Salesforce, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Salesforce Q1 Fiscal Year Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-answer session, and our instructions will be given at that time. If during your conference day you require operator assistance, press star then zero, and an operator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. John Cummings, Senior Vice President, Investor Relations. Sir, you may begin.

Thanks so much, Brian. Good afternoon, everyone, and thanks for joining us for our fiscal first quarter 20 results conference call. Our results, press release, SEC filings, and a replay of today's call can be found on our IR website at www.salesforce.com slash investor. With me on the call today is Mark Benioff, Chairman and Co-CEO, Keith Block, Co-CEO, Mark Hawkins, President and CFO, and Brett Taylor, President and Chief Product 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 which are subject to risks, uncertainties, and assumptions. Should any of these materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. Description of these risks, uncertainties, and assumptions, and other factors that could affect our financial results are included in our SEC filings including our most recent report on Form 10Q. With that, we hand it over to you, Mark. Okay. Hey, thanks so much, John, and thank you, everyone, for being on the call today. I am sorry I'm a little bit late here. I was working on Kramer, and that will be on in 45 minutes. So let me just say, first of all, we are just happy to share that revenue in the quarter rose to more than $3.7 billion, up 24%. in dollars and 26% in constant currency. And in Q1, we delivered nearly $2 billion in operating cash flow, up 34% year over year. And I just want to congratulate our entire team for these cash flow numbers because they are just phenomenal. For fiscal year 2020, we're guiding to $16.25 billion at the high end of the range, representing 22% projected growth year-over-year, and that's up $200 million from 90 days ago when we had our Q4 earnings call. No other enterprise software company of our size and scale is growing at this rate. Just last month, IDC, Worldwide Software Tracker, ranked Salesforce the number one CRM for the sixth year in a row. And I'll tell you, that is more important than ever, especially so many of our customers are going through these tremendous digital transformations. And we all know every digital transformation begins and ends with the customer. And, you know, when I'm with these CEOs all over the world, this is really front and center in their mind. It's probably, you know, as exciting to them and as important to them as it was to CIOs who are buying for Y2K, you know, which is almost 20 years ago. You know, I think the digital transformation remains just a huge growth opportunity for our entire industry. And it's not only that. In 2018, Salesforce gained more CRM market share than the other top vendors combined. Oh, 15 top vendors combined. That's amazing. We're number one in sales. We're number one in service. And we're leading in so many other areas. We're number one in model-driven application platforms, driven by our amazing community of 6 million developers. We're also leader in marketing and commerce and continue to gain share, and with MuleSoft, we also have this number one integration platform. It's incredible. We have an amazing opportunity ahead of us, and we're taking advantage of that through our relentless focus on innovation, which is why Forbes has ranked Salesforce as one of the most innovative companies for eight years in a row. We have a powerful vision for the future with intelligent customer 360, giving our B2B and our B2C customers a unified 360-degree view of their customers across every touchpoint, sales, service, marketing, commerce, community, some more. And I'll tell you, this vision that has been so well articulated now by our product organization that we call Customer 360, this is really driving tremendous opportunity at the highest levels in these customers. And we'll talk about that. But every company needs to have this Customer 360 capability. It doesn't really matter what industry you are, even the federal government. It's just a tremendous driving force. And Customer 360 will continue to be a major growth engine for Salesforce going forward. At its core is our core Salesforce platform, which is the most powerful and easy way for companies to build modern, intelligent applications. In Q1, we announced our new Einstein platform services that enable everybody, regardless of their technical skill, to build custom AI-powered apps with just a few clicks. And that has been so important for our customers because just as we've infused these Einstein AI capabilities across our entire product line and made Einstein Voice and also Einstein Vision capabilities available to every Salesforce app, we're now doing this exact same thing with another critical technology for our customers, which is blockchain. So when you look at our platform, you see this incredible capability of not just AI, not just blockchain, not just mobile. I mean, there's so many things that are in the platform, and the ability