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Home » salesforce.com’s (CRM) CEO Marc Benioff on Q2 2015 Results – Earnings Call Transcript

salesforce.com’s (CRM) CEO Marc Benioff on Q2 2015 Results – Earnings Call Transcript

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salesforce.com, inc. (NYSE:CRM)

Q2 2015 Earnings Conference Call

August 21, 2014 05:00 PM ET

Executives

John Cummings – Head, IR

Marc Benioff – CEO

Keith Block – President

Graham Smith – EVP

Mark Hawkins – CFO

Analysts

Heather Bellini – Goldman Sachs

Matt Hedberg – RBC Capital Markets

Karl Keirstead – Deutsche Bank

Jason Maynard – Wells Fargo

Brent Thill – UBS

Ed Maguire – CLSA

Kirk Materne – Evercore

Operator

Good evening. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Salesforce Fiscal Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to John Cummings, Head of Investor Relations. Sir, you may begin your conference.

John Cummings – Head, IR

Thanks so much, Jason and good afternoon everyone and thanks for joining us for our fiscal second quarter 2015 results conference call. Our second quarter results press release, SEC filings and a replay of today’s call can be found on our new IR website, www.salesforce.com/investor. We’ll also post the highlights of today’s call on Twitter at the handle @salesforce_IR.

With me on the call today, are Marc Benioff, Chief Executive Officer, Keith Block, President and Vice Chairman, Graham Smith, Executive Vice President and Mark Hawkins, Chief Financial Officer. The team will share a few prepared remarks and then we’ll turn the call over for questions. As a reminder our commentary today will primarily be in the non-GAAP terms. Reconciliations between our GAAP and non-GAAP results and guidance can be found in our earnings release issued about an hour ago.

During today’s call, we may offer additional metrics to provide further insight into our business or results. This detail may or may not be provided in the future. We may also reference certain unreleased services or features not yet available. We cannot guarantee the timing or availability of these services or features. So we recommend customers listening today make purchase decisions based on services and features currently available.

The purpose of the call today is to provide you with information regarding our fiscal second quarter results. Some of our comments may contain forward-looking statements, which are subject to risks, uncertainties and assumptions and should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual Company results could differ materially from these forward-looking statements.

A description of risks, uncertainties, and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-Q, particularly under the heading, Risk Factors.

So with that, let me turn the call over to Marc.

Marc Benioff – CEO

Okay, hey thanks so much John, I really appreciate it. And first, let me tell you I am so pleased to welcome Mark Hawkins, our new CFO to our team and he is on the call with us today. And once again, our enduring thanks to Graham Smith for a phenomenal six years as CFO and as you know Graham is still with us as a full time advisor to me and Mark and he is doing that until the end of March and Graham is also participating on the call today; as well as Keith Block our Vice Chairman and President and we’re really excited to tell you all the amazing things going on at salesforce.com.

First I want to tell you. I spent almost a third of the quarter leaving in Europe and it was an amazing experience. I know many of you followed my trails on social media. I was — we did very, very large customer programs in Paris, thousands of our customers there, as well as in Munich. We opened our new Paris Headquarters. We opened our new Salesforce tower in London and it was just an incredible time. We profiled our work with amazing companies in Europe, including a huge deal that we launch with Philips, where they are beginning a software company and building their next generation health applications right on the Salesforce platform and I was thrilled to have incredible press conference with the Philips CEO while I was in Paris. And then we profiled some amazing work that we’re doing for Louis Vuitton where we’ve rolled out a global clienteling net really profiling one of France’s most important companies, LVMH, and our incredible work for them.

And then moved on to Germany and we did the same thing. It was an incredible announcement and launch of what we’re doing with Roche and you may have seen some incredible demonstrations of technology at Roche’s next generation equipment built right onto our Service Cloud. It was just awesome. And again a multi thousand person program that we executed in Munich as well. It was really incredible.

