Salesforce.com, Inc. (NYSE:CRM)
Credit Suisse 2013 Annual Technology Conference Call
December 3, 2013 12:30 p.m. ET
Graham Smith – Chief Financial Officer
All right. I think we might as well just get started, as people start funneling in here. Very excited to have Saleforce.com come in, and obviously, we've got the man here. We've got Graham Smith, CFO at Salesforce.com. Graham, thank you for coming down again. Like I was saying earlier, the fact that executives like you coming down is what makes the conference so special. So, thank you for taking the time. Let’s do a quick, I guess setting the table here for everyone, just in case they missed the last quarter, which was – I forgot what the adjective is, it was phenomenal, awesome. I lost track of what additive was always associated with it, they were multiple, but maybe just review the quarter, I mean you had strength across multiple geographies, multiple product lines. I guess how would you categorize that and then sort of as you think about your guidance that you gave too?
I think we had a strong third quarter, I think if you look at business segments, we have -- we think about business broadly in three segments; enterprise, mid-market, and small business, and we had good execution across all of those segments. There wasn’t any particular standout, it was good across the board. From a geographic point of view, Americas and Europe continued to do really well, reported constant currency revenue growth solidly in the 30% plus range. The area we have a few challenges right now is in the Asia-PAC that is growing a little more slowly, it was around 17% I think in Q3. Asia-PAC, I think of it broadly is largely driven by Japan and Australia, those are the two big countries in that region that drive the number, and I think we’ve seen good execution in the SMB market there, but in enterprise it’s been inconsistent, and particularly in Japan, it’s been less stellar than we would typically like or expect, so I think there is a lot of focus with the new enterprise management team that we have hired this year on sort of turning around that Japan enterprise business getting the growth back, because I think if we could obviously just get Japan and Australia back to mid-30s as well, we will really be rocking along in terms of our revenue growth.
We had good cash flow quarter, had strong collections. I sort of reiterated the guidance for low teens overall operating cash flow growth through the year. I think there are some people looking at our year-to-date numbers, so they are scratching their heads a bit because we’ve had strong operating cash flow growth through the first three quarters, but Q4 is a really tough compare. We had a number of things happen in the last Q4 that made that cash flow number really quite spectacular, so I just want to remind people there’s a super tough compare on the Q4 cash number.
As excitingly, ExactTarget had a great first quarter as part as Salesforce. We saw really good traction again particularly in terms of the [lead] (ph) pass, we’ve put in place this lead pass program from our core sales team across to the ExactTarget sales people, it’s gone really well. We’ve seen a lot of nice large deals at ExactTarget which is exciting, and (inaudible) has done really well as well. They have sort of been moved into the sales cloud. They saw similar traction from lead pass, so they exceeded our expectations in terms of new business.
And then, I think the other thing clearly for us over time is important for us to move ExactTarget on to more of an annual billings model. They had a very different approach to that when they were an independent company. They had lot of customers on monthly billing. Annual contracts or multi-year contracts, but just monthly billing, and so we are looking to move them more over to our kind of approach, and again new business there was very – saw a lot better traction in the sort of annual billing front, so that’s good to see as well.
That’s probably a little summary of the quarter.
Yes. So, let’s stick on the marketing cloud for a minute. –I guess, as you pointed out, I’ve got the orange tie on hold (inaudible) exact target, but I should mention here, strong first full quarter inside of Salesforce.com. I wonder if you could talk about just integration steps kind of going forward as you bring ExactTarget closer into Salesforce.com what are the leverage points that you can see. There would be cross-sell to existing customers inside your sales force, how are you going to essentially handle the integration of ExactTarget?
Yes, I think FY15, so next financial year will be from a distribution integration point of view, it will look very much like this year with the exception that we will build in ExactTarget into the quotas for Salesforce sales team. So this year if you think about it, essentially the lead pass program that I described earlier, it’s kind of on top of their comp plans, definitely like a super incentive this year to really -- it wasn’t contemplated clearly when we set the quotas at the beginning of the year.
