Salesforce Inc (CRM) — Q3 2023 Earnings Call Transcript

Thank you, Bo. Good afternoon, and thanks for joining us today on our fiscal 2023 third quarter results conference call. Our press release, SEC filings and a replay of today's call can be found on our website. 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 Brian Millham, President and Chief Operating Officer. As a reminder, our commentary today will include non-GAAP measures. 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, which could change. Should any of these risks 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 in our most recent report on Forms 10-K, 10-Q and other SEC filings. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. And with that, let me hand the call over to Marc.

Okay. Well, thank you so much, Mike, and thank you, everyone, for being on the call. I just want to come back to how great it was to see so many of you at Dreamforce in September. It was really a wonderful experience for me personally. It was our most successful, but I really think it was our most important Dreamforce ever, because we were able to come together for what we called our great reunion. And being with all of you, especially at our IR day, was a joy for me. Now let's get on to the quarter results. We delivered solid revenue growth and profitability in an increasingly challenging environment. You've seen how we're driving customer success, the strength of our organic innovation and this incredible Trailblazer community and how it manifested at the Dreamforce. And everywhere we turn, we saw customers learning how to connect with their customers in entirely new ways and the depth of our Customer 360 platform. We're also thrilled to introduce Genie, which is our Customer Data Cloud, and it's one of the most transformational technologies we have ever delivered. And when you hear some of the metrics already coming out of customer adoption with Genie, I think that you'll be incredibly impressed, and I can't wait for Bret to talk about that. The best part of Dreamforce was being together. That was what it was all about for me, and I'm sure it was for you as well, and the 40,000 folks that all came to San Francisco to have this incredible experience and all the additional folks that joined us online. Now let's get to our results. Revenue in the quarter was $7.84 billion. That's up 14% year-over-year. I think that's a record for us. It was also 19% in constant currency. We closed some amazing deals in the quarter with great companies like Bank of America, RBC Wealth Management, and Dell, and I'm also going to get into that in a moment as well. Even with purchase decisions receiving greater scrutiny, we continue to gain market share and close marquee transactions. IDC recently ranked Salesforce as the number one in CRM, and now we've done that for nine years in a row. I'm proud that we've delivered revenue growth in this environment, but especially proud of the team for our continued focus on delivering record operating margins. Here, you can see now, up 22.7% non-GAAP operating margin we delivered for the quarter. When I look back at various financial crises, I think back even to 2008 and 2009, we were down to around 10%. So we've come a long way in a short period of time. This quarter has been further proof of our commitment to profitable growth, continuing our operating margin growth, continued focus on our revenue growth, and our market share growth. A great evidence of that is our remaining performance obligation, which is now an incredible $40 billion. As I've said in the last few quarters, the dollar had a strong quarter, and when we first said that, folks didn't really understand what we were talking about, or maybe it wasn't the first quarter we said that. I remember it was a trip to Japan when I called Amy asking her about revenue expectations. But when I told her what my guidance was looking at revenue, including foreign exchange, I don't think either one of us could believe what was happening, and now we've really seen that start to play out. We continue to see the impact of foreign currency fluctuations. That has been our biggest surprise of the year. In the quarter, we saw $300 million year-over-year headwinds to revenue, and we've expected a total of $900 million for the full year. That's something we just could not have expected a year ago, and that is when we initiated our revenue guidance. At Dreamforce and in my travels, our customers have asked how to best navigate this economic situation with high market volatility and uncertainty. A lot of CEOs have never been through these types of crises before. They haven't seen these kinds of variations in the market, foreign exchange, or market demand. We have a lot to say about that; this is not our first financial crisis. I'm seeing a lot of buying behavior that reflects a lot of what we've seen during other crises, whether in 2008, 2009, or even 2001. The current economic situation is nowhere near as severe as what began in 2008, but there are some patterns that we have seen repeat themselves. In early 2008, customers were reluctant to expand distribution capacity, they froze hiring, and initiated headcount reductions. We observed those occurrences then, and we did the