Salesforce, Inc.

Welcome to Salesforce fiscal 2021 second quarter results conference call. My name is Josh and I will be your operator today. At this time, all participants are in a listen only mode. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during the session, please put star one on your telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker, Mr. Evan Goldstein, Senior Vice President of Investor Relations. Sir, you may begin.

Thanks, Josh. Hello, everyone, and thanks for joining us for our fiscal 21 second quarter results conference call. I'm Evan Goldstein, Senior Vice President of Investor Relations. Our results press release, SEC filings, and a replay of today's call can be found on our IR website at www.salesforce.com slash investor. With me on the call today is Mark Benioff, chair and CEO, Mark Hawkins, president and CFO, Brett Taylor, president and COO, Gavin Patterson, president and chief revenue officer, and Amy Weaver, president and chief legal officer. As a reminder, our commentary today will primarily be in non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings press release. Some of our comments today may contain forward-looking statements that are subject to risks, uncertainties, and assumptions. In particular, our expectations around the impact of the COVID-19 pandemic on our business, 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. The description of these risks, uncertainties, and assumptions, and other factors that can affect our financial results is included in our SEC filing, including our most recent report on Form 10-K. With that, let me hand the call over to Mark.

Okay, thanks so much, Evan, and we're thrilled to be on the call with you today, and thank You know, this has been such a challenging time. You know, our hearts have broken. We've heard so many stories of pain and distress across the world. And, you know, for us, this really, this moment is actually quite humbling, quite bittersweet. You know, it reminds us that at Salesforce, business is the greatest platform for change, that we're really here. to be a great example of stakeholder capitalism, to really show how we're able to deliver a phenomenal return for our shareholders as well as for our stakeholders. And in many ways, this quarter really is a victory for stakeholder capitalism. It's been not only about our core values, but also about our core products. It's about showing how our customer 360 has been a platform for change for so many of our customers. And I'm going to talk about that briefly before I turn it over to Mark. But also our company being a platform for change to the communities who have needed us most. And I'm thrilled to deliver such a great return to our shareholders and also to our stakeholders. Certainly when we look at this quarter with more than $5.15 billion in revenue and and our highest operating margin ever at over 20%. Or when we look at, you know, just simple aspects of our operational excellence, like the 63% increase in seven-figure deals from a year ago, well, really indicates to us one thing, which is that values really bring value. It reminds me of a story that we really started last quarter with AT&T. You know, AT&T is an amazing company, a leader in the communications industry. And they have a tremendous visionary with Jeff McElfesh, who is the CEO of AT&T Wireless. And I'll tell you the thing that's interesting about AT&T is that they have a huge vision. And that vision is that every single customer touchpoint, whether it's their stores, whether it's their e-commerce, their app, whether it's getting a message from them, well, in each and single customer touchpoint, they want to know you as a customer they want a single source of truth and that's a deal that we signed obviously in february and i was thrilled that this quarter we've deployed now hundreds of stores and the first 35 000 users because i'll tell you at this moment in time there's never been there's never been a time when we've had to go faster we've had to deliver customer success faster And we've had to be there for our customers. And I'm absolutely thrilled to deliver that success for AT&T. I also look at another incredible win in the quarter with PayPal. You know, this is a tremendous organization that's really at the right time at the right place because we really need contactless payments. We all know that. So to see them have such great success with our sales cloud and our service cloud, To see their CEO, Dan Schulman, embrace us so deeply in our vision for having a one-on-one relationship with journeys, so powerful. You know, another incredible victory in the quarter has really been Work.com. Here's a product that I don't think there's a product that we've ever built faster, but never been more successful more rapidly. And you look at so many success stories. Public sector organizations and enterprises today, in the middle of this pandemic, everyone needs contact tracing. They need shift scheduling. Everybody needs a workforce command center to try to bring everyone back safely. Well, work.com is delivering that. Just look at the results at the University of Kentucky, for example. It's a difficult situation for universities to bring all these students back, and we're thrilled to partner with them with work.com. I look at so many other customers and so many other success stories during the quarter, whether it was PwC or VF Corp or great public sector wins like the Veterans Administration or the State of Rhode Island. We look internationally at tremendous victories like Banco Brandesco just had a great conversation with their CEO, Octavio Bilovari. Tremendous vision for the future of financial services and how Customers are the most important thing today to go faster for their bank. And ultimately, I guess the most proud I was during the entire quarter was when we delivered an additional $20 million to our San Francisco and Oakland public schools, bringing our total contributions to $118 million to our local banks. public schools. But one thing that's so important right now is their need to be able to enter into distant learning. So it's that idea that we've been able to do well and do good at the same time, that this has really been a victory for stakeholder capitalism to show that we can build a great company, but we not only have great core values, but we have great core products. So I just want to give my sincere thanks and gratitude to everyone who had such a great success during the quarter, our customers, employees, our partners, all of our key stakeholders. And with that, I'd like to turn it over to Mark.