Look first of all let me just thank all of our European customers and partners and employees that gave me unbelievable support while I was there and I really want to thank everybody for that. And now I just want to you know that Salesforce has become the absolute number CRM platform in the Europe and of course worldwide and also the fastest growing top 10 software company in the world. As you saw, we’ve got accelerating revenue growth to 38% growth in the quarter.

We’ve exceeded the $5 billion revenue run rate, the first enterprise cloud company to do that. Pretty incredible and I don’t think there’s ever been — I don’t think there’s ever been a software company that has grown at 38% at the $5 billion revenue line and we are thrilled to be that company and we’ve got a huge top line strategy. We also had just phenomenal execution of our ExactTarget acquisition. You probably saw that we bought ExactTarget a year ago. We’ve deeply integrated that into our enterprise and it is just incredible what has happened with them.

We’re also honored that Forbes yesterday named Salesforce the world’s most innovative company for the fourth year in row and that is just a testament to our relentless focus on customer success, delivering a truly innovative customer platform and honestly we’re just in shock on that recognition. We couldn’t believe it when we were the Forbes most innovative company in the world and now we’re the fourth. We’ve done it four years in a row. That’s just awesome and of course that Fortune has named us one of best places to work, top 10 recognition and we’re going for number one on that as well.

Look, our exceptional second record financial results just speak for themselves. Revenue growth accelerated 38% from a year ago to more than 1.3 billion. Less than a year after we surpassed our $4 billion revenue run rate, we’re now more than $5 billion. Deferred revenue grew by 31%. That really exceeded what we thought we could do and we’ve got dollar value of booked business on and off the balance sheet, grew 32% from last year at $7.4 billion, awesome. And now you can really see that clear trajectory, the $10 billion in revenue which has been our dream and when we start to get a look at our revenue, as well as our deferred business, you can start to connect the dots and see exactly how we’re going to get there and the speed and rate and growth and we’re super excited about our next big goal now after $5 billion which is going to be get to $10 billion.

Operating cash flow rose to $246 million, an increase of 34% year-over-year. That cash flow has been awesome this year, more than $719 million for the year so far and we are now guiding to more than 1.1 billion in operating cash flow for this year, which is really an incredible achievement for our Company and really I think speaks to the power and quality of the business model that we have put together. Not only we’ve got this awesome top line growth but we have phenomenal cash flow as well.

And while we delivered world class growth, we also our grew our operating margin, something we’re deeply committed to and we’re able to deliver non-GAAP EPS of $0.13, which also exceeded our guidance and we’re going to continue to grow and exceed and deliver these awesome EPS results as we head towards that $10 billion number.

Given our strong financial results and pipeline in new business, we’re raising our full fiscal 2015 guidance by $30 million and we’re also quite committed to delivering 125 to 150 basis points of operating margin improvement this year as well. I think these two things just demonstrate Salesforce has never been stronger, has never grown faster and it’s just getting to an unbelievably new level.

And since we initiated fiscal year ’15 guidance November last year, we’ve now raised our guidance by $170 million, which is roughly the same amount of revenue that we delivered in our first year as a publically traded company a decade ago. Of course I think we’ve now delivered more than 1700% return for our investors since we went public and we now are one of the top 10 best performing equities over the last decade.

We had $176 million in revenue in 2005 and we thought that was absolutely great as I mentioned, but it turned out we underestimated what we could do. We underestimated what we could do in a decade and that always seems to be how it is in our industry. We’re always over estimating what we can do in the year and underestimating we can do in a decade and here it is, Salesforce did that itself.

Well, it’s amazing. I couldn’t be more proud of our team has accomplished and we’re continuing our growth trajectory, connecting our customers with their customers in new ways and you can see Salesforce just continuing to execute in its sales and service and marketing and platform businesses and now for the eighth year in row the Sales Cloud was just announced as the leader in Gartner’s Magic Quadrant for Salesforce automation.

Last month IDC named Service Cloud the number one in customer service and support and in April we announced Service Cloud SOS which delivers instant and personalized customer service within any mobile app. And so every company, every app, every customer can have their own mayday button right to their customer service and support center. Amazon has shown us an incredible vision of customer service. Every customer wants to do that and we’re making that possible with our Service Cloud, now with the mayday button, so every customer can have that incredible capability in their own apps.