same during the recession in 2011. I think when tough times come or when the stock market shifts, companies begin to question whether they should be expanding distribution capacity, should they halt advertising or marketing, actions that can immediately be taken. Combined with foreign exchange headwinds, organizations shifted focus to finding efficiencies, reducing costs, and increasing productivity. We felt this again, and it led us to change how we operate and where we invest our dollars. We've developed our own playbook; we wrote it all down. We forecast what was going to happen again. We dusted off plans from 12, 13 years, and even some from 22 years ago. We have transformed our approach to gain market share while focusing on operational discipline and excellence during economic headwinds. As the economy began to recover, whether in 2010 or 2002, we accelerated our growth. I have to tell you, when we looked at the numbers, I was shocked to see how things change. We were able to navigate successfully, adjusting our company in several critical strategic areas. I've always believed that economic crises create opportunities, and we're squarely in that moment, and we've acted. Starting in July of this year, the buying environment became more measured, and foreign exchange headwinds became increasingly complex. We informed you then that this challenging macro environment would not be short-term. We want to emphasize that we're not economists. We don't know exactly what's happening or when recovery will occur, but we see a lot, and I think we understand much because of our strong global data. We're not assuming that the economy will improve anytime soon, but we're reporting what we see with our customers, the changes they make, and how they feel these headwinds. We're following our playbook to ensure we’re positioned to gain market share, maximize profitability, maintain our operating margin, grow revenue, and continue to invest, especially when the economy recovers. For this fiscal year, we're maintaining our revenue guidance of $30.9 billion to $31 billion, reflecting a 17% year-over-year increase or 20% in constant currency. This also considers the incremental foreign exchange headwind, with an expected additional $100 million since our last quarter. We're raising our fiscal year 2023 non-GAAP operating margin guidance from 20.4% to 20.7%, a 200 basis point increase year-over-year, and I expect more, particularly with our increased focus on expanding our operating margin. Salesforce is mission-critical to nearly every Fortune 1000 company, because every company is becoming a customer company, so now is the time to focus on relationships. If there is one critical thing every company has to do to get through this, it's to maintain connections with their customers. We’re entering transformational deals with major brands as the industry continues to transform digitally regardless of the economic situation. When we consider this by industry, there are several distinctions. In telecom, we work with almost every major player to transform how they connect with their customers. They must deliver faster, better service while keeping costs down and improving NPS scores. A great example of this is our deal with T-Mobile in the quarter. We have done a lot of work with Mike and T-Mobile over the years, and this merger presents an amazing opportunity for how they work with businesses, and we'll help develop the vision for the next-generation user experience for T-Mobile for Business. In financial services, we're engaging with major companies to enhance client relationships and unify teams especially in this environment. A prime example is Bank of America, a customer for over 20 years, has significantly increased productivity and reduced technical debt. They are saving time and money and connecting with their customers in new ways, and we're honored to have such success with them across multiple business sectors. Before I go further, I want to invite you to join us in New York City next week for our Salesforce World Tour on December 8. Join us in person or online for announcements of new innovations and insights from our customers. Before I conclude, I need to express something that saddens me deeply: Bret Taylor is leaving the company. Bret and I are like brothers. I love him very deeply. It has been a joy to have him here. This feels like a tremendous loss, and I am experiencing it right now. You can probably hear it in my voice. It also reminds me of all the great people we've lost in this company over time. This is hard for me, and I’m extremely sad to see him leave. I know he has created two great companies and wants to create a third. You can’t keep a wild tiger in a cage, so we have to let him go. But I don’t like it. Bret, you will always be our brother, and we love you very deeply. You always have a home here, and we're going to try to get you back somehow, so don’t think you’re going to get out of here alive. We're very upset about this; it will be a difficult moment for us. I know you will be with us through the end of the year, and I know you will continue to work with us even after this point. But Bret, we love you, and we are so sorry to see you leave the company at the end of this year.