Well, great. Thanks, Mark. And I hope everyone continues to be safe and well during this historic and challenging time. As Mark described, this was an exceptional quarter for Salesforce. Both the company and our customers navigated the crisis better than our guidance assumed. While the performance in Q2 leaves us optimistic about the future, it is important to note that we remain mindful of how the pandemic may continue to impact our customers and our community. Let me take you through some of the results for Q2, and I'll begin with the top-line commentary. Revenue was $5.15 billion, representing 29% year-over-year growth. Q2 was the first time in which the company surpassed $5 billion in a single quarter. Our revenue performance by cloud continued to demonstrate strength across the portfolio. Sales cloud grew 13%. Service cloud grew 20%. Platform and other grew 66%, with Tableau contributing 41 points of that growth. And marketing and commerce grew 21%. Additionally, we had a strong year-over-year performance by region in constant currency. Ameri grew 28%, with Tableau contributing 10 points of that growth. EMEA grew 38%, with Tableau contributing 13 points of that growth. And AsiaPAC grew 23%. Before I detail the quarter's performance, please note that the following should be compared against the guidance assumptions we provided on the Q1 earnings call. Specifically, the outperformance in the quarter was driven by five factors. One, better new business generation, notably. We saw Q2 business consistent with historical trends. Two, higher license revenue driven by new business performance. And four, achieved certain performance obligations within last quarter's large telecom transaction. Under contract, ended Q2 at approximately $30.6 billion, up 21% year over year. both new business and renewal contracts. Current remaining performance obligation, or CRPO, which is all the future revenues under contract that is expected to be recognized as revenue in the next 12 months, was approximately $15.2 billion, up 26% year-over-year. CRPO benefited from new business outperformance. favorable foreign exchange, strong renewal performance, and the inclusion of last quarter's large telecom transaction. Q2 GAAP EPS was $1.44. The outperformance in the quarter was driven by higher revenue as well as notably due to the Encino IPO. These mark-to-mark adjustments benefited GAAP EPS by approximately $0.55 and non-GAAP EPS by approximately $0.58. GAAP EPS was also benefited by $2.17 as the company changed its international corporate structure, which included the consolidation. Please note that this had no impact on non-GAAP EPS as the company utilizes a fixed long-term projected non-GAAP tax rate, which generally excludes the effects of discrete events. Turning to cash flow, our operating cash flow was $429 million in Q2, down 2% year-over-year. CapEx for the quarter was $100 million, operating cash flow less CapEx, of $315 million, up 22% year-over-year. Full-year fiscal 21 revenue guidance to $20.7 billion to $20.8 billion, 22% growth. Guidance includes approximately $100 million of revenue from our acquisition of Velocity. For Q3, we expect our revenue to be $5.24 billion to 5.16% growth. As a reminder, Q3 represents Tableau's fifth quarter at the company, and therefore the year-on-year growth rate will be normalized. While the demand trends were strong in Q2, we remained mindful of assumes that the revenue attrition remains consistent with Q2's actual performance and assumes we deliver modest new business growth during the second half of fiscal 21. We are taking this quarter by quarter as the pandemic is not over and we are only halfway through the fiscal year. In In that mind, from that perspective, we will continue to evolve and reimagine our business to enhance our relevance and deliver the highest level of customer success and innovation. As we look at success in this new all-digital work-from-anywhere environment, allocating resources to prepare the company for growth in strategic areas. This means we'll be redirecting some of our resources, to fuel growth in areas that are no longer as aligned with the business priority will be de-emphasized. Furthermore, we intend to accelerate spend and go to market in product originally planned for next year and pull that into the second half of this year. These investments in growth are planned and they will increase our expenses in the second half. Updating our revenue guidance, we're pleased to be able to raise our fiscal 21 non-GAAP operating margin guidance to a year-over-year improvement of 75 basis points. As a result, we are updating our fiscal 21 GAAP diluted EPS to be $3.12 to $3.14, while non-GAAP diluted EPS will be $3.72 to $3.74. For Q3, GAAP diluted EPS is expected to be $0.03 to $0.04, while non-GAAP diluted EPS will be $0.73 to $0.74. As a reminder, our EPS guidance assumes no future contribution for mark-to-market accounting as required by ASU 2016-01. For operating cash flow, we are raising the fiscal 21 guidance to 12% to 13% year-over-year growth. We continue to expect CapEx to be approximately 3% of revenue in fiscal 21, resulting in a free cash flow growth rate of approximately 15% to 16% for the fiscal year. Operating cash flow is expected to be impacted by these incremental growth investments. We expect CRPO to grow approximately 19% year-over-year in the third quarter. And as a reminder, Q3 represents TAPO's fifth quarter at the company, and therefore the year-on-year growth rate is now normalized. To close, we delivered a landmark Q2 in the face of adversity and have set ourselves up for a strong second half of fiscal 21 and beyond. We are proud of our ability to successfully lead.