Exact Salesforce marketing cloud was just rated as the top digit marketing solution by Sera magazine and last month we launched a major update to Salesforce Journey Builder, which allows the planning and personalizing or optimizing the one-to-one customer interactions across multiple channels and you’re going to see an unbelievable overview of the new version of Journey Builder, which is coming up at our connections conference and if you don’t know about connections let me tell you, you’re not going to want to miss that. It’s in Indianapolis. It’s going to be happening September 23rd to the 25th and we’ve got a phenomenal group of people coming in, incredible CMOs, like Beth Comstock of General Electric and we even have Will-I-Am coming in to do some incredible entertainment for us and we’re going to be showing the future of marketing September 23rd and 25th in Indianapolis with Connections.

Look, at the core of clouds and customer platform is Salesforce1, something we announced last year at Dreamforce and it’s the world’s number one platform for developing these mobile apps. I mean we’re just seeing incredible growth in our customer base with our ISVs. You can build and deploy an app on Android, on iPhone, on iPad, on any tablet. It’s just awesome and companies are running their entire business right from their phone. I saw that everywhere I was in Europe and Salesforce1 is really the only solution that I’ve seen that can deliver this world-class enterprise capability in the mobile environment and our customers just love it.

We have the largest enterprise cloud ecosystem, more than 1.7 million developers using our leading edge development tools and they are moving to mobile, using Salesforce1, these new open APIs, this incredible infrastructure that we’ve delivered. And also I want to let you know that that app exchange that I just mentioned now has more than 2,000 apps available. A lot of them already moved over to Salesforce1 and both apps have been now installed more than 2.5 million times by our Enterprise customers, which is unprecedented in the Enterprise software market.

We announced a strategic platform and partnership with Microsoft this quarter. As you know we have an incredible situation with Microsoft, who has become I believe our largest customer of our marketing cloud. They’ve built an incredible new product that they have, called Office 365 right onto the marketing cloud. They use Journey Builder to guide their customers through their journeys and it’s brought Microsoft and Salesforce closer together. We’ve got more involved with Sequel Server than ever before and we’re looking to unite our products more closely than ever before and you’re going to see some incredible things at Dreamforce with Salesforce and Microsoft Office and the new version of Salesforce1, which is coming to Dreamforce and I’ll tell you, it’s a great partnership for our customers. They could not be more excited.

We also launched our new Salesforce Wear initiative, because customers are buying wearables at rates like we have never seen and they want to those wearables deeply integrated with our enterprise infrastructures and we are giving that to them and we are the enterprise leader right now in the wearables market place. Earlier this month, we also completed our acquisition of RelateIQ, an incredible company, which is going to greatly accelerate bringing advanced machine intelligent and data science right into our core platforms, as well as trading an incredible new application as part our family of products, and for those you who haven’t tried RelateIQ, I use it on regular basis, I’d recommend you take a look RelateIQ, you’ll be blown away that the levels of productivity that it brings every user.

And of course nothing is more indicative of the value of Salesforce than the level of customer usage on our platforms and I’m thrilled to announce that last month we delivered our first $2 billion transaction day, an incredible milestone for the entire cloud computing industry. More exciting, our service delivered more than 130 billion transaction this quarter, up 52% for a year ago and you saw exact target delivery and even more transactions on top of that.

It’s been a remarkable quarter for Salesforce. But before I close, I want to remind you that we’re just one month away from the marketing event of the year, Connections and September 23rd to 25th in Indianapolis, I mentioned that, it’s just going to be awesome. You’re not going to want to miss it. I’m going to be there doing the keynote and you’re going to see the future of marketing itself unfold in Indianapolis.

