Salesforce.Com Inc at RBC Capital Markets Bus Tour - San Francisco
Jul 11, 2017 AM EDT
RY.TO - Royal Bank of Canada
Salesforce.Com Inc at RBC Capital Markets Bus Tour - San Francisco
Jul 11, 2017 / 10:30PM GMT
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Corporate Participants
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* Andrew Zilli
Salesforce.com - Director, IR
* Mark Hawkins
Salesforce.com - CFO
* John Cummings
Salesforce.com - SVP, IR
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Conference Call Participants
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* Ross MacMillan
RBC Capital Markets - Analyst
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Presentation
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Andrew Zilli, Salesforce.com - Director, IR [1]
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All right. Let me go ahead and get started. Thank you, everybody, for being here. For those who don't know me, my name is Andrew Zilli. I'm a Director on the Investor Relations team here at Salesforce. With us today, we have Mark Hawkins, our CFO. Thank you, Ross and RBC for bringing the group in.
Just before we get started, this is a webcast, and obviously, as you, guys, know, anything that -- we may make some forward-looking statements. Those are subject to risk and uncertainties, which can be found in our SEC filing on the SEC website or on Investor Relations -- our Investor Relations website at salesforce.com/investor.
I will turn it over to Mark now to make some opening remarks and then we'll open it up for Q&A.
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Questions and Answers
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Mark Hawkins, Salesforce.com - CFO [1]
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Fantastic. Well, first of all, thank you for coming. I know you, guys, had a busy couple of days and it looks like a great plan here, so really are happy to have you and happy to host you.
Glad to have John here joining us here as well and bring everybody in here. So, we've got a full house. Glad to address any kinds of questions that you have. Again, I'm pleased to have you here.
I think probably the thing you would enjoy the most is to jump right into it, so I'd say let's jump right into it. So, Ross, did you have any opening questions, and then let's discuss what's on your mind, that'd be great?
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Ross MacMillan, RBC Capital Markets - Analyst [2]
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If I could start with one that we thought a bit about this year which is -- which is pricing.
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Mark Hawkins, Salesforce.com - CFO [3]
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Yes.
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Ross MacMillan, RBC Capital Markets - Analyst [4]
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You know, our sense of this year, there is a few more things happening on pricing, whether it's [healthy living] and adjustments rolling through the base, [Lightning] upgrades, a [catch] of new products with a base. Maybe you could just talk about pricing in general and whether it's right to think that it's having a more material influence of growth this year?
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Mark Hawkins, Salesforce.com - CFO [5]
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Sure, happy to do that, and I think the answer to that is it's really having a minimal impact on our growth this year, just to give, right, [a quote] on that. We do have within our standard MSA around a 7% uplift, that's part of the renewal uplift, that's standard part of a term. But, in fact, the reality is the 700 are very de minimis effect on our growth this year.
So, our pricing environment, it really hasn't changed. Competitive environment really hasn't changed in fact. And I think you, guys, are well-briefed and we very rarely have any kind of pricing movement (inaudible - microphone inaccessible) so.
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Unidentified Participant [6]
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That's the annually, 7%?
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Mark Hawkins, Salesforce.com - CFO [7]
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That is a 7% uplift. It is at the time of renewal. It's a standard MSA. It's not to say that that's right, it's the ultimate number, but that's in our standard term.
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Unidentified Participant [8]
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Every three years or every year?
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John Cummings, Salesforce.com - SVP, IR [9]
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Just to jump in, so, [Alex], most of those MSAs tend to be longer term contracts.
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Mark Hawkins, Salesforce.com - CFO [10]
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That's right.
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John Cummings, Salesforce.com - SVP, IR [11]
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I mean probably a little longer than our average, our average-plus. So, average contract length is running a little more than two years. So, yes, if you think about that perhaps over three-ish years.
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Mark Hawkins, Salesforce.com - CFO [12]
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Exactly, okay, Alex, hopefully that helps.
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Unidentified Participant [13]
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Yes.
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Mark Hawkins, Salesforce.com - CFO [14]
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That's great. All right. So, that's the first question and (inaudible). Feel free you, guys. I'm sure there are others out there. Yes, please.
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Unidentified Audience Member [15]
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How should we think about your billings growth contribution from up-sell versus new logos?
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Mark Hawkins, Salesforce.com - CFO [16]
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So, just to be clear, billings growth from up-sell versus new logos here]. Let me -- let me touch on that in a couple different ways. First of all, I just talked about our new book of business, yes, because we focus on that.
If you think about our new book of business, for all of our new business, roughly 60% of it we sell into install base, right, from that standpoint. And of that 60% that's sold already into install base, about half of that goes into -- is related to even new products, relatively new products from that standpoint.
So, I just want to come back and make sure I'm addressing your question fully. When I think about our new book of business, that's kind of -- we give a lot of it from install base and then you could see how much of its new products versus selling more of our existing offering where our customers are expanding their offering into that. Let me make sure that I've addressed your question. Hopefully -- does that help?
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Unidentified Audience Member [17]
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That does. And then to follow on to relevant marketing load for new book of business that comes from install base versus sales and marketing load for new book of business that comes from new logo, how do they (inaudible)?
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Mark Hawkins, Salesforce.com - CFO [18]
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Well, we don't -- we haven't actually exposed that amount right there from that standpoint, the difference on that, we have not. So, I think it's probably intuitive that going into a new install base is going to be more efficient than the new logo, but we haven't actually gone to that level of detail. John, feel free if you have any other --
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John Cummings, Salesforce.com - SVP, IR [19]
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Yes, I think the only thing I'd add to that is we've talked in the last few years about how we've been expanding inside account once we win in the enterprise (inaudible - microphone inaccessible).
So, the challenge is sometimes we'll go in and we'll -- [at the contrary], we may start with Salesforce automation, say, in a division or in some element of business, and then they decide to go big and [wall to wall], and all of a sudden, you may have had some deployments that was a fairly small deployment and then as they think about adding new products and maybe they do that in a significant way as a step function up, that really looks like a new logo in many respects, right? Or certainly behaves like it from a selling motion because you've got to go through a much bigger selling effort, right, whether that's a consultant selling effort, maybe you're working with an identified process.
So, it's easy just to say, "Well, I've got an add-on into this business. In a different space, I've got an add-on to an existing customer who already is using Salesforce automation, and now, they're just going from 50 users to 100 users," versus "I've got 100 users of Salesforce automation. Now, they want to go into 1,000 users of Salesforce automation plus 1,000 users of service plus marketing plus e-commerce plus some other." So, it just depends.
