Thank you so much for joining us. My name is Keith Weiss. I run the U.S. Software Research effort here at Morgan Stanley. Very pleased to have with us from Salesforce, President and CFO, Amy Weaver. Amy, thank you for joining us. Great. Thanks, Keith. Great to be back again this year. Excellent. Quick disclosure. For important research disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Excellent. With that out of the way, a lot to talk to on Salesforce. Sure. A lot transpired since you were here last year. Maybe just to start out from like a high level to set the stage. Sure. Talk a little bit about the demand environment. I think your most recently quarterly results, impressed people on two fronts. Like, one was the degree of discipline on operating margins and sort of, I think those targets definitely surprised to the upside. The other is fundamentally, you guys did better than expected on the top line. The CRPO exceeded expectations. Can you talk to us a little bit about what you're seeing out there on the demand environment, how it's kind of transpired through 2022, and what you're looking forward to into 2023? Sure. I'd love to. You know, first, we were just talking before the microphones came on about the fact that we were here just a year ago and what a difference a year makes. It's been a fascinating year, not just for Salesforce, but for the tech industry. We're definitely coming off 90 pretty intense days, but I just couldn't be more excited about how we're positioned and looking forward to a really transformational year for Salesforce. You know, going back on growth, let's go back to last summer. Last July is when we really started seeing a shift in how our customers were really buying from us. I talked to kind of account executive after account executive who said the same thing. They went away for 4th of July weekend, and they came back to the office and felt like they'd walked into an entirely different selling environment. Now, I'm sure that the shift wasn't as dramatic as that in the economy, but our quarters can be very back-end loaded. July is our last month of the quarter. For us, it became very, very apparent in July. What we saw were really three things. First, elongated sales cycles. The second was additional approvals. Even smaller deals needing to go up to you know, to the board of directors at a customer before it could be signed off. Also, particularly in the enterprise, we saw some deal compression. That deal you've been working on for months, that was always the $10 million deal, suddenly the budget had shrunk to $8 million. All of those things were happening at the end of Q2. We moved into Q3, if anything, I think it got marginally worse. All of these things, you know, the entire environment seemed to deteriorate slightly. Q4, I expected it to continue deteriorating, and it didn't. I feel like things really leveled out. They didn't level out at, you know, a great new level, but. They leveled out. What I also saw is that we executed better. You know, it was no longer a surprise that that deal was going to take a little bit longer or that extra approvals were going to be necessary. We had adjusted, and we're executing better against that environment. Got it. If we look forward into. Yeah. Calendar 2023, your FY 2024. You talked about you feel Salesforce is really well positioned here. What is it sort of within sort of the market, within the sort of solution portfolio that gets you excited about that positioning into what's still a pretty? Yeah. Trepidatious, you know, demand environment? You know, there's a lot of things that make me excited about this next year and where I see it. Stepping back, though, if I look at, you know, our guidance for this year, where I see where we're going, I'm not assuming a material uptick in the near term in terms of the selling environment. I'm also not assuming that it is going to deteriorate further. Somewhat steady state. What I feel really good about is the position where Salesforce is, where we sit in the market, what we have to offer. If you look at kind of traditional sales plays, we've always had our sales play where you're What do you do if you're selling to the CEO? What do you do if you're selling to the CIO or the CMO? What the sales teams have realized right now, every deal, every sale, you're selling to the CFO. CFO is really behind these. By the way, I love this. I think it's a great approach. I hope that this continues. Every CFO I talk to, including myself, wants the same things. You're looking for efficiency. You're looking for automation. You're looking for consolidation of your vendors. We provide all of that with Salesforce. You know, this is exactly what our products are designed to do. I think particularly the consolidation point is important. We have this incredible suite of products, the whole customer 360, and companies can really consolidate with us, and that also has benefits for us with multi-cloud adoption. When one of our customers goes from having a single cloud to two clouds, three clouds, it's not just a matter of adding more