Next year, we will build in some quota for our core sales team to make sure that we maintain that focus on lead pass. We are not, I don’t think likely to have all of our go-to market systems fully integrated next year, so I think I very much see Scott Dorsey continuing to run their go-to market sort of operations much the same way they have done this year, I think from a product point of view, you started to see the fruits of the integration at DreamForce. We are having regular meetings in terms of making sure that our development teams are converging and not duplicating work where unnecessary. We are starting to see things like chatter showing up, some of our platform technology showing up in their products. They are obviously looking at how do they integrate Radian6 and Buddy Media into the ExactTarget marketing cloud, so I think they rolled out a lot of new functionality in the last few months really since Connections, and so I definitely view FY15 as one very much focused on bringing in Radian6 and Buddy Media into the whole ExactTarget marketing cloud and setting up the right levels of integration, and then starting to work on the Salesforce ExactTarget integrations, I think Scott talked about this at the Analyst Day. I think the initial focus is very much going to be around service cloud, because clearly today you really can't have great service or kind of great marketing without great service, right, in today’s world where everybody knows everything in real time. If you don’t have great customer service, great products, that’s going to impact our ability to market, so there is clearly strong synergies there if we can build good integration.
And I think one of the point from DreamForce is an angry customer used to be just an angry customer (inaudible) angry customers become negative marketing for you.
It is just how integrated, we used to talk about sales, service, marketing, CRM in the past where there was sales, there was service, and there was marketing, where it seems like now what you guys are talking about is really holistic approach where there are not these separate silos –anymore, you do have to think of it as a continuum.
Yes. If you wind the clock back a couple of years, the reason we bought Radian6 initially was a service cloud play, right we didn’t at that point really, we weren’t thinking about necessary marketing cloud at that point, but what we saw was that precisely what we just have been talking about is like, if you don’t -- if you have an angry customer or you have bad sentiment or a bad reputation brand, it’s going to be impacted and that is ultimately really going to cause problems from a marketing point of view at some point, and today that point seems to be almost instantaneous, and so Radian6 was very much an attempt by us to sort of build that sort of social network, Internet sort of intelligence into the service cloud so that the customer service operations could see very much in real time what was going on with their competitors, with their products and services, with their brand, whole bunch of things, and clearly from that really evolved kind of marketing cloud strategy. So, it was kind of interesting that that was really -- that marketing kind of service aspect really drove the whole – the end of whole sort of marketing cloud initiative.
I guess, thinking about the same here with just all of those announcements and things coming out of DreamForce, one of the things to talk about obviously a lot with Salesforce1 and the other platform there. Why don’t you provide just more details about how you think about just the opportunities that the Salesforce1 platform brings to you versus what you guys had historically?
Yes. Well, clearly platform has been an incredibly important part of our success over the last 13 to 14 years. Our costumers’ ability to take Salesforce whether it's SFA or service cloud and customize it to fit their business process has been, I really think a huge part of our success, and it's clearly one of the big differentiators with our products based on our platform versus the historical on premise software where customization was really sort of a dirty word and something you avoided really at all cost.
So customization was super important, but if you look at today’s IT challenges, there are many, but certainly first and foremost among them is probably mobility, I mean how does today’s CIO figure out the fastest and the least expensive and the least complex way of moving both legacy apps in the end and new apps being built on to mobile devices in an effective way, and then secondly how do they take costs out of their IT operations.
I mean everybody feels, you know if you look at any company that’s 20 years old, they are going to have dozens, if not 100s of legacy applications, and how do I put those into a new low cost model and ultimately do I need to be able to put those apps on a device, and I think Salesforce1 -- then I guess the third thing is today's world is very much more about stitching together sort of a hybrid set of on premise apps, hosted apps, public cloud apps, I mean it's a very kind of hybrid world. Everybody is dealing with how do I integrate that, and so APIs have become more and more important overtime. So Salesforce1 really is aimed squarely at all of those things that I’ve just talked about. We have increased the API coverage by an order of magnitude literally, tenfold increase in APIs, and we are doing -- 40% of all our transactions today are API calls, so that means the last quarter, 40 billion transactions on Salesforce roughly were API calls, so increased API coverage, I think Mark talks about the sort of mobile interface, the mobile capabilities of Salesforce1 is being just amazing engineering if you essentially can run Salesforce1 on any mobile device and not only can you run the core applications, but any app you write on the platform is immediately available on those mobile devices, any partner application that is built on our platform, whether it's on the AppExchange or not, it is immediately available on a mobile device. I mean those are just – those are amazing solutions if you are a CIO today. So, I mean I just think we have seen great traction with the platform today. I just think Salesforce One is going to hopefully just be additional huge boost to that business for us.