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Mark Hawkins, Salesforce.com - CFO [20]
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Okay, good. Please, yes.
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Unidentified Audience Member [21]
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It feels like every time I met with you in the last 6 to 12 months and there's a group of investors in the room like margins are like hugely one of the first or second questions that really come up. How do you, guys, think about there are a lot of other companies have given three-year targets or longer for this growth rate or like going to be X margin or whatever, how do you think about, one, (inaudible) flexibility of market gets rough and you do a deal and (inaudible) but also getting investors that are sort of confident sort of trajectory at the margin (inaudible)?
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Mark Hawkins, Salesforce.com - CFO [22]
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Sure. I'm glad you addressed that. So, in terms of the question, I'll just repeat it since we have folks on the recording as well, but in terms of operating margin, how do we think about it?
Clearly, the way we think about it is our revenue margin framework. That is something that's, in fact, what we try to get into the right ZIP code to [get] the growth rate and then you look at the range of operating margin that we want to deliver.
We know in the last -- this is the fourth year of operating margin expansion, uninterrupted even though we had significant M&A last year, and it's something that's important because even though we're a growth company, number one, we're also committed to expand operating margins that you've seen in an uninterrupted way for the last four years. I think very much around the operating margin framework is the way we think about it, first of all.
And I want to come back because you had talked about long-term targets. So, again, our framework is the way to think about it is you think about where our growth rate is that you can start to think about where the margin is and certainly familiar with what other people have done in terms of their long-range target, our approach is with the framework. So, hopefully that helps. Feel free to -- if you have a follow-up question. I want to make sure we addressed that.
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Unidentified Audience Member [23]
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Yes, I mean I guess just the other one. The [item] will be this year, from the past year, you've been [absorbing] process from an acquisition I guess, maybe (inaudible) and what are the (inaudible) prepare forward (inaudible) deal, should we be expecting more leverage to (inaudible) the prior 12 months, what's the [drive there]?
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Mark Hawkins, Salesforce.com - CFO [24]
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Sure. So, one of the things -- I'm glad you brought that up, I think you know that, for example, this year we're absorbing D.R. write-down. So, unlike a lot of companies, we do not non-GAAP out like the deferred revenue write-down for Demandware, for example. We're taking all that in stride while we're delivering what we're delivering, right? And so, and obviously, M&A has an effect there, but we're pushing through that.
In terms of forward-looking, we get into the guidance for next year -- next year, what our commitments here, I think what's important to look at is we are absolutely committed to operating margin, I've not only we said that but we delivered it, and this is the fourth year in a row in that respect.
But also, the thing that we're doing in juxtaposition is we're looking at $105 billion TAM with a company that's taking a significant market share, has a significant setup and is going to attack that, and I know there's a huge opportunity.
So, we're trying to -- I think what's important to you as an investor, I know that and it's very, very important to me, I want to make sure you know that, is not just doing your growth but doing your growth and the operating margin and the cash flow.
So, that's something that's very much on my mind, it's very much on [Ross'] mind. But again, when you see a $105 billion TAM there, we're trying to balance that while we go take share, which we certainly have, it's [sitting right up data]. Okay, (inaudible - microphone inaccessible), Ross.
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Ross MacMillan, RBC Capital Markets - Analyst [25]
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I want to understand why you (inaudible) question, when you raised the revenue guidance for Q1 for this year, the start of that was (inaudible - microphone inaccessible) the headwind, but when you guided originally on margin, (inaudible - microphone inaccessible) headwind from FX didn't change the margin size (inaudible) the revenue guidance.
I was just curious as to whether that was because it was a small portion, if you will, of a too small -- too small make a difference or whether it was a deliberate decision to sort of, well, take the revenue but kind of invest a little bit more at the margin at the same level.
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Mark Hawkins, Salesforce.com - CFO [26]
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Yes. So a couple of things, one is that it's a fairly immaterial change. And when it cuts that other way, we certainly lower our numbers, right. I mean from that standpoint, so you can tell from that standpoint that it's not largely immaterial in terms of our commitment to the margin because that's the number one answer.
The number two thing is clearly, when we raised the revenue, we held the operating margin percent that has impact on the sheer number of operating margin dollars that we (inaudible - microphone inaccessible) as well.
But that certainly is absolutely in the forefront of my mind to look at this and to drive top-line, seize a $105 billion opportunity to deliver the margin, to deliver the cash flow, all three have to happen. We know how important that is to all of you, that's certainly something that's very top of mind for me.
Other questions? I want to make sure I addressed that fully too. Other questions? I'm sure there's a question.
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Unidentified Audience Member [27]
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What's (inaudible - microphone inaccessible) 606 impact (inaudible - microphone inaccessible) this year, you, guys, figured out like 200 basis points again or?
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Mark Hawkins, Salesforce.com - CFO [28]
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Yes. So, the 606 impact, since you're asking that, we're working through all that and stay tuned on that, but we're not at -- in a position where we can actually describe that to you as of yet.
We will, there'll be a time, we would be sharing that with you because we've been looking on this project for quite some time so we are in front of it. We're getting a refined sense of revenue which will be obviously small relative to a lot of companies in terms of the overall impact relatively speaking because we're a pure cloud company and you know how that works.
And then we'll also talk about the other effects of the -- including commissions, but it's not that time yet but that will be coming. And we'll have a very complete communication on that. So, I don't know if you have anything.
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Andrew Zilli, Salesforce.com - Director, IR [29]
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Yes, I was going to say that our hope is --
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Mark Hawkins, Salesforce.com - CFO [30]
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Yes.
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Andrew Zilli, Salesforce.com - Director, IR [31]
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-- to talk mostly about this at the analyst day --
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Mark Hawkins, Salesforce.com - CFO [32]
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Yes.
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Andrew Zilli, Salesforce.com - Director, IR [33]
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Representative^ -- at Dreamforce this year in November. And once we get -- because by that point, we'll have gotten -- we'll have gotten to a lot of the testing so we'll have a better idea of sort of what the revenue impact is.
And then depending on how significant some of these other impacts are and some of what we -- what we determined, we may do -- have a road show later in the year sort of post-analyst day, they're really sort of a deep dive on how 606 impacts us. That was a little bit TBD depending on kind of how the numbers turn out. But I think probably most of what you're looking for, you'll get it at the analyst day.