And then I’ll tell you, we’re not that far away. So get ready for the biggest technology event in the history of technology and that is Dreamforce October 13th to the 16th in San Francisco. You’re going to see the future of cloud, social, mobile, the future of the connected world. You’re going to see businesses running — you’re going to see businesses running their entire business right from their phone. You’re going to see people creating these amazing customer journeys like Microsoft is doing with Office 365 and you’re going to see incredible new capabilities from Salesforce and we’re going be also launching a major new product line there, as we like to call it a new cloud. So we’re going to have the biggest and most exciting and most thrilling Dreamforce ever.

You’re going to hear from global thought leaders. Klaus Schwab, the Head of the World Economic Forum has agreed to come and we’re going to be profiling our work with the World Economic Forum and how they use Salesforce to run their operations. Former Secretary of State, Hillary Clinton has agreed to come and she is going to — she is also going to be in conversation at Dreamforce with Klaus Schwab. Former Vice President, Al Gore, is going to be there talking about the environment. We’ve got Reid Hoffman coming and whole of PayPal Mafia actually, which is Reid Hoffman, and Jeremy Stoppelman and Max Levchin, all coming to do in innovation panels and discussions on how to create startups and create more value in our industry market and Dreve Send [ph], of course an incredible venture capitalist and a pundit in our industry going to be there to talk about his work and where he feels the world going. Steve Case one the original pioneers in the entire tech industry is going to be there talking about his work and start ups and then you’re going to have motivational speakers like Tony Robbins is going to be there running a huge program for people, showing them how to take their own capabilities and skills to new levels.

Neil Young, rock and roll legend is going to be there, launching a major new product, Pono; and neuroscience Adam Gazzaley is going to be there as well talking about his amazing work with Oculus Rift and how he has created systems that let us fly through our own brains. It’s going to be awesome and perhaps I’m most excited about that my old friend Tony Prop from HP, an amazing Microsoft Executive and I will be in conversation on the future of Microsoft Office and how Salesforce and Microsoft are more tightly integrated than ever before. Of course we can’t wait for the talented Bruno Mars, who headlined in Super Bowl, who is going to be headlining a huge outdoor concert at Civic Center. And you’re not going to believe everything that’s going on.

But let me just tell you one thing, if you plan to come to Dreamforce, you also better plan to bring a can of food with you as well, because we’re going to run the world’s largest food drive of all time and no one is coming to Dreamforce if they’re not bringing food with them and things to help others and we’re going to run the biggest food drive, we’re going to raise huge millions of dollars for philanthropy and we’re going to not only create the future, but we’re also going to create a better future for all of us. I’m looking forward to seeing all of these, Connections and Dreamforce. It’s going to be amazing.

And now I will the hand the call over to our Vice Chairman and President, Keith Block. Keith.

Keith Block – President

Thanks, Mark. Q2 was absolutely an outstanding quarter. And we continue to acquire and expand meaningful strategic relationships with enterprises of all sizes, in every region across every segment and major industry. That being said, we had significant double digit growth and a number of large deals in the quarter, which was terrific and a lot of them were net new logos, which is really an indication of the type of success we’re seeing in our enterprise growth strategy.

I am incredible proud of the entire distribution team and what we’ve achieved together in a very short period of time. And it’s pretty clear that customers are choosing Salesforce as the trusted advisor for the customer platform. We’re having a huge impact on the marketplace delivering solutions and driving customer success. So we’re very, very excited.

I’d like to tell you about one of our larger transactions in the quarter, which is 3M, a leading manufacturer with a long history of global innovation. This is a great transaction and really is an example of the energy and the success that our team have been delivering in the marketplace.

Salesforce will now be powering 3M global transformation with Sales Cloud and Service Cloud as their global customer platform across 27,000 employees. Salesforce will be the social and mobile front end to 3M’s SAP back office and it will provide their sales, service and marketing teams with a 360 degree view of the customers. We’re very, very excited about this. This is a terrific example of one of many eight figure transactions in the quarter and a great example of how customers are returning to Salesforce to unlock the value from their legacy systems.

We also closed another deal with Safeway. They selected the Salesforce1 platform to build next generation applications that will drive greater productivity across their store operations. Store managers and associates will be able to complete all their tasks right from their mobile phones, very, very exciting and leveraging Salesforce communities, Safeway will bring all their stores and associates into a single communications platform, again a very, very powerful story that we’re very, very excited about.