for our customers to easily build these state-of-the-art applications is pretty awesome, or just simply extend our CRM apps. Last week at TrailerDX, our sold-out developer conference in San Francisco, we introduced Salesforce blockchain. It is a breakthrough. Every customer app can have blockchain capabilities. It's the world's first declared a blockchain service solution. And it's built in deeply now into all of our apps. It's built in deeply into our platform. It's built natively on our platform, enabling customers to easily create blockchain applications with simple drag and drop as they can with every other Salesforce app. And I'll tell you, I was in Minneapolis on Friday demonstrating that to one of our very large customers. and showing how they can use it for their supply chain. And it's just incredible what it's going to do for so many of our customers in every industry. Also, our ecosystem is developing a huge economy around Salesforce, one that is going to create more than 3 million jobs and more than $850 billion in GDP by 2022. And that is why we're so excited about Trailhead. which is our online learning platform and our online re-skilling platform that empowers everyone. Now we have more than 1.4 million learners changing their careers and their lives on Trailhead. And I'm sure so many of you have met these inspiring people and their incredible stories of how they transformed themselves using Trailhead. And in the quarter, our new MyTrailhead product became generally available. And now any of our customers can actually create their own branded service just like what we have done and reskill all their employees, customers, and partners too. So it will be a huge driver of workforce development, which is why we were so excited that two weeks ago we were with Ivanka Trump at our first ever Tradeoff Laser Day in Indianapolis in our headquarters in Indiana where we signed the White House pledge to America's workers and we plan to get more than a million Americans the skills they need to earn these Salesforce credentials and badges and do everything necessary to make them successful and to get top jobs in our ecosystem over the next five years. Finally, at Salesforce, our vision has always been to change the way the world does business and at the same time improve the state of the world. And that's why I'm extremely excited today that Salesforce.org is reunified officially as part of Salesforce. providing an even better experience for all of our nonprofit education and philanthropy customers and empowering them to fulfill their missions and tightly unifying our .org employees with our company. They already sit in our buildings and they're already here with us, but now they're fully part of our structure as well, and it's a tremendous opportunity to accelerate our work in this incredible nonprofit world. And now, as you're going to hear from Keith, we're well positioned to continue on our path to organically double our revenue again in the next four years, achieving a revenue target of $26 to $28 billion for fiscal year 2023. And now, over to Keith. Hey, thanks, Mark. Thanks, everybody, for joining us on the call today. As Mark said, we have never been positioned for the future better than we are right now. We delivered strong revenue growth in the quarter, And we're seeing great momentum across all of our clouds and all of our industries. In fact, for the first time ever, Service Cloud exceeded $1 billion in revenue for the quarter, becoming our second cloud. That is pretty awesome, right? That is unbelievably awesome. A billion-dollar quarter for Service Cloud. You know, a lot of these other cloud companies that we read about all the time, they're not even doing billion-dollar quarters. And here, bam, Service Cloud. Congratulations. No, it's pretty amazing. So it is becoming our second cloud. as Mark said, to surpass an annual revenue run rate of $4 billion, which is pretty incredible. It is pretty awesome. And MuleSauce, by the way, also had an outstanding Q1, capping off a record first year and celebrating its anniversary here as part of Salesforce. Now, we are well prepared, as Mark said, to deliver on our FY20 goal and also our goal of $26 to $28 billion in revenue this year in 2023. So we're all excited about that. Quarter after quarter, we continue to take share and outpace the competition. I think that's pretty clear. As Mark alluded to, we have been meeting with CEOs around the world, and the common theme that we're hearing is the importance of transforming their customer experience and the value of providing a 360-degree view of the customer. And that's something that Salesforce does better than anybody. And that's why we continue to see massive demand for our solutions from both new customers and existing customers, across the world, every industry, every market segment. And as you can see this, it's in our results, 25% year-over-year revenue growth in the Americas, 27% in the APAC, and 32% in EMEA in constant currency. We're very, very proud of those results. A great example of a customer who understands the importance of transformation in the customer is Dell, who's really done a fantastic job in their