Got it. Another question I often get is, obviously you have made a big hire over the summer in Keith Block, and brought over multiple people from Oracle, and one of the questions I get is how is this going to change, it was all obviously it's been already a very effective go-to market strategy at Salesforce.com, but how do you – what do you expect from Keith in terms of him putting the imprint on Salesforce.com? How is this going to change the go-to market, I guess?
Yes. I think it's important to point out clearly Keith and many of the other Oracle people we have hired in last few months, I mean they are people that Mark has known for decades literally, so it's not like we haven’t had ongoing relationships with a lot of these people in the past.
I think if you look at what Salesforce has achieved over the last 13 years, we grew up in the SMB space. That was our original marketplace that we were absolutely -- that’s what drove our early growth with small medium size costumers who didn’t want to deal with complexity of IT, and that was hugely beneficial for them and for us. The last five to seven years have certainly been – yeah, we have had some great enterprise storage, and we have done some really large transactions in the enterprise space, but I think ultimately our sense was as we started this year, was that whereas our commercial business SMB had really just continued to be this sort of machine, and executed very, very consistently. We hadn’t quite got that level of consistency with enterprise, and I think what certainly we believe Keith is going to bring, I know he is very much focused with also the people he has bringing in is just taking enterprise to that next level of performance, and for us that’s really going to be probably around three things; one is first and foremost speaking our costumers’ language.
We have now invested a lot over the last few years in any kind of industry capability, sort of I don’t think of industry capability necessarily as meaning product, although over time it might mean product capability, but even just to the point of having industry leaders with a mandate around hiring and training and lead generation, demand generation, all of the right ISV partners we need to be with, who the right partners and connections we need to have in the global SI companies, all of those things I think need to move to the next level in terms of how they are managed within the company, that’s the first thing.
Second thing is our sales model, distribution model in enterprise, we have our core sales team and then we have had sort of product specialists who either focus on platform or service cloud. We need to make sure that we have the right sort of balance of resources across those two groups. And then, I think the third thing is just really taking partnering to the next level. ISV certainly would become very important for us. We have seen some big ISV successes this year. But I think global SIs are just an incredibly important and regional systems integrators are an incredibly important part of our success and our future success. We had those managed, say we know different -- in different parts of the company even prior to Keith’s arrival, so I think just think of those three things sort of partners ISVs, the distribution sales model, balance of resources across the different sales roles, and then industry as I think those are kind of going to be the three things that Keith is very focused on. Hopefully, that will result in even more enterprise success.
It worked pretty well the first time, so getting the band back together. I am going to ask one more question and then I will pause for the audience here, but just speaking of ISVs, I mean you had a pretty important milestone this year with Veeva going public being built on your platform. How much of that do you think actually is a milestone moment that could actually accelerate adoption of platform by ISVs to show, hey, look you can grow big enough and go public by being part of our platform and you don’t have to build your own.
Yes, I think it's interesting. The ISV opportunity, I think where we originally kind of conceived of AppExchange and all those things, I think we had a belief few years back that we would get -- at some point, we would get a bunch of established software companies to sort of jump, make the leap just sort of say, okay I am not going to go develop that, I am going to move everything over the Salesforce, that’s really turned out not to be – not to have been particularly the case, and I think that’s understandable.