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Mark Hawkins, Salesforce.com - CFO [34]
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And we'll be very granular on that, so hopefully that will help you. OK.
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Unidentified Audience Member [35]
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Beyond just the accounting nature of 606 from a strategy perspective of what's changing, what change (inaudible) customers, right?
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Mark Hawkins, Salesforce.com - CFO [36]
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So, just -- [Brian], just to make sure I'm hearing that, is there any strategy change related to 606?
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Unidentified Audience Member [37]
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Some companies are (inaudible - microphone inaccessible) 606 (inaudible - microphone inaccessible).
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Mark Hawkins, Salesforce.com - CFO [38]
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Right.
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Unidentified Audience Member [39]
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Right, because revenue (inaudible) is not function of billing (inaudible).
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Mark Hawkins, Salesforce.com - CFO [40]
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Right, right. We don't have any change to announce on that front with regards to 606. We have a pretty clear approach we've taken for billings and it's been very consistent from that standpoint. So, there' no -- there' no announcement of any change of that nature, but we'll go through every aspect of 606 with you, I'm happy to do so, but no change in report.
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Unidentified Audience Member [41]
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On the margin follow-up, can you maybe just articulate (inaudible) obviously margins are (inaudible) -- can you just articulate where you're incrementally investing more this year, right, to drive the growth and top-line? What's incremental versus, say, at last year where you had the concern because of the M&A?
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Mark Hawkins, Salesforce.com - CFO [42]
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Sure. So, a couple of things here, one on the operating margin, in terms of incremental investment, I think somebody earlier said, clearly, we've done, the M&A clearly, it's had an effect, right? And that shows up in our numbers all across our P&L including even the side that I talked to you about with the D.R. write-down.
And so, if you have a pretty good sense of what that is based on the stuff here that we shared and if you look at that plus what we're delivering to 150 basis points of operating margin, you could get a sense of the rate of what we're absorbing and the rate of what we're improving.
I think if you look at our P&L in aggregate, you can see that some of the really important things for us obviously are things such as our cost to delivery, we then invested in our infrastructure to prepare something internationally for example. And so, that has had some effect at our gross margin and that's very consistent with the way we've been messaging to you for some time as we go to expand that opportunity over the long horizon. So that is certainly very important to us, number one.
But number two, obviously, our customer success is very important to us and making sure that the customers not only buy our product but they actually adopt it and are very happy. And the reason that's so critical financially and I know you, guys, all get this, is [when you get] an economics in the mid-30s notwithstanding what we're not (inaudible - microphone inaccessible) customers.
That economics really, really works well when you were taking those all the time. So, tech infrastructure internationally, our customer success to make sure that we really are able to fully enjoy the mid-30s unit economics that are driving today from that standpoint is important.
The M&A that we've taken on including absorbing in stride the hits that we're taking for D.R. write-down and related cost that impede us from M&A is still going to 150 and in our fourth year operating margin expansion. So, those are kinds of things that we're taking in stride. Brian, is that specifically what you're looking for? Yes, please?
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Unidentified Audience Member [43]
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To follow up on that, you mentioned [tech] investment internationally, what about the sales -- I mean are there incremental investments that are more aggressive this year than last?
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Mark Hawkins, Salesforce.com - CFO [44]
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We certainly -- I'm glad you asked that. Certainly, internationally, when you look at our mix of sales and marketing, we're investing even more internationally so that is absolutely our point for sure.
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Unidentified Audience Member [45]
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Is that larger than [FX] incremental investment on --
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Mark Hawkins, Salesforce.com - CFO [46]
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[Marketing].
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Unidentified Audience Member [47]
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I would think that would be larger?
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Mark Hawkins, Salesforce.com - CFO [48]
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I'm just giving you right now our growth rate in terms of the mix between what we invest in the U.S. versus international for sales and marketing. But in terms -- in terms of the aggregate dollars, I haven't gone to that level of detail (inaudible - microphone inaccessible).
But both are investments in our future, both are investments in growth and both are investments to help us capitalize on a really unique setup to you, guys. When you see the share that we're taking, it's really first that I'm sure you're looking at that. The setup is there, we need to execute on it to achieve. Other questions? Yes, please?
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Unidentified Audience Member [49]
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Can you talk about, you guys are (inaudible) Demandware, can you talk about where you are in the integration, and also any changes in the go-to-market focus? (Inaudible - microphone inaccessible) a couple $100 million champion, like where is that, they had some mid-market to you? Has that changed? And maybe just to level set it and compare it to sort of the ExactTarget, how long that's a good comp in terms of internally how that acquisition went?
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Mark Hawkins, Salesforce.com - CFO [50]
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Sure. I would say to you a couple of things, and one of the things I'll point the data for you to help you when you look at the stuff here is (inaudible - microphone inaccessible) part of what we said we would do. Demandware has absolutely been doing really well. And I would say to you that it's always interesting that we've been involved in buying a lot of companies over my career. You soon understand very quickly, is this (inaudible - microphone inaccessible) you hope, it is kind of part of what you hoped versus better than what you hoped. Demandware has been squarely better, that we hope the opportunity will be long term, [5%].
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Unidentified Audience Member [51]
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Is that being driven by the cost opportunity? You, guys, have large enough customer base and that's been the primary driver.
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Mark Hawkins, Salesforce.com - CFO [52]
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The cross-sell notion is starting to happen right now, and I think part of it is just also investing in the right number of AEs in their core business, let alone the cross-sell from that standpoint, and we see the possibilities.
Now, when you have the entire suite of offering including our e-commerce capability, there's nobody in the world that has that. We're finding customers that want it all. And you can see that as an -- get more into multi-cloud likely the -- at Dreamforce, I suspect, but we're seeing the benefit of that.
Also, I think the culture is really aligned well. The way they're snapping into innovation standpoint is aligning well. I would just say that is absolutely on track and it's going to be [one].
You know, we've talked about where we've done well and I think ExactTarget we've looked at them. We have talked about given M&A that didn't go quite so well in the last five years or so. Largely, they go quite well and I think you could agree, but I think this is going well.
I think other integrations, things like [crux] and the demand for crux and the appetite you're talking to a lot of customers, I would be surprised if you're not hearing that feedback but very good.
And if I compare it to ExactTarget, ExactTarget, we were probably slower in terms of integration that we took. We've got faster on this. I think that's been beneficial. I think we've been more aggressive on that I think which is beneficial.