We're going through serious challenges.

This is a moment that is very much humbling and bittersweet. And we just continue to focus on business is the greatest platform for change. Our products have to be that platform for change. Our values need to be the platform for change. We know what role we play in our industry. We know that we are a light and that we have to continue to be that light, especially during these difficult times.

Your next question comes from Taylor McGinnis with Deutsche Bank. Please go ahead.

Hi. Thanks for taking my question, and congrats on the awesome quarter. So the raise in the full year operating margin improvement guide of 75 basis points I thought was really solid, considering one that you guys are pulling forward some expenses to fuel growth and guiding to revenue growth in the mid-teens and the back half. Curious if you're able to break down the components driving that guide, like how much is coming from T&E savings perhaps you saw in 2Q or expect to see further down the line and wondering if you're able to quantify the pull forward of expenses.

Yeah, thank you, Taylor, for the question. I appreciate that. You know, we were very pleased to be making the raise of 75 basis points in the midst of everything, especially in the fact that we're, you know, further investing to really, you know, perpetuate this long-term success for our customer and serving all our stakeholders. So I think, you know, we're not curious. Think about product. Think about go-to-market in particular. in terms of the further acceleration in the investment, I think is a good way to frame that. Of course, we're getting some T&E benefit as well. But, again, our profit level is a choice, and that's the amazing thing about our business model. We're making a choice in terms of where we want to strategically invest. We've shown in Q2 how we can deliver what we delivered, which was a record. operating margin, but we're also trying to balance growth and profit over the long, long place. So that's our, that's our approach. I think you nailed it in terms of some of the things, and we're really pleased to be able to raise and make the investments. I hope that helps Taylor.

Hey, thanks. I was going to make an order and getting congrats on a real, on really strong results. I really want to drill, drill down into some of the specific clouds, you know, specifically Service Cloud, that continues to deliver just really robust growth. And obviously, last quarter became the biggest individual cloud, and that continues to stretch that gap. Can you talk about some of the dynamics that you see in there in Service Cloud, and how do you think about the sustainability of this on a go-forward basis?

Well, sure. Let me just touch on some of that at a very high level, and then let me ask Brett to come in as well. But you're right. Service Cloud. You saw that new innovation. The engineering team has done a fantastic job. The products are amazing. Velocity has added a lot to Service Cloud. They have built a lot on Service Cloud. the use of messaging channels on the platform grew more than 600%. I think that in a powerful way, you know, this idea of bots growing at 100% log per day, 33%, quarter over quarter, conversations at nearly 19 million per day during the quarter. And, you know, it's a key part of every deal we do. Customer 360% and you're building a single store, the service cloud has to be part of it. There's plenty of companies that have customer service or help desk or service desk or whatever as bespoke, isolated solutions, but that's not our vision. To bring together a customer 360, because look, like for AT&T, the person in the store needs to be able to Professional at home has to work with the service professional in the call center. It's all interrelated. And that's why PayPal, for example, is able to get done because it's sales and service together. By the way, combined with marketing. Combined with all their other systems through MuleSoft. Combined with analytics with Tableau. You know? So, anyway, Brett, would you like to come in here and, like, illuminate your vision around that? Yeah, Mark, I think you characterized it well.

They can transform their business. They can go digital. They can integrate sales and service. It's really that single source of truth. And it's the anchor tenant of the customer 360. And I think that's where the momentum is coming from. And, you know, when you look at that, You know, it is really the anchor tenant of the value proposition of that customer 360. Another great example that Gavin mentioned in our last earnings call is Standard Bank. You know, it's, again, a complete solution for the largest bank in Things that I think is really powerful about that story is probably one of the most impactful calls I've done with Gavin in this past quarter was we were talking to their executive team, and the executive team all the way down is actually becoming rangers on Trailhead. They're using the service cloud and the Customer 360 as an opportunity to not just transform their time, technology, but transform their culture to become customer-centric and really become a platform. They're rolling out Trello to all 50,000 employees with the goal of achieving 20,000. Do you think that this really illustrates the power of these stories around digital transformation and customer service really being the centerpiece of that customer 360 transformation?

