to the guidance and what you're seeing going into the fourth quarter?

I think Amy should directly address that, and then Gavin can come in as well. Amy?

Brent, coming into Q4, we actually feel very, very good about this. As Gavin said, and he can tell you more, we feel very strongly about the demand environment. When I look at revenue for the year, again, I want to emphasize that we've raised $100 million since Q2. We raised $50 million at Investor Day, which is about halfway through Q3. And we could see a very strong quarter coming as well as an additional 50 right now. So I do believe that those are guides for CRPO and for revenue are supportive and reflect what we're seeing in the market. So Gavin, why don't I give this to you for a little bit more color on what you're seeing?

Sure. Well in a word, we started the fourth quarter really strong. And as I said in my comments, demand is strong across the piece. The pipe looks very good. Americas is particularly strong. And parts of Europe I think are performing equally well. There's a good performance across the verticals. And so it's a balanced performance across the piece. So look, we're feeling confident about the fourth quarter. There's no question about it. So we don't give you any specifics, of course, at this stage. But as I say, I'm very pleased with the way we started in the first few weeks.

Congratulations on a great quarter, Bret. I have two questions for Amy. First, regarding the Q4 guidance that is drawing significant attention, can you explain how foreign exchange impacts are factored into that guidance? How have you addressed the strong U.S. dollar in your margin commentary and the full year '23 guidance? My second question is broader. You've been pursuing a new approach to balance growth and profitability for several quarters. How is that effort progressing? Is it proving to be easier or more difficult than you initially thought to shift the company's focus towards greater efficiency?

Let me begin with foreign exchange. I believe many global CFOs are closely monitoring foreign exchange this week. It has had a modest effect on our guidance, and we will continue to keep an eye on it moving forward. To illustrate the volatility since Investor Day, the euro has devalued by approximately 4% to 5%, while the British pound has decreased by about 2%. These changes have some impact on us. Although we don't provide detailed information about our currency distribution, I can share that our international revenue mainly comes from four currencies: the euro, the British pound, the yen, and to a lesser extent, the Australian dollar. While we do not give explicit guidance on foreign exchange, we certainly take it into consideration during our planning processes and adjust our guidance based on those projections. What is your second question? Please go ahead.

He wants to talk about our kind of march towards greater efficiencies. I mean I think this has been really the highlight of the last 6 quarters, which is we took advantage of the pandemic to reset our model. We've talked about that we have a new model. We're taking that extremely seriously, not only just in how we budgeted fiscal year '22, which is what we're finishing right now, but also we're finishing up our budget for fiscal year '23. That obviously also takes into consideration these changes in foreign exchange, the strengthening of the U.S. dollar is something that I'm sure all of you are watching, and we watch as well. We're a global company. These things matter to us. How our numbers shake out always depend on currencies. And there can be variation quarter to quarter based on that. So when we look at efficiency, we saw an opportunity when the pandemic hit to really look at how are we spending money overall. And we were really taken by changes in the pandemic cycle: T&E, the use of our real estate, our marketing spend. And we started to rebalance, to reshape, to rethink about how do we look at our model, our overall model, not just our revenue model, but our expense model.

Thank you, Marc. This is something I mentioned during Investor Day. I genuinely believe we can keep driving growth, which will remain our top priority. Additionally, we can achieve this while increasing efficiencies through disciplined decision-making. As Amy stated, this is a principle we are applying across the company. The focus is on maintaining tighter control across the business and implementing best practices across our operating units. When we have a successful model, we aim to replicate it globally. I am concentrating more on aspects like participation and productivity, ensuring we maximize the value from our 10,000-strong sales force, which is one of our competitive advantages. We want to make sure everyone contributes each quarter and we capitalize on both small and large deals throughout the year. Lastly, we are exploring new channels. While our direct sales model remains our strongest approach, we are noticing that customers, including larger ones, are increasingly interested in purchasing more through digital and online platforms. We are revamping this area to make it a larger part of our overall strategy for generating new bookings in the future.

Yes, thank you so much, Gavin. And I from Gavin, Amy, and Bret should indicate to you how fortunate I am to have this great management team running Salesforce during this pandemic. And then this ability to have not only this great team but to put in the new model during this and now this new structure as well. Look, we're in a new world. We all know that. And we've all seen all the things that are supposedly happening this week, who knows how much of it is actually true? So we have the ability to adjust and to run the company dynamically. And I think that's why you see such an incredibly strong quarter here in Q3. And I believe we're going to have a world-class quarter in the fourth quarter and a great fiscal year next year as well.

Congratulations to Bret on becoming Co-CEO. One for the Co-CEOs and one for the CFO. When you look at the operating model of the company, it is working quite well. You're pretty close to 20% organic growth rate, give or take. Your margins are pretty close to 20%. In fact, you absorbed Slack and did margins that were on par with your best margins before. So everything is going well. Do you feel the need to make any acquisitions? Or even if you do, do you feel like you can contain all this with the current margin structure? And one for Amy, when you look at the tremendous operating efficiencies you've been able to experience in a very short period of time, does that increase your confidence in the longer-term outlook? Granted that you don't have a specific margin target for the longer term. How should we think about the sustainability of the improvement of margins in the longer term as we watch the incredible success you've had in a very short span of time?