And ExactTarget obviously, you can see the map on that one. That one penciled up very, very [easily]. I think anybody who would look at that one relative to purchase pricing; you can see that that's a good investment for us. Okay, is that all?
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Unidentified Audience Member [53]
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Yes. Any change in market, where you go to market motion, where upcoming, moving up market, moving down market?
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Mark Hawkins, Salesforce.com - CFO [54]
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I think we're trying to leverage our full expertise and we're probably moving a bit more up market than they were, but I wouldn't say, John or (inaudible - microphone inaccessible) I would see a material change there. I don't know if you -- I mean some of the --
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John Cummings, Salesforce.com - SVP, IR [55]
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I mean I think you'll hear more about obviously (inaudible - microphone inaccessible) Salesforce volume business. We're very happy with the way that this is moving. And in terms of kind of where they were in sort of integration like from Mark's point, much faster integration, they jumped on that, is [snapped in] to Alex's organization, the selling motion is under [Keith]. There is even investing directly and to expanding that sales organization for Demandware. So, I think that that -- I think just stay tune but we're very happy with the progress and it's an outstanding business and a differentiator for us.
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Mark Hawkins, Salesforce.com - CFO [56]
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For sure it is.
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John Cummings, Salesforce.com - SVP, IR [57]
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Okay.
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Unidentified Audience Member [58]
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Service Cloud you accelerated the last several quarters, what's driving them?
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Mark Hawkins, Salesforce.com - CFO [59]
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So, a couple of things, just like we've talked about, one is that we see -- I tried to address this directly and I'll come back, I'm sure you're happy with that, the first thing is we see the portfolio of our products and the ebb and flow of going back and forth.
I think if you look factually, you look at the reacceleration of Sales Cloud, you can look at the reacceleration of Marketing Cloud, Marketing Cloud without Demandware, and you can see the ebb and flow of growth rates kind of coming and going.
One of the things that we try to do is manage the entire portfolio. So, we think that it's a very natural effect. And a lot of it depends on different investment cycles and things that are happening.
Or in the case of Service Cloud, we've invested things like HeyWire for SMS messaging. We've invested now in field service. All these are early attributes to this and also our Service Cloud Lightning and all part of the investment cycle to deal with all the different growth rates.
But that's what I would say. It's very much a portfolio effect. By the way, we're -- last year, we were like, what, $2.5 billion cloud growing, like the last quarter was over 20% and taking share -- I don't know if you saw the share take that we did which was pretty awesome.
We feel really good about the Service Cloud notwithstanding that we'll keep paying attention. There are already different growth rates of the different clouds. And feel free John or (inaudible - microphone inaccessible) to (inaudible - microphone inaccessible) on that.
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Unidentified Company Representative [60]
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Yes, the only -- I mean the other thing I would say is, it is the $2.5 billion price, so it's a bit of a low margin number probably at some point. But if you look back at what Sales Cloud was growing when it was $2.5 billion, it was growing on a 10%.
And so, the price is still leaving -- I know it come down from kind of the mid-30s a couple of years ago. It's still growing almost twice as fast as where our biggest and most successful product ever is growing in a bigger and faster growing market.
So, I think as long as we continue to make these investments, right, field service is new as Mark mentioned, it's taking time to ramp that up. But I think kind of overall, we feel really good about where that growth trajectory is for a product of that size.
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Mark Hawkins, Salesforce.com - CFO [61]
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Yes, I hope that helps.
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Unidentified Audience Member [62]
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Like these other clouds that you've accelerated after investing, do you feel like Service Cloud could accelerate with some of these investments?
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Mark Hawkins, Salesforce.com - CFO [63]
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Sure. Again, I've tried to be really careful not to guide by cloud, but our -- you know my view in terms of our growth opportunity in the 20%-plus range for the foreseeable future for our revenue growth overtime.
And we've got a really attractive market where you take a look at the share gains. And I always talk about competitive separation when you add the next three people and their share is less than your share, you really start (inaudible - microphone inaccessible) so, I think that that is going to be a very important part of our growth success and a long play. There'll be ebb and flow as there always have been. And you can see that in the numbers. That's the main point I'm trying to share and I think it will be important (inaudible - microphone inaccessible) cloud. I hope that helps your question.
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Unidentified Audience Member [64]
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Yes, thank you.
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Unidentified Audience Member [65]
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Mark, do you think you can do that 20%-plus growth in the foreseeable future organically or does that require some --
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Mark Hawkins, Salesforce.com - CFO [66]
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Right. My decision that I talked to you about was that it's all in but I will just leave it at that. John, feel free to. Organic is what we power. We power our growth with organic. And if you look at where we've been, it's been powered by organic. If you look at last year, it was powered by our direct [mechanic] with the absence of one or two percentage points of growth.
So, from my standpoint, we're going to get there with organic growth, and obviously, we're always complemented with M&A from that standpoint. But you can see most of our M&A has been active hires, it's been technology tuck-ins. We had a few that have been additive to revenue but that's (inaudible - microphone inaccessible). John, feel free to --
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John Cummings, Salesforce.com - SVP, IR [67]
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No, I was going to say this --
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Mark Hawkins, Salesforce.com - CFO [68]
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Organically..
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John Cummings, Salesforce.com - SVP, IR [69]
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-- very clear, we said during our analyst day that we expect around 20%-plus for the foreseeable future, that's organic.
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Mark Hawkins, Salesforce.com - CFO [70]
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Yes. We're powered by organic growth and everything else (inaudible - microphone inaccessible). Most of our M&A is not -- historically is not the revenue.
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Unidentified Audience Member [71]
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There'd been some (inaudible - microphone inaccessible) some slowdown at least what our calculation is of organic constant currency growth over the last, I call it, year. And so if you kind of continue on a trajectory (inaudible - microphone inaccessible) maybe a year or two that great things that would cause kind of to stabilize and maybe accelerate.
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Mark Hawkins, Salesforce.com - CFO [72]
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Well, you can look at what we did last year and you look at the growth rate was (inaudible - microphone inaccessible) right in terms of revenue growth rate. You can see what our guidance this year and we would be disclosing the M&A. We gave, I think, 22 points of growth.
I think it was, from my standpoint, to be the fourth biggest software company in the world and to be growing, really mean power organically well above the 20. I think it's something that you're pleased with and we think it's an opportunity going forward. So it's organic with M&A being mature and tough to take, and arguably it's not been (inaudible) at least the short-term of it has generated for us.