Thank you, Marc. It's hard to follow that while trying to keep my composure as well. I want to start by expressing my deep gratitude to you and the entire Salesforce team. Over the past six-plus years, I could not have imagined being where I am now when I joined the company. I am proud of the trust, innovation, and customer success we've delivered, especially during the last few tumultuous years. This incredible community has helped organizations maintain connection with their customers amidst public health crises and economic turmoil; it’s remarkable, and I am incredibly grateful. Marc, you've been my mentor long before I joined the company. Your friendship and guidance have made a significant impact on my professional career. The past few years have been challenging; I’ve reflected on what matters most to me, and while it’s never easy to transition, I feel this is the right time for me to return to my entrepreneurial roots amid technology landscape and economic shifts. Salesforce has never been stronger, and I have great confidence in the company's future. As Marc mentioned, I will remain as Co-CEO through the end of the fiscal year to ensure a smooth transition and a strong close to the quarter and fiscal year. I will always be a part of this company and community. As Marc shared, we had a solid quarter with double-digit performance indicating the strength of our business model and commitment to delivering profitable growth. We continue to lead in organic innovation; our product portfolio is strategically positioned, mission-critical, and highly differentiated. Our ecosystem and AppExchange marketplace are unparalleled. As you saw at Dreamforce, our innovation engine is in overdrive with Genie, Slack Canvas, Net Zero Marketplace, and more. Genie, in particular, enhances our Customer 360 platform—automated, intelligent, and real-time, driving faster time to value for customers. The adoption of Genie has exceeded our expectations, processing over 100 billion customer records daily. During Cyber Week alone, Genie handled over 1.1 trillion records. An excellent example of Genie's power is Inter, a leading digital banking service in Brazil, which consolidated six data systems into one, converting 35 times more customers with Genie. Like Marc, I've met with hundreds of CEOs nationwide over the past months, and in this buying environment, our customers are focusing on three priorities: quick value realization, ensuring digital transformation drives cost savings alongside customer satisfaction and growth, and consolidating platforms to reduce complexity and risk. We are delivering on all three at scale today. Our customers have reported an estimated 25% reduction in IT costs and a 26% increase in employee productivity using Salesforce, based on a survey of over 3,500 customers. A great example is RBC Wealth Management, who can onboard new customers in minutes instead of days by consolidating over 26 technology systems into one using our Customer 360 platform, thus reducing maintenance costs by 50%. Despite the economic headwinds mentioned, we're proud of again achieving record low revenue attrition this quarter, further proving how mission-critical Salesforce is for our customers, especially in this environment. We launched new product bundles for sales, service, marketing, and analytics, enabling our customers to consolidate tools on Salesforce for efficient growth. This quarter, seven of our top ten deals included five or more clouds. Now, let's turn to cloud performance. Sales Cloud continues to drive productivity for the world’s most significant brands, growing 12% year-over-year and 17% in constant currency through customer wins at companies like Bolt, Snowflake, and Thermo Fisher. Service Cloud assists customers in delivering exceptional experiences while cutting service costs, also growing 12% year-over-year and nearing $2 billion in revenue for the quarter due to wins with Carl Zeiss, Dell, and Fujitsu. Our Marketing and Commerce Clouds empower digital experiences for top retailers, collectively growing 12% year-over-year or 18% in constant currency, with victories at Banco Bradesco, Hugo Boss, and Slack. Following Black Friday and Cyber Monday, I want to thank our engineering teams for delivering unmatched reliability this quarter, especially during peak sales such as Cyber Week, which saw a 11% year-over-year increase. Our Marketing Cloud sent nearly 49 billion messages during this period, up 21% year-over-year, totaling 1.4 trillion messages sent this year—remarkable results. The platform business, including Slack, grew 18% or 22% in constant currency, highlighted by wins at Japan Airlines, WorkSafe Victoria, and Zoom. Our Einstein AI platform produces 194 billion predictions daily across the Salesforce Customer 360 platform, up 57% year-over-year. Slack now facilitates over 2.6 billion actions per day, marking a growth of 46% year-over-year with successes at companies like Rivian and Verizon. The Data segment, which encompasses MuleSoft and Tableau, remains central to digital transformation for customers, growing 13% year-over-year or 16% in constant currency. MuleSoft's growth reached 19% year-over-year with wins at Western Union, SmileDirectClub, and Kona. Integration transactions on the MuleSoft platform increased to $6.7 billion per day, up 33% year-over-year. Tableau saw growth of 8%, benefiting from new product integrations such as revenue intelligence tied between Sales Cloud and Tableau. Our industry solutions continue showcasing strength in our portfolio, incorporating out-of-the-box processes that enable customers to achieve faster value and lower implementation costs. Despite many quarterly successes, we expect this challenging buying environment to persist into next year. I am convinced that Salesforce has never been more critical to our customers amid these conditions. I am immensely grateful for our employees, our 80 million Trailblazers, and all our customers and partners for leading innovation, agility, and resilience during these times. Finally, I want to express my personal gratitude to Amy for being with me when I became a first-time CEO, guiding us through challenging times towards customer success.