Another large deal that we closed in the quarter is with Fastweb, which is the leading Telco provider in Italy and also a subsidiary of Swisscom. Fastweb selected the Sales Cloud and the Service Cloud to get a holistic view of their subscribers, whether they’re in the store, online or over the phone or with an agent. In the Salesforce community Fastweb partners will soon be able to connect directly with agents to drive a whole new level of customer service. This is really a great example of helping the customer to transform the business model and this what we’re all about, transforming our customers business models.

We’re also very pleased to have closed the landmark transaction with a large global manufacturer based in Europe and one of SAPs largest customers, where we will replacing tens of thousands of Microsoft users. We also signed on newer expanded relationships in the second quarter with some great brands, Etna, AIG, Burner, Caterpillar, Cathay Pacific, General Motors, Konica Minolta, [indiscernible] Bank, PG&E, Procter & Gamble, Roche, Singapore Airlines, USAA and Yahoo! and many, many more. These are all excellent, excellent global brands in a variety of different industries and each one of this companies are looking for us to provide them with deep industry expertise.

So whether it’s communications or financial services or healthcare or manufacturing, retail or the public sector, we are delivering the next generation customer platform and help our customer transform their business models for the future. And as you can see from these incredible global brands, we’re seeing tremendous levels of success internationally, as Europe and Asia Pac both deliver strong growth in the second quarter.

We’re just beginning to scratch the surface on our international growth potential. That’s why we’re aggressively investing in our international market by increasing our distribution capacity, building new datacenters that we have announced and expanding our very important partner ecosystem.

And speaking of partners we continue to see tremendous energy and enthusiasm in the ecosystem. The number of ISVs continue to scale. Our systems integrators continue to expand their Salesforce practices and all of this is accelerating our momentum, our reach and clearly our success in the marketplace. So I want to thank the entire organization for their outstanding execution in the second quarter.

And with that I’ll turn the call over to Graham.

Graham Smith – EVP

Okay. Thanks Keith. As you’ve just heard, we have a really strong second quarter. It’s great to be handing the CFO role over to Mark with the company performing at such a high level. As many of you already know, Mark is an exceptional finance executive and I am fortunate to be transitioning the role to somebody who I’ve known personally for several years, who I admire, and who is really going to be a great fit with Salesforce.

Mark understands the challenges of growing an organization at scale. He was with HP on its journey from $3 billion in revenue to more than 50 billion and took Dell [ph] from $25 billion to more than $55 billion. I’m confident Mark will be instrumental in helping the Company scale to $10 billion and beyond. As you know, I’ll be here until March as an advisor to assure a seamless transition. I’ll be on hand to answer any questions this afternoon. Before I turn the call over to our new CFO, I’d like to thank all of you on the phone for your support during my time at Salesforce.

And with that, let me pass it to Mark, who will take you through the financial details for the quarter.

Mark Hawkins – CFO

Thanks Graham. I’m excited to be here and build upon the foundation of innovation and customer success that has made Salesforce one of the truly great software companies. I’ve been in the industry for three decades and in the last 15 years I’ve watched Salesforce lead the movement to cloud social mobile and when I think about Salesforce, I think about an absolute leader and pioneer and I am delighted to be here and to help guide the Company through our next phase of growth.

As CFO, I’m going to be focused on three things, driving our strong top line growth while delivering on our commitment to improving operating margins. Number two is ensuring the Company’s infrastructure and operations continue to scale as we grow. And number three is working closely with Graham to insure a smooth transition for the entire Salesforce team.

With that, let me take you through the financial highlights of our second quarter. We ended the quarter with revenue, deferred revenue, cash flow and non-GAAP EPS, all growing above 30% year-over-year. During the quarter we also announced the acquisition of RelateIQ, we reached a one year anniversary of the acquisition of ExactTarget and showed improvement in our non-GAAP operating margins year-over-year. In terms of Q2, revenue was $1.3 billion up 38% over the last year. Now excluding an FX benefit of approximately $9 million, revenue was up 37% and the non-GAAP EPS for the quarter was $0.13.