transformation around customer experience. Dell is a a long-time customer, their strategic partner, and in the quarter, they expanded with us to deliver more automated and intelligent customer service experiences with on-site bots and predictions and next best action. Very, very important. Excuse me. In Q1, we also built and strengthened relationships with some of the leading companies around the world, including Tokyo Marine Holdings, one of Japan's largest insurance providers. They're standardizing sales and service and marketing on Salesforce, which is very, very cool. And they also were deploying financial services cloud to a million agents in over 50,000 agencies. We also expanded with Hera Group, an Italian utility company. I just came back from Italy last week. This is a company that is serving over 4.4 million citizens. And we also formed a new relationship with People's Choice Credit Union, one of the largest credit unions in Australia. You can see this is an ongoing phenomenon globally. Again, very, very excited about what's happening. We continue to deepen our relationship with the U.S. federal government. The Department of Education recently selected Salesforce as its platform to modernize and streamline the experience for millions of citizens with federal student loans. Excuse me. Are you okay? I am good. All right. Southwest Airlines, which has won awards. What are you drinking? I'm drinking coffee. Are you drinking anything? I'm fine. Well, maybe I should switch. Anyway, Southwest Airlines, Mark, which has won awards for their world-class customer service, is creating an entirely new employee experience with a centralized knowledge center built on Salesforce. Using service-bounding communities, Southwest is transforming the delivery of their HR services with new self-service chat and mobile capabilities for more than 60,000 employees. It's also about our partner ecosystem. We all know the importance of our partners, and they continue to play a critical role in our customers' transformation. And not only were partners involved in 63% of our new business in Q1, but they were some of our leading adopters as well. Accenture selected MyTrailhead. This is very important. To scale their culture of continuous learning and provide top talent for their clients, this is their business. And leveraging custom content, they're reskilling their employees on topics like artificial intelligence, networking, and leadership development. Again, think about the business that Accenture and these other providers are in. It's all about talent and bringing value to the table. We're also seeing strong momentum beyond the United States. Australia's Telstra was another great MyTrailhead win from the quarter. I was recently with our CEO and board discussing the strategic importance of re-skilling the workforces. It's a common theme and is top of mind, as Mark alluded to, for every CEO in the world. It comes up in every single conversation. Our vertical solutions continue to drive success and value for our customers, and Q1 belongs to Einstein Analytics for Financial Services. It's the first complete intelligence platform for wealth and banking, and in the quarter, we had incredible financial services pod wins with Zions and CIBC. We also released new health capabilities to provide a complete view of the factors that contribute to a patient's health. Again, very, very important, enabling providers to deliver better care and improve outcomes. In Q1, Cerner, a leading provider of health care information and EHR technologies, chose to replace their current CRM in Salesforce to continue transforming how they engage with their consumers and their providers. Finally, as I mentioned, it's been a year since we acquired MuleSoft, and we are absolutely thrilled with the combined success. April Mulesoft was named the leader in the Gartner Magic Quadrant for Enterprise Integration Platform as a service. And that makes us the only company, the only company to be recognized as a leader in both this and Gartner's most recent Magic Quadrant for full-wide cycle API management. So to close, I want to thank our customers, our partners, our employees for our strong results this quarter. And with that, I'll turn it all over to Mark Hawkins. Well, thanks, Keith. And as you've heard from Mark and Keith, we're pleased with our first quarter results. delivering strong revenue growth across each of our clouds and geographies, year-over-year operating margin improvement, and a record quarter of operating cash flow. Let me take you through some of the details for G1. First quarter revenue grew 24% in dollars and 26% in constant currency. As you can see, we experienced FX headwinds in G1, which on a dollar basis represented $61 million, or two full points of growth year-over-year. Our industry-leading product portfolio continued to deliver strong subscription and support revenue growth in U.S. dollars year-over-year. Sales cloud grew 11% in U.S. dollars. Service cloud grew 20%, and this quarter, as noted, eclipsed the $4 billion annual run rate. Marketing and commerce grew 33%. Platform and other grew 46%, including approximately $140 million in subscription and support revenue