Your next question comes from Walter Pritchard with Citi. Please go ahead.

Hi, thanks. I'm wondering a similar question in that vein on Commerce Cloud. I know, you know, customers pay to some degree on GMB and they have to come back and, you know, re-up as volumes go up. Can you help us understand how Commerce Cloud, just the impact of Commerce Cloud in the quarter and how that's driving product, you know, sort of holistic sale across?

Brett, can you...

Yeah, Mark, we saw over 100% year-over-year GMV growth this past quarter. And I think it really reflects the broad digitization of commerce. And, you know, I think when I look at, you know, our commerce cloud and our differentiated value proposition, it's two things. You know, one is we do both B2C commerce and B2B commerce. And I think that when I talk to customers, it's really about all of their channels. It's their direct-to-consumer channels. It's their warehousing. It's their partnerships. And we're really the one. Second thing is the integration of our commerce cloud with the rest of customer experience. Buy online, curbside pickup, right? We've probably all experienced that, many of us, for the first time. When you think about the technology that facilitates that, that's the integration of our Commerce Cloud, our Order Management Solution, Service Cloud, and really that end-to-end customer experience. So you're right that GMV is a good indicator of growth of the Commerce Cloud, I also want to be clear that our commerce cloud is really a part of a broad solution that we're providing to customers to really digitize their commerce experience all the way from making that order through the end of that customer experience, whether you're picking it up on the curb or it's being delivered to your doorstep. And those transformations have never been more important in this all-digital-work-from-anywhere world.

Your next question comes from Kash Rangan, the Bank of America. Please go ahead.

Hi, thank you very much. It's absolutely still binding to see organic growth rates, the solid margin expansion, et cetera, and the leading indicators, RPO as well. My question for you, Mark, you sounded really exact about Tavoli. You made a very profound statement there. It could end up being the most impactful acquisition for certainly Salesforce, maybe in the software industry. As you look at digital transformation, Customer 360, help us paint the picture of what Tableau can do for Customer 360 and digital transformation for the industry looking into 2021 and 2022. Thank you so much.

Well, I really appreciate that question because I'll tell you that we're so fortunate to be able to acquire Tableau last year. It is one of the world's leading enterprise software companies, probably one of the most loved brands. The ability to see and understand data, the ability to build these compelling visualizations like you see in the public domain, like at public.tablo.com. But I think the parts that you don't really know are that when we talk to so many companies, they've gone wall-to-wall with Tableau. And doing those types of deals, that's very exciting for the rest of us. You know, we were always in the analytics business. Of course, Sales Cloud, we've had dashboards and reports, which were great, but very much, you know, about kind of big reporting out of Sales Cloud. Or we had Einstein Analytics, which is incredible, but it's super advanced AI, highly personalized. that every company can do it easily. It's a simple, easy-to-use, and easy-to-understand product. I'm sure a lot of you use it. Plus, you can build these amazing, this incredible culture. They call themselves the data fam. It's awesome. And they are an incredible group. And they also delivered a great quarter, which impacts us. Mark can talk about how that impacts us. But let me tell you how it impacts me. It's when I talk to somebody like Bob Rick, the CEO of PwC, which was one of our largest deals of the quarter, but it's also when PwC says, that's going to be our new analytics platform. And they see how this has become part of our customer 360. And there's a lot of new innovation, a lot of exciting stuff coming for Tableau. And you'll see incredible announcements that are coming. But, Mark, can you just fill in, how does it impact us on a financial basis?

Yeah, Mark, I'm happy about Tableau. It's just such a great company to serve our customers. One of the things that was nice, formed with their offering and their particular term license offering. They had a number of really nice deals. We wanted to go even beyond one year. We call it multi-year. And when that happens, that further helps us in the sense of people liking the product, wanting to invest not in just a year but in a couple of years. And the more years out, Mark, the more, you know, we see that benefit in the top line is how it integrates into the digital transformation. So it's been very positive. It was a very nice performance for sure.

And I'll also just say, and I think, Mark, and I'll come in here for a second. second, Nielsen. You know, we're two years in Nielsen. You know, here's another, this has been a game changer for authenticity. We're going to enter in all your legacy systems and put APIs on top of them and give you this tremendous capability. These two companies together, this is a huge accelerator for on our business that they're both working so well. Mark, can you extend that thought?