Well, I think you're right, Kash. We're doing a very good job of absorbing Slack and integrating it deeply into the company, not only into the distribution organization with Gavin and not just with its financial characteristics with Amy but you can see the tremendous vision. Especially if you watch the Dreamforce keynote that Bret brought to Slack and Salesforce together with Slack-First. And I'd love for him to talk about that. Because I think when we get to Dreamforce New York City, which is going to happen on December 8 at Javits Center, and I hope all of you will join us there. We'll have 2,000 customers there with us, and we'll be broadcasting that all over the world as well. Well, I think that you'll see that this has fundamentally changed the tone and tempo and future of Salesforce, that we're really a very different kind of company because of this amazing acquisition. That said, this is a large acquisition. It is taking a lot of work time from the management team to absorb it. And it still will take several more quarters before we can tell you that we're really running deeply integrated with Slack.

Yes, I'll start by emphasizing what Marc mentioned, which is that our current focus is on integrating Slack, rather than pursuing any immediate mergers or acquisitions. What distinguishes Salesforce is our track record of effectively integrating and expanding our acquisitions. My favorite slide from Investor Day, presented with Amy, highlighted the growth of ExactTarget, MuleSoft, and Tableau, and now we are beginning to see early returns from Slack. This integration truly empowers our organization and necessitates significant attention from the management team. Slack holds a special significance, as Marc noted. We find ourselves in a unique moment where the traditional work structure has shifted unexpectedly. The global landscape is being reimagined, and this presents us with an exceptional opportunity to collaborate with our customers during this transformation. None of us can predict the future, but we are certain that we won't be returning to a five-day office schedule. Slack has emerged as a crucial element in every customer discussion. I encourage everyone to either join us in person at the Javits Center on December 8 or tune in online via Salesforce Plus to witness the synergy of Salesforce Customer 360 and Slack. You’ll understand why we are so enthusiastic about this and can observe some of the initial positive outcomes this quarter as we surpassed our guidance.

Yes, I want to emphasize that we have made numerous remarkable acquisitions, including ExactTarget, MuleSoft, Tableau, and Slack. However, it's important to note that there isn’t a conclusion to these acquisitions. It requires substantial effort, skill, and some luck to maintain their success. We are innovating both organically and through these acquisitions, which we are integrating into Customer 360, our overarching vision. This process is ongoing and dynamic, demanding our full focus. We are particularly enthusiastic about Slack and the progress we've made in such a brief timeframe.

Kash, following up on your second question about operating margin, we've had a great year on this. I'm really delighted to predict that we're going to end the year around 18.6. And as you know, at Investor Day, I was thrilled to announce a guide to 20% next year, which I think symbolically is a key number for us. And we're doing that despite it being a full year of Slack and what I'm hoping will be some moderately increasing T&E expenditure. But we're very much committed to doing that. Now we have not given long-term guidance beyond FY '23. But I will say we are committed to continuing to improve operating margin. As Bret said, there's a reimagination going on. We're having a chance to reimagine everything about how we operate. And I want to be able to make sure that we're using that to look at operating margin and look at how we're running a company with fresh eyes and continue to improve.

Bret, I was hoping you could touch on some of the growing pains that were alluded to with MuleSoft. I think you also mentioned that there were some changes made in that business that you feel pretty good about. So maybe just unpack that a little bit. And Amy, maybe as a follow-up to that question, how should we think about the seasonality and modeling of the data cloud business, just given it's the first time that you're breaking that out?

I appreciate the question. As Marc said, there's really no finish line with integrating acquisitions. And we've made some changes that we think are right for the long term and what it's been. I think maybe perhaps, Marc, our fastest-growing acquisition today that you saw in Amy's slide at Investor Day. So we feel very confident in the decisions we've made and have to get through a bit of this change management, we are seeing in the short-term results. But we feel very confident in the future of MuleSoft and certainly no change in the demand environment. Actually, Gavin and I were just talking about this just before the earnings call, just how important MuleSoft is in a lot of our Q4 deals, particularly the Customer 360 deals where our customers are connecting multiple clouds to multiple back-end systems. And how much integration is such an important part of our customer conversation. So we feel confident in the long-term of the business and recognize we have some short-term growing pains as we integrate our acquisitions.

Yes. Gavin, could you come in here and kind of address that directly? And just tell us about the demand environment for the fourth quarter and next year, and what kind of pipeline and capabilities you're seeing with customers today.

Well, I'm not going to give specific numbers. But you can hopefully tell from my tone and conviction the demand environment is strong. The pipe is strong, and we're feeling confident about Q4 and looking into Q1 as well. I think Bret said it very, very eloquently. We've gone through a little bit of, I would say, growing pains this quarter with Mule. There are operational challenges, but the actions that need to be taken are very clear. But it does not change in any way our belief that MuleSoft is fundamental to our ability to deliver our Customer 360. So I see its role in solving customer problems and creating value for customers is absolutely fundamental. And I'm confident we'll be able to work through these over the next quarter. So across the board, Marc, the business and demand environment looks strong. And as we cycle through another wave of COVID, I don't see that changing fundamentally.

All right. Thank you for joining us on the call today. If you have any other follow-up questions, please e-mail us at investor@salesforce.com. Look forward to speaking with you next quarter.