Great. Bret, thank you. And let me start by saying it has truly been a joy to work with you for the last six years. I will miss you dearly, but I’m also excited for your next steps, which I know will be an incredible success. Now, turning to our results here. I am pleased to report another quarter of double-digit top- and bottom-line growth. Despite increasing macro pressure, revenue grew nearly 20% in constant currency. As we discussed at our Investor Day in September, we have entered a new day for profitability. I am very proud of our Salesforce team for generating record operating margin during Q3. As we've reiterated, profitable growth is a major focus as we enhance best-in-class operational excellence across our business. Our customers are optimizing time to value, driving cost savings, and consolidating platforms. We aim to support them in this current economic climate. Now for our Q3 fiscal year 2023 results, total revenue for the third quarter was $7.84 billion, up 14% year-over-year, or 19% in constant currency. Foreign exchange remained a headwind, with the dollar's continued strength impacting results. The total FX impact for Q3 was $300 million, approximately $50 million higher than our forecast. A few highlights from the quarter: as we outlined at Investor Day, we focus on three balanced growth pillars: Customer 360 Advantage, industry solutions, and geographical expansion. All pillars reflect the increasing adoption of our portfolio among customers. First, multi-cloud adoption continues gaining traction. Customers utilizing five or more clouds have increased ARR by over 20%. Our industry solutions significantly bolster our revenue growth, with seven out of thirteen industry clouds achieving over 50% ARR growth this quarter, particularly in energy and utilities, manufacturing, and our recently introduced Automotive Cloud. From a geographical perspective, the Americas grew 16% year-over-year, EMEA grew 10% and 23% in constant currency, while APAC grew 14%, or 30% in constant currency. Revenue attrition in Q3 was again below 7.5%, demonstrating the value our services provide in this tough operating environment. Q3 non-GAAP operating margin stood at a robust 22.7%, driven by our ongoing focus on disciplined execution, our hiring slowdown, and resource prioritization. Q3 GAAP EPS was $0.21, and non-GAAP EPS was $1.40, boosted by mark-to-market accounting of the company's strategic investments. Operating cash flow totaled $313 million in Q3, reflecting a 23% decrease year-over-year. CapEx was $198 million, resulting in free cash flow of $115 million, down 52% year-over-year, influenced by lower billings. Turning to remaining performance obligation (RPO)—representing all future revenue under contract—RPO concluded Q3 at approximately $40 billion, up 10% year-over-year. Current remaining performance obligation (CRPO) was around $20.9 billion, increasing 11% year-over-year and 15% in constant currency, including one point of incremental FX headwinds. Q3 was a milestone for Salesforce. After announcing our first-ever share repurchase program during the last earnings call, I am pleased to share that we returned $1.7 billion to shareholders in Q3. Concerning our guidance, we are happy to maintain our fiscal year 2023 revenue guidance of $30.9 billion to $31 billion representing a 17% year-over-year growth or 20% in constant currency, despite an incremental $100 million FX headwind since our last call. This recruits the total year-over-year FX headwind to $900 million. Additionally, our guidance includes flat or slightly above $1.5 billion. We stay committed to expanding our profitability over the long term. I am proud that we are raising our fiscal 2023 non-GAAP operating margin guidance to 20.7%, an increase of 200 basis points year-over-year, including approximately 75 basis points of headwind from Slack. Because our regional revenue and expenses align in the same currencies, there's typically a natural FX hedge in our operating margins. For Q4, we expect GAAP EPS of $0.23 to $0.25 and non-GAAP EPS of $1.35 to $1.37. For the full year, GAAP EPS is expected to range from $0.55 to $0.57 and non-GAAP EPS from $4.92 to $4.94. CRPO growth for Q4 is projected to reach approximately 7% year-over-year or 10% in constant currency. This guidance considers the challenging trends in customer behavior mentioned previously. We expect our fiscal 2023 operating cash flow guidance to be around 16%, at the lower end of our previous estimates, driven by lower billings, including a three-point headwind from cash taxes linked to tax law changes requiring capitalization of certain R&D costs. Expect CapEx to be near 2.5% of revenue for fiscal year. This will yield a free cash flow growth estimate of approximately 17% for the fiscal year. Before concluding, I'd like to share thoughts on fiscal year 2024. As noted, we are facing an unpredictable macro environment as customers want to ensure the long-term health of their businesses. Given that, we believe it’s prudent to withhold revenue guidance for next fiscal year. Regarding operating margins, we are driving discipline while following Marc’s playbook to consistently expand our margins amidst top-line headwinds. The leadership team continues to evaluate our cost structure to drive profitable growth. We aim for at least a 25% non-GAAP operating margin by fiscal year 2026, inclusive of capital allocation decisions. As our business expands, we will target returning an average of 30% to 40% of free cash flow annually to shareholders. Mike, should we open up the call for questions?