for MuleSoft, of which 55% is treated annually. as term license. Keep in mind the FX headwind for total revenue affected each of the clouds on a similar proportional basis. Diving into MuleSoft a bit more, we continue to execute well with MuleSoft contributing $170 million to total revenue in the first quarter. While this is our final quarter of discrete revenue reporting from MuleSoft, we intend to provide additional color on MuleSoft going forward as appropriate. Our renewal rate remained healthy in Q1, and dollar attrition continues to remain below 10%. In fact, our attrition rate continued to improve modestly in the first quarter year-over-year, similar to the year-over-year improvement in attrition that we saw last quarter in Q4-19. Q1 GAAP EPS was 49 cents, and non-GAAP EPS was 93 cents. Required mark-to-market adjustments of our strategic investments benefited both GAAP and non-GAAP in the first quarter by approximately 27 cents. Turning to cash flow, I was very pleased with our strong cash collections in the first quarter, which drove the operating cash flow of $1.97 billion of 34% year over year. In fact, in Q1, we generated more operating cash flow than we did in our entire fiscal year 2016. CapEx for the quarter was $159 million, leading to free cash flow as defined as operating cash flow less CapEx of $1.81 billion of 34% over Q1 of last year. Our remaining performance obligation representing all future revenues under contract ended the first quarter at approximately $24.9 billion of 22% over last year. Current RPO balance or CRPO which is business that is both billed and unbilled and is expected to be recognized as revenue in the next 12 months was approximately $11.8 billion of 23% year over year. On a constant currency basis, CRPO was up 24% year-over-year after considering an FX headwind of more than $100 million. While we made changes to our sales organization as we do every Q1, we did not see a material impact or CRPO, as you can see in these results. Before I turn to guidance, let me touch on the FX environment and the combination of Salesforce.org and the related impact of Q2 and FY20 guidance. First, regarding FX. As is evident in our results, we've seen a substantial decline in our FX rates since our Q4 call. The Great British Pound, for example, decreased approximately 5% since our fiscal fourth quarter 2019 earnings call, and our zero declined by approximately 2% over the same period. Second, regarding Salesforce.org, with the recently announced closing, we continue to expect Salesforce.org to contribute approximately $150 to $200 million in revenue in FY20, with approximately 40 to 50 million of this revenue recognized in Q2. And as previously discussed, we will incur a one-time non-cash accounting charge of approximately 200 million in the second quarter related to our settlement of the reseller agreement with Salesforce.org, which impacts our Q2 GAAP and non-GAAP EPS guide by approximately 20 cents. We expect the combination of Salesforce.org to be additive to our long-term revenue targets and will provide more detail during our annual analyst day in the fall. Now turning to Q2 and FY20 guidance. We are now expecting north of $200 million in FX headwinds to the year, and given this context, we are pleased to be able to absorb these headwinds and still furnish FY20 revenue guidance of $16.1 billion to $16.25 billion for 21% to 22% growth year-over-year, and with the dollar strengthening relative to the GDP and the euro, We're not only experiencing headwind to revenue, but also have an increasing pressure on operating margins as well. In that context, along with the integration and transaction expenses associated with the combination of Salesforce.org, we are also pleased to be able to maintain our plan of delivering flat to 25 basis points of non-GAAP operating margin improvement year over year. As a result, we are raising our FY20 GAAP diluted EPS to 78 to 80 cents, And our non-GAAP diluted EPS to $2.88 to $2.90. And as a reminder, our EPS guidance assumes no future contributions from mark-to-market accounting as required by ASU 2016-01. For operating cash flow, we maintain FY20 operating cash flow guidance of 20% to 21%. For Q2, we expect revenues in the range of $3.94 billion to $3.95 billion. GAAP diluted loss per share of $0.08 to $0.07 and non-GAAP diluted earnings per share of $0.46 to $0.47. We also expect CRPO growth of approximately 20% to 21% year-over-year in the second quarter. To close, we had another quarter of strong results and we maintain to be on track for FY20 revenue and profitability goals and achieve our long-term organic target of $26 to $28 billion in FY23. I'd like to thank our employees, customers, partners, and shareholders for their continued support. And with that, I'd like to open up the call for questions.

Thank you, sir. Ladies and gentlemen, at this time, if you would like to ask a question over the phone, please press star and then 1 on your telephone keypad. If your questions have an answer, you should move yourself in the queue. Simply press the bound key. And our first question will come from the line of Heather Bellini with Goldman Sachs. Your line is now open.