Yeah, definitely, Mark. In fact, again, MuleSoft also was a contributor to our overperformance. Again, people love the product, Mark. I like the dialogue you mentioned with the BF Corporation where they're buying multiple products, including MuleSoft, to get that 360 progress, if you will, of the customer. And for MuleSoft, again, this again has a favorable effect on us and solve problems that customers really need help with. And, Mark, if I might just add, whether it's MuleSoft or Tableau or even our core products, one of the things that we certainly hear more and more is this whole notion that and Gavin talked about digital imperative, it is very clear that our products are becoming more and more mission-critical. MuleSoft, Mark, is adding to that. MuleSoft is adding to that 360 solution, and we're becoming more mission-critical. And one of the effects, Mark, that that had in this quarter is our attrition rate was better than we had expected, and that's in part because we're becoming more mission-critical with MuleSoft, with the integration of these 360 products, and just this year alone. over performance in MuleSoft and Tableau contributing to our results.

Your next question comes from Remo Lencha with Barclays. Please go ahead.

Hey, thanks for squeezing me in, and congrats from me as well. Question for Mark and Gavin. In this new environment that we are living in, can you talk a little bit about what you're seeing in terms of customer engagement, in terms of deal size that you're kind of maybe targeting, but then also... Like we talked earlier about Dreamforce being kind of more online, like, you know, Dreamforce always was a big event for lead generation, et cetera. Like, how are you shifting that? And, you know, that maybe kind of bring in a little bit of the comments about the go-to-market investments. Thank you.

Brett, would you like to take that?

Yeah, sure. A lot about is we're really focused on having a beginner's mind with our business. So as Mark mentioned, this is all of our first pandemic and the way we're doing business is completely transformed. All of our sales engagements happen via Zoom rather than being in person. And, you know, when I talk to a lot of customers about their own digital transformation, I always try to get into digital media. That's not a digital transformation. That's a digital translation. And when we think of things like Dreamforce, as Mark said, more than anyone else, I'm totally bummed out we're not going to be in San Francisco in October or November because it's one of my favorite times of the year. But we really feel like we've demonstrated over this past quarter our ability to reimagine the way we engage with our company, where he said, you know, on one hand, we're all staring at these screens and it feels so impersonal. On the other hand, I'm staring into all of my colleagues' and customers' living rooms, and it's oddly more personal at the same time. Our ambition is to transform the success of our technologies, our customer success teams, our distribution teams. And, in fact, I think there's a broader imperative for digital transformation than there ever has been. The way we're going to engage with our customers has completely transformed. And I think as a company, we really think we've developed over the past quarter that mindset of constantly transforming and reshaping ourselves. to be able to meet our customers where they need to be met. And I think we have the ability to continue executing on that with humility that predicting the future right now is really hard. We're in the midst of an unprecedented environment. But I think we've developed a lot of confidence internally at our ability to transform ourselves.

Your next question comes from Sarah Henley in Dowler with Macquarie. Please go ahead.

Great. Thank you so much for taking the questions and squeezing me in. Mark, how do you feel about M&A today and all of this back and forth going on around TikTok? Do you think the emanating applicants are picking up or just the IPO market? And then a more specific question on the quarter. Look, the resilience here is really impressive. There was commentary made, but could these better margins be a bit of a new normal given work from home? Yeah.

Well, thanks. I mean, certainly we're seeing a very interesting environment in the markets, in M&A, in ICO. I think that for a company like Salesforce, you know, we don't really see an M&A environment. These are not, you know, we're not in the moment. I honestly feel like we're very lucky that public companies today, you can do the math. We would not have been able to buy them. There's no way, no how. It wouldn't have worked for us. I just don't see it. Maybe things are changing. But I think, you know, this isn't part of our plan, right? Focusing on our business, focusing on these operational values, executing our business. Look, we always maintain a beginner's mind. You know that. But the reality is right now this is about our own execution. We've made these two major plays to extend and complement our customer 360, and that's what we're focused on.

On the growth and investment and could the margins – thank you for the question, sir. Are we – You know, always are mindful of, you know, we want, you know, obviously growth number one. We want to deliver cash flow. We know how critical it is. And we're always trying to balance that. We're always making choices with the opportunities in front of us. And, you know, we at the executive suite. So we are pleased to be trying to be better. We're always trying to keep an eye on that and going forward, but we think we have the right balance. The opportunity given the total addressable market that we're so well positioned for to serve our customer and the rest of our stakeholders. So we think it's the right balance today. I take your point, and we're always assessing, and we're always trying to be better.

That is all the time we have for questions. We'll turn the call back to Evan Goldstein for closing remarks.

Thank you for joining us on the call today. If you have any follow-up questions, please email us.

This conference call, thanks for participating. You may now disconnect.