That's good. Thank you, Amy. Bo, we'll go to Q&A, and we'll take the first question.

Excellent. Thank you guys for taking my questions. Maybe one for Marc and one for Amy. Marc, on the leadership change or Bret leaving, we're all very sorry to see Bret leaving. The good news is there's already a CEO in place. Should we expect a replacement for Bret on a going-forward basis? Are you considering returning to a co-CEO dynamic or replacing what he did day-to-day with someone else? And then for Amy, at the Analyst Day, you discussed a more back-end loaded operating margin trajectory towards that 25%. Has that dynamic changed due to the macro environment and top-line degradation?

Thanks, Keith. It's a great question. We're still in shock and feeling the loss of Bret. He has been an incredible asset to the team and a great friend. I must say, however, we have many fantastic people in the company. Bret’s management team, what we call the ELT, includes incredible individuals; many of whom have been with us for decades. I couldn't be more proud of Bret and everything he’s accomplished in the last seven years. While we focus on Bret's departure, we must also acknowledge the incredible leaders throughout our company who’ve done outstanding work, whether they're product leaders or operational leaders. We need to spotlight them too. We’re focusing on maintaining the momentum Bret helped build. Up until his departure, we’ll keep recruiting him back—I’m a good salesman after all! But please know, we have a capable team in place here.

To address your question about operating margin, we are committed to achieving a 25% target by FY26. We aren't providing guidance for FY24 yet, so I won't comment on the linearity. But achieving a record operating margin of 22.7% shows our commitment across the board. It's not stemming from one silver bullet but rather a disciplined approach across the entire company. Structural changes are focused on workforce costs due to a moderated hiring pace and on-cost efficiencies. We are prioritizing travel and assessing our real estate footprint; that’ll also drive margins over the long haul. I'm enthusiastic about the tools we're putting in place to achieve our goals.

Yes. Thank you very much. Bret, best of luck, and thanks for everything. Marc, I wanted to ask if this volatile environment is conducive to remote work—do you expect some employees to shift back to in-office? Regarding Amy's comments on real estate, could you touch on plans for the Salesforce Tower and how it could contribute to margin expansion?

Yes, certainly Mark. I hope the operating margin reflects our commitment; we've achieved a record 22.7%. You're absolutely right; we have expenses pre-pandemic that we don’t need now. I see a rebound in in-office work as all of us are in the office today. I also realize some companies advocate offices strongly, funny enough, I had some conversations with Darius from Honeywell on this. They still require factory workers every day to be present. We, too, have our own type of factory workers who perform missions in the office; we're collaborating directly with our tailored models. I anticipate some in-office work while not returning to previous norms. The percentage of remote workers was 20% at Salesforce prior to the pandemic; we're likely seeing a balance between in-office and remote working moving forward.