So, John, feel free if you see differently so (inaudible - microphone inaccessible).
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John Cummings, Salesforce.com - SVP, IR [73]
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Yes, I'm feeling [silly] as well here.
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Mark Hawkins, Salesforce.com - CFO [74]
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Yes.
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John Cummings, Salesforce.com - SVP, IR [75]
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I mean, I think if you ask me as well, it's like what's going to help [perpetually] that growth (inaudible - microphone inaccessible) try to generate. The market that we're participating in particularly on (inaudible - microphone inaccessible) service, it's the aPaaS, look at market and e-commerce, these are all markets that are high teens, 20s or growers, right? So in aggregate the markets will play in a solid growth trajectory. And we're taking share on top of that to kind of create consistent track record of doing that.
I think we'll be very well-positioned with our product portfolio to continue to take share or investing in the right go-to-market resources as well. And then you invest in international then you sort of add up kind of an aggregate and put this mosaic together and that's one of the reasons we feel comfortable about, that view, in addition to the fact, that you're looking at a balance sheet with a considerable amount of (inaudible - microphone inaccessible) business (inaudible).
------------------------------
Mark Hawkins, Salesforce.com - CFO [76]
------------------------------
[I would say it in] $0.5 billion. And I think John's walked down that lane of both international opportunity, secure [game], [DOB], $14.5 billion it's out there, the $105 billion TAM. The industry opportunity, having a suite of offering, good time action to market, I think this really helps us have confidence around going to the 20% above power organically for the cherry on top of the cake for the functionality that we bring them on M&A. So that's where we're ready to see in the prior three years we doubled the company.
And the same questions of growth at 20% were consistent years ago and we talk to you, and here we are again. And we feel like that market opportunity is there for us (inaudible - microphone inaccessible) you can see the results heretofore basically here and then (inaudible - microphone inaccessible) after.
------------------------------
Unidentified Audience Member [77]
------------------------------
How was your partners rating about Community Cloud? I'm just curious as to where that falls in terms of the segment and if there's a way to sort of think about the side of that product relative to other products in the growth rate.
------------------------------
Mark Hawkins, Salesforce.com - CFO [78]
------------------------------
Growth rate. So the Community Cloud, I'm glad you asked that, and the other thing I would tell you is when you look at Sales Cloud, Service Cloud, Marketing Cloud, so and so forth, this portion of it that's related to communities-related sales, communities and service/community related together clouds, it's actually embedded in those so we haven't broken it out separately from that standpoint, number one.
Number two, without getting into a lot of details, that is a very strong offering and is growing very nicely. I'll leave it at that. I don't think we've ever guided more specifically on that, but that is a well-executed functionality. I think you're absolutely right on that front. And that sizing, I don't think we've disclosed that.
------------------------------
Unidentified Audience Member [79]
------------------------------
No, and --
------------------------------
Mark Hawkins, Salesforce.com - CFO [80]
------------------------------
Yes.
------------------------------
Unidentified Audience Member [81]
------------------------------
-- I have to go look back and (inaudible - microphone inaccessible) in their sort of market share on that --
------------------------------
Mark Hawkins, Salesforce.com - CFO [82]
------------------------------
Yes.
------------------------------
Unidentified Audience Member [83]
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-- (inaudible - microphone inaccessible)
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Mark Hawkins, Salesforce.com - CFO [84]
------------------------------
But you're bang on in terms of that is well-received offering by the customer.
------------------------------
Unidentified Audience Member [85]
------------------------------
Yes, it's helpful for sales guys with products like that because it really becomes an additional feature (inaudible - microphone inaccessible).
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Mark Hawkins, Salesforce.com - CFO [86]
------------------------------
Yes.
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Unidentified Audience Member [87]
------------------------------
-- right, which is here's a way to sort of add, have a discussion around that and saying here's what the benefits of those kind of products are. So it's (inaudible - microphone inaccessible) sales (inaudible - microphone inaccessible).
------------------------------
Mark Hawkins, Salesforce.com - CFO [88]
------------------------------
Thank you, (inaudible).
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Unidentified Audience Member [89]
------------------------------
Mark, just in terms of seasonality for the business here, so I know you guys mentioned last year that things were continuing to shift through the second half of the year when Keith Block was in town at Boston, he talked --
------------------------------
Mark Hawkins, Salesforce.com - CFO [90]
------------------------------
Yes.
------------------------------
Unidentified Audience Member [91]
------------------------------
-- quite a bit about the large-scale business and a pretty big pipeline there. Is there going to be a bigger shift this year for any reasons? Is there something you expect to just constantly shift over time or I know last Q4 was like 40% [rescue], right?
------------------------------
Mark Hawkins, Salesforce.com - CFO [92]
------------------------------
Yes. One of the things we've seen doing -- we try to just continue to be (inaudible - microphone inaccessible) to everybody and during the (inaudible - microphone inaccessible), we can almost see that it's almost like a symmetrical pattern where we call it compounding.
And what happens and it's kind of, as you think about it, we have Q4 is our biggest book of business or new book of business as well as renewals. And so what happens is if you have a business and you're going to, let's say, Unify 10 or 15 contracts that have all started in different areas in the company and you want to go with the Salesforce and you're going to review that, Q4 would be logical times since that's been the cycle that the company has been on just historically in terms of how customers have been operating with the biggest quarter for renewals and (inaudible - microphone inaccessible).
So my point here is we see this ever compounding effect that's been happening for -- we traced it for what eight years or --
------------------------------
Unidentified Audience Member [93]
------------------------------
Yes.
------------------------------
Mark Hawkins, Salesforce.com - CFO [94]
------------------------------
And, [Warren], you can just see the mathematical effect of how that's happening. And the reason that's so important to understand, it's the invoicing is what we're talking about. That's when they do the invoices for the renewal of this book of business. The reason it's so important is if you have seasonality plus you have compounding, you got to [tape off] into effect. And when you do that, you can see a better profile and then place a quite predicted profile of how the business is evolving. That's what I would say. And you guys feel free to chip in if you have an (inaudible - microphone inaccessible) comment.
------------------------------
Unidentified Audience Member [95]
------------------------------
Can I follow-up on [Johann]'s question earlier? You mentioned you do a road show for 606, which seems a little odd given your business didn't change that much, but then you bring up this point of invoice dynamic. Is there any -- does it make sense to try to change that? And when you think about the incentives, the sales reps and to collect more upfront, what are your thoughts on strategically if that's the right approach?