On a regional basis, Americas grew 39%. EMEA grew 42% in dollars and 36% in constant currency, sustaining a long trend of constant currency growth above 30% and Asia-Pacific grew 25% in dollars and 27% in constant currency continuing the acceleration that we’ve seen over the last few quarters. Looking at the second quarter revenue by cloud, Sales Cloud were $610 million, Service Cloud was $319 million, Salesforce1 platform and other was $181 million and ExactTarget marketing cloud was $122 million. Now second quarter dollar attrition, excluding ExactTarget remains 97%.

And with that now let’s turn to margins. Our Q2 gross margin was 79.3%. That was down 140 basis points from last year. The decrease in our gross margin is principally related to our acquisition of ExactTarget late in Q2 of last year, which by the way, prior to acquisition had a gross margin in the mid-60% range. Now going forward, we will continue to seek operational efficiencies from the integration to positively impact our margins. Some of the ideas we’re working on include driving benefits from centralizing procurement, leveraging share infrastructure and increasing the share of projects done by our professional services partners.

Our second quarter non-GAAP operating margin was 11%, up 79 basis points from Q2 last year and up 126 basis points sequentially. From a headcount perspective we had another great quarter of organic hiring in Q2 adding more than 900 employees, bringing our total headcount to more than 15,000. Turning to cash flow, we delivered a strong operating cash flow of $246 million, up 34% over the last year and we now expect our full year operating cash flow growth of 26% to 27%.

CapEx was $72 million in the second quarter, down 30% over last year. CapEx as a percent of revenue was approximately 5%, down from 11% in Q2 of last year. For the full year we continue to expect CapEx as a percent of revenue to be in the range of 5% to 7%. Free cash flow which we define as operating cash flow less CapEx was approximately $174 million up, 116% from last year.

A couple of notes on the balance sheet. We ended the quarter with approximately $1.7 billion in cash and marketable securities. Deferred revenue ended the quarter approximately $2.4 billion, up 31% over the last year. We faced a slight FX headwind to deferred revenue in the second quarter of approximately $1 million on a year-over-year basis and a headwind of approximately $14 million sequentially. In the second quarter 71% of the value of all subscriptions and support related invoices, including ExactTarget were issued with annual terms. This compares to approximately 67% in Q2 of last year. Unbilled deferred revenue or revenue that is contracted but not yet invoiced and is off the balance sheet ended quarter at approximately $5 billion, an increase of 32% over the last year.

Turning to guidance, as Mark mentioned, we’re once again raising our full year 2015 revenue guidance by $30 million at the high end of the range to $5.34 billion to $5.37 billion, for a year-over-year growth of 31% to 32%. Since we first established our fiscal 2015 revenue guidance nine months ago, we raised our full year outlook by $170 million.

We’re also raising our full year non-GAAP EPS guidance by $0.01 to $0.50 to $0.52 and we remain on track to increase our full year, our non-GAAP operating margin by 125 to 150 basis points. For the third quarter we anticipate revenue in the range of $1.365 billion to $1.37 billion, representing year-over-year growth of approximately 27%, as we pass the first anniversary of the ExactTarget acquisition. We expect non-GAAP EPS in a range of $0.12 to $0.13, which includes the cost of Dreamforce and we expect billed deferred revenue in the third quarter to increase approximately 30% year-over-year. All the underlying assumptions of our GAAP and non-GAAP guidance and a complete GAAP to non-GAAP reconciliation can be found in our earnings press release issued today.

At the close, I would like personally thank all of our 1,500 employees for their hard work and dedication in achieving these absolutely terrific results. I’m excited to be the part of the Company’s journey to $10 billion in revenue and well beyond and I look forward to working with all of you and seeing you at one of our upcoming events, including Connections and Dreamforce.

And with that, I would like to open the call for questions. Operator?

Question-and-Answer Session

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