I think companies that already have an existing business have been cautious about from their perspective, I guess putting their destiny in our hands, I think at some level, it's still little misguided because if you think about it clearly we have to make the platform fantastic for our own business, and so there’s never a question in my mind that that would have been a good economic decision for companies to take because building a platform like we have security, availability, performance is super big investment and clearly they could benefit from that. But that really hasn’t played out, but what has played out is we are now almost 1,000 ISVs and to be honest we could have more, but I think we do a good job screening ISVs who we don’t think are necessarily going to be right for sort of our family if you like, and so what you are starting to see is the fruits of that huge recruiting effort we put into newer companies and that’s really what I see is the huge opportunity down the road.
So whether it's the DocuSigns, the Apptixes, Veeva, Kenandy we have got both -- we have got companies building vertical applications like Veeva, government applications, healthcare, you name it and then we have got companies building, what I’d call horizontal capability that we don’t cover with our core applications like quote management, electronic signature, and so on. And I just think the speed it's given them to market in terms of not have to worry about all building out the service I think is amazing for them. I think clearly the economics are pretty compelling for them, so I think speed and the economics are just -- they are fantastic for ISVs, and we are adding the new ISVs, the ISV revenue growth, I mean today is still only a few percentage points of our revenue, but I think if you roll the clock forward five years, I think it's a really significant part of our revenue. It's a good revenue stream.
All right, last couple of minutes here, I will just pause to see if there are any questions from the audience. So if you just raise your hand and the mic will come up. Okay, (inaudible) I will just keep going. Let’s talk about just sort of the evolution of Salesforce, this is a question I always get, first it was Salesforce automation. It sort of felt like when you had sort of escape velocity there, there was service and then escape velocity there in your platforms and marketing. I mean how do you think about, I am assuming you are not just going to stop at marketing at some point, but there will be the next cloud, but how do you think, I guess what's the strategy of as you evolve, I mean is it deliberative, okay we are kind of going step by step and thinking okay, we have escape velocity, we have hit some sort of early revenue level or productivity and then we move on to the next one, how do you think about evolving sales force from here?
I think we are largely driven by our customers. There is clearly some aspect to it that is based around a more formal approach to business strategy, but I think ultimately if we are listening to our customers properly, and I think we have been pretty good at that of the life of the company. We had a lot of customers telling us that they wanted to buy marketing from -- that was something they saw strategic and important to the relationship, and if you think about B2C for example, we obviously didn’t sell SFA to B2C companies, but once we started selling service clouds to B2C companies, then they said, hey we love service cloud, why don’t you -- we would love to be able to buy more from you on the marketing side, so I think we listen to our customers and I think part of that is, for example, why we’ve ended up I think in the performance management area. I think when you look at our applications today, we are, I think, among probably the first company to try and integrate performance management within the business process app.
So no longer do you have to login to some separate HR application to manage performance, set goals, set training requirements, provide recognition, all of that can be done essentially as part of the platform now, any app you run in the platform today you can take advantage of those work.com capabilities, and that was something again that customers have been talking to us about saying they would see value in that.
So, I think what are we hearing from our customers, I think one of the consistent themes is we could do more in the area of analytics, and so I think we have tended to be a company that doesn’t get too far ahead of things in terms of announcements that we like to have a solid product offering before we really start talking big about anything, but I think that’s – that’s clearly a big market that hasn’t really been a lot of disruption in that analytics market, so I think that’s something we will look at equally. There are other aspects I am sure of sub markets in ERP that we can look at and say might be interesting over time. So I don’t want to – I don’t think it's fruitful. I know that Mark doesn’t feel it is particular fruitful to project too far out and say we might do this, we might do that. I think we are better off just being very thoughtful, incremental, as you say just kind of like really get -- put a lot of resources behind whatever we do whether it's sales, service, platform marketing, we will do that. We are not going to try different things at once. We are not ready to say what that next thing is (multiple speakers).
We shouldn’t worry about the buck shot strategy. We try everything still that kind of rigor and process and think about how you expand and evolve in time.
Yes. I think we will go after big markets, and we will certainly try and go after high growth markets, but certainly you know there will be things that we feel we can continue to disrupt or really add a lot of value for our customers at some way.
All right. Well we have hit our 25 minute mark. So that went fast, our time is up. So Graham like I said, we really do appreciate you making the time and come down here. I know, busy time for you at this time of year. So thank you very much.
[No formal Q&A for this event].
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