------------------------------
Mark Hawkins, Salesforce.com - CFO [96]
------------------------------
Yes, I am very comfortable with the approach that we have today, very comfortable of that. And so noted is on that whatsoever.
I think the -- just to be clear on that 606 standpoint, the reason we talked about is that if it's helpful is to make sure that the market understands all the intricacies of 606. We're committing to err on the side of transparency and really strong communication because I think it's important for people to understand that.
By the way, people all over the world who are trying to understand cloud companies ask us our view on 606 like not stop, right? And so we think it's just a great opportunity to share but you should think of this as just simply making sure anybody that wants to understand 606 as it relates to our company or just to try to understand 606 for the fourth biggest software company in the world is a pure play cloud company. I'm happy to share that.
And you guys can be the judge of how (inaudible) communications of all the other companies that are doing that, but we want to have a very high standard of just doing a good job of sharing what we have.
------------------------------
Unidentified Audience Member [97]
------------------------------
I think just one thing I want to make sure that there's no confusion on is when you're mentioning around the invoicing and seasonality, there's nothing to do with sort of multi-year invoicing for now, right? The standard contracts for annual invoicing --
------------------------------
Mark Hawkins, Salesforce.com - CFO [98]
------------------------------
Exactly.
------------------------------
Unidentified Audience Member [99]
------------------------------
-- and there's no (inaudible) incent people to do annual. That's just a policy.
------------------------------
Mark Hawkins, Salesforce.com - CFO [100]
------------------------------
Exactly.
------------------------------
Unidentified Audience Member [101]
------------------------------
So it is --
------------------------------
Mark Hawkins, Salesforce.com - CFO [102]
------------------------------
Yes, you're exactly right.
------------------------------
Unidentified Audience Member [103]
------------------------------
-- (inaudible - microphone inaccessible) enterprise or deal that would require an MSA.
------------------------------
Mark Hawkins, Salesforce.com - CFO [104]
------------------------------
You're exactly right.
------------------------------
Unidentified Audience Member [105]
------------------------------
Good. How about the Marketing Cloud? Pretty much they're over a year just like you're seeing in that market and how you're familiar with the position.
------------------------------
Mark Hawkins, Salesforce.com - CFO [106]
------------------------------
I can talk about that. Sure. So the first thing that I like about it is IDC is declaring that we're number one in that market, which was kind of neat. A lot of good companies and a lot going on in that respect, but you take exact target and the capabilities we put together there. You put crux together with that from that standpoint. You put our commercial studios and things that are happening there of great capability. And yet we have lots of room to grow, and the market has been very fractionalized because there's a lot of opportunity in that market.
So we like our positioning, we like the fact that we took share. We like the fact that where we show up in the leadership quadrant for Gartner. And yet we're very, very focused on what more can we do for our customers. So that's my view on that. We like our position.
------------------------------
Unidentified Audience Member [107]
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The (inaudible - microphone inaccessible) --
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Mark Hawkins, Salesforce.com - CFO [108]
------------------------------
Sorry, could you --
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Unidentified Audience Member [109]
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The (inaudible - microphone inaccessible) position of TV advertising (inaudible - microphone inaccessible).
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Mark Hawkins, Salesforce.com - CFO [110]
------------------------------
The (inaudible) of TV advertising is out of [value]. That's a question I haven't -- but it's a great question.
------------------------------
Unidentified Participant [111]
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(Inaudible - microphone inaccessible)
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Andrew Zilli, Salesforce.com - Director, IR [112]
------------------------------
Yes. I mean I don't have much talk about it at least on the Marketing Cloud team right now. Who knows? But I mean I think --
------------------------------
Mark Hawkins, Salesforce.com - CFO [113]
------------------------------
Yes.
------------------------------
Andrew Zilli, Salesforce.com - Director, IR [114]
------------------------------
-- it's a little bit of -- the Marketing Cloud, the marketing world is always an interesting one. It's always changing, right? I mean, every day there's some new companies doing something a little bit differently to try and get your attention wherever you are. I think we're really still focused on the true campaigns, and emails and text messages in that aspect of things. And obviously, a couple of (inaudible - microphone inaccessible) give us really good presence in social advertising.
(Inaudible - microphone inaccessible) made that jump into the TV world. I don't know that that's something we really focus on anywhere in your term at least, but that really changes things. I mean, it's about supreme -- that and always people cutting the cord and not really watching TV anyway. So I think probably nothing anywhere near-term at least for that.
------------------------------
Mark Hawkins, Salesforce.com - CFO [115]
------------------------------
The only thing, I guess, I was thinking about the question and further as Zilli was giving the answer. But I think the one thing about digitization that is not so much [secured] to TV that's because it's a pretty dialogue for you as you're talking with other companies and then (inaudible - microphone inaccessible).
The digital transformation more broadly speaking obviously is helping us a lot. And the thing that's becoming really clear and it makes a ton of sense when you think about it. When people talk about digital transformation is interesting, where do you start if you're a CEO?
Think about a company. You started the back office, probably not. Where do you start with digital transformation? What we see is that they start with CRM and that definitely is affecting our business, and that is definitely a good guide for us.
Then you can talk to SIs, which, by the way, all are using the top SIs all use our product in addition to workgroups and ask them about that. It might help. And it's a little bit digitization, but not TV-related as much per se. Okay? Other questions, please.
------------------------------
Unidentified Participant [116]
------------------------------
Mark, I know Einstein has announced last year that (inaudible - microphone inaccessible) also released it. I've been at Chicago conference, customer conference, is that something we should think about having impacts on revenue this year? (Inaudible - microphone inaccessible) during that, right? (Inaudible) sometimes it's a (inaudible) financial impacts of that (inaudible).
------------------------------
Mark Hawkins, Salesforce.com - CFO [117]
------------------------------
My view is because -- and thank you for the question. My view is that because it's new, just due to the sheer magnitude and size and scale of our company right now, I don't think about that have any huge impact from that standpoint (inaudible - microphone inaccessible). We are very excited to have it.
The dialogues that we're engaged with, with customers, it'd be great to (inaudible) who's topic is coming up a lot with customers in terms of how they can apply this. But I think from a financial impact, I don't think about that as a big event. (Inaudible - microphone inaccessible).