I wholeheartedly agree, Mark. Being together promotes learning and collaboration, driving better networking and enablement. We've seen that people are returning to the office more frequently, which enhances our customer interaction areas. Maintaining connections in our culture is a priority, so I've recently required my team to spend more time in the office and in front of our clients.

Turning now to your question regarding our real estate strategy, we constantly analyze our footprint to optimize for scale in this hybrid environment. Over the past two years, we have reduced our footprint significantly, evaluating during lease turnovers, and consolidating through opportunities as they arise. Our new head of real estate is conducting a thorough examination and is very efficient in how we utilize our workspace.

Thanks, Mark. Bo, let's go to the next question.

Great. Thank you. I wanted to direct a question to Brian. Could you elaborate on the initiatives being undertaken and what you’re witnessing in the field against the backdrop of the macro environment? Considering Salesforce’s relatively mature penetration, how do you foresee this situation evolving in terms of sales capacity?

Certainly, Raimo. While the buying environment has changed, our platform remains vital for all customers. There’s healthy demand, and our pipeline remains strong. We're experiencing a heightened interest in the C360 platform. We've adjusted our strategy to engage the entire C-suite and not just the CEO. Our efforts in multi-cloud expansion show promise for capturing existing customers while enhancing our existing product offerings to meet market needs.

Thanks, Raimo. Bo, let's go to the next question.

Great. Thanks so much for taking my question, and Bret, best wishes. Marc, you are under pressure from investors to drive profitability, including some activists. However, it seems this is an excellent time to invest in opportunities arising from current global dislocations. How do you balance both priorities?

Thank you, Brad. It’s great to address this issue because it’s on my mind daily. First, we aim to enhance our operating margins consistently and won't engage in activities that would undermine this momentum. As a shareholder myself, upholding profitability is critical. We also want to reduce dilution through our recent stock buyback, which was important. We’ve discussed returning $10 billion and have already bought back over a billion in the quarter. Driving profitability while capturing opportunities is a true tightrope walk. Every company is going through transformation, reflecting an excellent time to capitalize on opportunities without compromising our operational margins.

Bo, let's go to the next question.

Thank you. This question is for Brian. Brian, you mentioned the healthy pipeline levels. Can you share what industries are most impacted by the macro backdrop, the products that have held up, and your expectations regarding sales elongation?

Certainly. Starting with industries that are resilient, travel and hospitality performed well in the quarter, manufacturing rebounded effectively, and automotive had strong results. However, we noted pressure in the tech sector and financial services, which remained flat. Investment in our industry cloud is crucial; we're experiencing accelerated growth in these segments with higher retention and close rates. Products like marketing automation are typically affected early in downturns due to budget cuts. We expect this trend to persist in sales and service expansion as there may be hesitance in hiring.

Great. Thanks, Kirk. Bo, let's take our last question.

Great. Thank you so much for squeezing me in. Congratulations, Bret. For Amy, retention rates continue providing valuable revenue with high margins. Can we delve into strategies being employed to enhance those rates and how product bundling may be contributing to this?

It's wonderful to have you back as a covering analyst, Sarah. I'm pleased with our record low attrition this quarter. This reflects the effort of our entire team and solidifies how mission-critical Salesforce has become. I’ll pass this to Brian since he has more expertise on what we’re doing to drive retention rates.

Thank you, Amy, and thank you, Sarah, for your question. Customer success is core to our mission, and everyone in the company shares this responsibility. We’ve increased investments in customer interactions to ensure timely success while enhancing our industry clouds, which leads to faster time-to-value for clients. Our strategic partnerships support better implementations, ultimately leading to high retention rates across our customer base.

Great. Thanks, Sarah. Thank you all for joining the call today, and we look forward to seeing everyone over the next few weeks. Take care.