------------------------------
Mark Hawkins, Salesforce.com - CFO [118]
------------------------------
Other questions? (Inaudible - microphone inaccessible).
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Unidentified Audience Member [119]
------------------------------
Where do you think there was (inaudible - microphone inaccessible) what are customers asking for the (inaudible - microphone inaccessible)?
------------------------------
Mark Hawkins, Salesforce.com - CFO [120]
------------------------------
That's a good question. I guess, it's a really good question because I feel like we're at the beginning of the journey, what I like the most about Einstein and what's out there (inaudible - microphone inaccessible) are these cases that are very easy to understand, auto data capturing for Sales Cloud. Productivity right away, helpful right away, lead scoring for predicted lead scoring, understandable, something we can do right away.
When you think about e-commerce side, some of the things that could happen right away from an A.I. standpoint, a very easy (inaudible - microphone inaccessible). I think the biggest thing that I think about -- and I'm not the product officer so you got to bear with me in terms of the limits of that vision. But I think people realizing this is the beginning of the journey.
What I think people like is we know with Salesforce, three times a year, they're going to get the best of the best of this stuff coming forward for year after year in A.I. And I think these are some of the immediate functionalities, but I welcome these two gentlemen (inaudible - microphone inaccessible).
So I think development-wise I think it's just fully cultivating what's going to be possible in CRM. It's probably what they want the most. And these are the first offerings, and I think that's probably the developmental opportunity.
------------------------------
John Cummings, Salesforce.com - SVP, IR [121]
------------------------------
I would actually say I think we still want to make sure we're getting the -- and working with customers undervalued they're getting from the types of use cases that we're applying on (inaudible - microphone inaccessible) today. So I'm not trying to [punk] the question, but just trying to say that we want to make sure that we got the lead scoring right.
------------------------------
Mark Hawkins, Salesforce.com - CFO [122]
------------------------------
Yes.
------------------------------
John Cummings, Salesforce.com - SVP, IR [123]
------------------------------
We're working on things like the predictive forecasting in sales and so forth. Intelligent call routing (inaudible) go on down plus we want to make sure you're making all that board really well before you (inaudible - microphone inaccessible). Now I want to start getting, I think, the breadth (inaudible - microphone inaccessible). It is across the core product, so I think again about making sure (inaudible - microphone inaccessible) make the best products. Okay.
------------------------------
Mark Hawkins, Salesforce.com - CFO [124]
------------------------------
And maybe to John's point, the thing I like the best is we're in the market. You know what I mean? We have products. We have functionality now in the market. And the way to make it better and better is to get in the market and just keep learning and innovating, and developing, and I think there's nobody that's delivering more (inaudible) in CRM than us and yet it's beginning the journey for us, very much the beginning.
------------------------------
Unidentified Audience Member [125]
------------------------------
And it gets probably 6% (inaudible - microphone inaccessible) perfect answer. But to what percent of your (inaudible - microphone inaccessible) are going towards Einstein and A.I. generally? Are there areas of future improvement (inaudible - microphone inaccessible)?
------------------------------
Mark Hawkins, Salesforce.com - CFO [126]
------------------------------
Sure, sure. We haven't disclosed that, but I would say to you that it's growing. You could see with some of the M&A that we've done, it's obviously important about the M&A side as well as organically from that standpoint, but I don't have a percent I can share with you at this time. But you should think about this as something that's very, very much on our mind and all of our kind of forward-looking development activities, so I think that would be what I would say.
------------------------------
Unidentified Audience Member [127]
------------------------------
(Inaudible - microphone inaccessible) maybe what percentage of your customers have seen that Einstein demo, and if you think about the opportunities like you said, your sales people (inaudible - microphone inaccessible) every customer, and then essentially like, well, it's not a financial driver today. You might get (inaudible - microphone inaccessible) demos its products to your customer base.
------------------------------
Mark Hawkins, Salesforce.com - CFO [128]
------------------------------
Sure. The first thing that goes in my mind when you asked that, which is very good for a question, only this kind of comes back with things that are going through my head. So, for example, we're doing world tours, our Salesforce world tours. You're familiar (inaudible - microphone inaccessible) from Chicago (inaudible - microphone inaccessible) and people having dialogues.
And depending on when the world tour is happening, I mean, Einstein, you're seeing activities and articulation of what's happening from that standpoint. So I don't know if you consider that like a demo or not when somebody gets out and talks through that at which we get a lot of reach both in person and then online.
I don't have a specific percentage, but this is certainly high profile and all of our marketing events that are part of our overall demand generation and customer interaction, so I don't have an exact percent but it's --
------------------------------
John Cummings, Salesforce.com - SVP, IR [129]
------------------------------
We're still focused on enablement on this and really [G.A.] product and say it's part of enablement that we run (inaudible - microphone inaccessible)
------------------------------
Mark Hawkins, Salesforce.com - CFO [130]
------------------------------
Yes.
------------------------------
John Cummings, Salesforce.com - SVP, IR [131]
------------------------------
-- we're running quite a few complimentary licenses [of that]. It's one of those things that what if our customer that gets really comfortable with this and understand the value it's going to drive and they need to see the value so they need to use it, test it, try it --
------------------------------
Mark Hawkins, Salesforce.com - CFO [132]
------------------------------
Yes.
------------------------------
Unidentified Audience Member [133]
------------------------------
-- drive value from it. And so we're continuing to push that into the user base. And stay tuned, I mean, it's very early.
------------------------------
Mark Hawkins, Salesforce.com - CFO [134]
------------------------------
It is early. But I hope that gives you a big (inaudible - microphone inaccessible). We're certainly --
------------------------------
Unidentified Audience Member [135]
------------------------------
I know, John, you had a question on (inaudible - microphone inaccessible).
------------------------------
Mark Hawkins, Salesforce.com - CFO [136]
------------------------------
Good. There's an (inaudible - microphone inaccessible).
------------------------------
Unidentified Audience Member [137]
------------------------------
(Inaudible) about competition (inaudible - microphone inaccessible) that's talks a lot about in terms of service data that an opportunity to (inaudible - microphone inaccessible) option with Microsoft comes up a lot. And then on the ladder with Microsoft, there have been engagement there and now feels like that there's maybe not engaged and maybe that's impacted some of the kind of ecosystem and partnering (inaudible - microphone inaccessible) closer with Microsoft and just talk generally about, you know.
------------------------------
Mark Hawkins, Salesforce.com - CFO [138]
------------------------------
Sure, glad to do so. Well, the thing I will kind of point back to when I think about these -- I just look at third party data like the IDC data that just came out. Let's just talk about Microsoft quickly.
If you've seen that data, if you haven't, you probably want to see that. I think their market share, it is what it is. Let them speak to it. But we gain more market share in CRM in aggregate are incremental than their entire market share. So I think that there's certainly in accounts, we certainly compete with them. They're certainly a fine company. But in terms of who is the leader at CRM, if we just reference that, our incremental shares last year was greater than the entire share and their share were down slightly.
If you look at Microsoft standpoint -- and we've worked with them -- obviously, we collaborate where it helps our customers and their (inaudible - microphone inaccessible).
If I look at ServiceNow, ServiceNow certainly is really [fixed] up in the marketplace as well. I look at market share in our service space, they don't show up. I don't (inaudible - microphone inaccessible). I think there's probably (inaudible - microphone inaccessible) firms or competition to people whether any accounts and frequency of that, frequency of that (inaudible - microphone inaccessible).
I think it's really helpful if we can see objective data as opposed to positioning. That's what I would say. But certainly we respect these companies we compete and they show up at different accounts at times.
------------------------------
Andrew Zilli, Salesforce.com - Director, IR [139]
------------------------------
I know you guys have another meeting I think after this, so I think we probably have time for one.
------------------------------
Mark Hawkins, Salesforce.com - CFO [140]
------------------------------
Okay.
------------------------------
Unidentified Audience Member [141]
------------------------------
(Inaudible - microphone inaccessible) question (inaudible - microphone inaccessible) down 67% the last two years (inaudible - microphone inaccessible) shareholder returns (inaudible - microphone inaccessible), [back] to the senior status now, I believe comp on [CSR] in some form of fashion.
------------------------------
Mark Hawkins, Salesforce.com - CFO [142]
------------------------------
Right.
------------------------------
Unidentified Audience Member [143]
------------------------------
I have two questions, how has that impacted the senior executive more level discussions? And two, what does that mean for the next two years that will be different versus the last two years?
------------------------------
Mark Hawkins, Salesforce.com - CFO [144]
------------------------------
Sure. And I would say a couple of things here. I'm sure everybody gets this, but just to make sure we're level-setting everybody, the [comp] at a CEO is a function of what the Comp Committee of the board of directors decides. And obviously, what that -- again I think we all understand that.
The second thing I think everybody understands, I just want to make sure that we level-set everybody as part of the ongoing engagement with the shareholders. We always take input on what would you like to see as the metrics, what is the feedback, say on pay, things of that nature which (inaudible - microphone inaccessible) familiar with. And as a result of say on pay activities and just looking at the data relative to the feedback and the benchmarking, that cause the Comp Committee to make their decision as they did.
And, of course, at the higher CEO [mass] level, I think it's really positive to have that the performance shares like do things like CSR personally. I'm an advocate of that. And so I think these are all evidence of good governance.
And, John, you've been deeply in this, I've been deeply in this. I just think (inaudible - microphone inaccessible). We have an amazing CEO who's very much onboard with all this. And obviously (inaudible) has the leadership mentality as well, so I think these are good dynamics. I think it's all about constantly aligning yourself to the shareholder, which I am a huge advocate for. And I think this is a good thing because I think aligning is positive.
In terms of what it does differently, obviously, I think there has always been an aspiration to support the shareholder and take a long view of really creating something that is huge or shareholders long-term. And I think that gets us back to $105 billion TAM, us closing in and on it with market share, us having a very unique set-up. And absolutely, the leader in a market space that Gartner says is the biggest part of enterprise software in the world and the fastest growing in 2020.
Nobody is better positioned. We're taking share and we need to generate the economics that help reward our shareholder while we go really build a long-term franchise to take us to the next level is my take. But I love to hear you guys commentary on that.
------------------------------
Unidentified Company Representative [145]
------------------------------
Articulated it pretty well --
------------------------------
Mark Hawkins, Salesforce.com - CFO [146]
------------------------------
Yes.
------------------------------
Unidentified Company Representative [147]
------------------------------
-- I mean at the end of the day, it's just about conversations with the shareholders (inaudible) and having those conversations and (inaudible - microphone inaccessible) in the feedback and (inaudible - microphone inaccessible). I think you know that we've been out having these conversations. We do that in sort of the off-season, if you will, after our annual meetings. And we'll continue to do that, so it's really defined, in many respects, (inaudible - microphone inaccessible) more dialogue.
------------------------------
Mark Hawkins, Salesforce.com - CFO [148]
------------------------------
Yes. But I hope that's a (inaudible).
------------------------------
Unidentified Company Representative [149]
------------------------------
Ross, how are we doing?
------------------------------
Ross MacMillan, RBC Capital Markets - Analyst [150]
------------------------------
(Inaudible) --
------------------------------
Mark Hawkins, Salesforce.com - CFO [151]
------------------------------
Okay.
------------------------------
Ross MacMillan, RBC Capital Markets - Analyst [152]
------------------------------
-- one final question.
------------------------------
Mark Hawkins, Salesforce.com - CFO [153]
------------------------------
(Inaudible - microphone inaccessible) just one more.
------------------------------
Unidentified Audience Member [154]
------------------------------
Given your performance toward like the lower end of your margin framework given your revenue growth (inaudible - microphone inaccessible) range that we've been out, when you (inaudible - microphone inaccessible) write-off for Demandware, I mean, and the other areas [cost] that went into that, is there any reason to think that shouldn't (inaudible) under that range?
------------------------------
Mark Hawkins, Salesforce.com - CFO [155]
------------------------------
I think you're getting into the -- first of all, you're getting into the guidance for next year, it sounds like, from that standpoint. We're going to address that for sure when we do the -- that that number will come back and talk exactly about the operating margin improvement that we'll do (inaudible - microphone inaccessible) that can help.
But I take your point completely. And your point that we're absorbing not insignificant cost right now while delivering 150 basis points, I think is also an accurate thing. But beyond that, that's what I don't want to do is get ahead of myself, what you should know is that we're committed to that framework. That's something that I sort of standby today. Okay.
------------------------------
Unidentified Company Representative [156]
------------------------------
Guys, again, I want to close by thanking you (inaudible - microphone inaccessible).
------------------------------
Unidentified Participant [157]
------------------------------
Thank you.
(Multiple Speakers)
------------------------------
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