revenue. There's truly a multiplier effect. You go from one to two, it is seven times more revenue, 12 times, 200 times more as you go all the way up the chain. It's not just adding revenue. The more clouds, the more products you're buying from Salesforce, the lower the attrition rates. Right. You get up to the top, you know, the seven clouds, they're not leaving because they're all in on Salesforce, and we're all in with them. I think this multi-cloud experience is really our future. Got it. You thought I was kidding, but I really am gonna ask you some AI questions as well because I think there's. We were talking about this is all going to be a deep dive on AI, which. All gonna be about generative AI. One of my favorite subjects. Yes, please. In terms of that consolidation benefit. Yeah. You talked about the financial implications, which are definitely positive, but there's technological benefits as well. Yes. Because AI is all about the data you have to kind of train the models and to create. Exactly. These optimizations, t he more of that business process you get in the scope of Salesforce, it just makes you guys better positioned to be able to be the ones who are providing the AI or sort of. Well, that's exactly right. Making it actionable. We have two product areas that really fit with this beautifully. The first is Genie, that we announced at Dreamforce. What Genie is, it's really a data pool, and it is creating a data lake among all of the Salesforce products where you can get instant, real-time, actionable insights. It's not just Salesforce. You can also set this up with other data lakes such as Snowflake. You can bring in other product information. The average company has nearly 1,000 different systems that they're running. I think it's like 978. That is 978 siloed areas of information. If you can bring that all together, the differences in terms of actionable behavior is remarkable. We're fairly early days with this. I'll tell you, I've been with Salesforce for a little over nine years. I have never seen our engineering team as excited about any feature, any breakthrough, any product, as they are about Genie. We're starting to use it with some of our customers. An early, a very early adopter, for example, is Ford Motor Company, and they're already big on Salesforce. They, you know, they've got this new Mach-E electric Mustang, and they use our marketing, our Commerce Cloud to push out notifications so that people who are buying the car know when it's coming. They've got all the details. They're using Sales Cloud for their dealers to chase leads. They're using Service Cloud for their technicians. Now they've got this Data Cloud that is bringing in all of this information, so they're learning among these areas and pushing this out. Many may have seen today we have TrailblazerDX going on. TrailblazerDX is our big developer conference that's going on just down the street here. We've announced Einstein GPT, this is the first kind of generative AI for CRM. If you imagine this data pool, this data lake with Genie, then you add on top of it these AI, particularly generative AI capabilities, it's really an exciting moment for Salesforce. Right. What I thought was so interesting about that announcement was the way that you structure it, you keep it an open ecosystem, right? You have. With OpenAI. The Data Cloud from Salesforce, which is where you're getting your data. Right. You have the applications which expose that generative AI and sort of make it actionable, but you're able to plug in different engines. Yes. The first engine in terms of the AI model is OpenAI, but there's definitely opportunities for more to come over time. I think that's exactly right. We're really at early days, but I just love seeing Salesforce be out in the lead on this. Going back to the multi-cloud, it's really interesting because this all plays in with it, and it makes those multi-cloud experiences even more powerful. It's one of the reasons I see multi-cloud as taking really getting a lot of traction right now. Right. Every quarter, we look at our top 10 deals. That's a very big deal if you were somehow working on one of those top 10 deals. Just to make it into the top 10 for Q4, you had to have at least five clouds in there. Half of those, so five of the top 10, had seven or more clouds. Got it. I wanna shift gears a little bit and talk about some of the restructuring, some of the changes that are taking place, and maybe start with the changes that you guys are putting into place in terms of the sales organization. This is actually something you started talking about at Investor Day about an ability to be more efficient with that selling. Can you walk us through kind of, at Investor Day it was more sort of like aligning the sales efforts with the type of deal being done. It sounds like that's expanded a little bit more, that you could be. Brian Millham was talking about this on the conference call, that even when you're going after those, like, big industry solutions and the multi-cloud deals, you could be more effective and more efficient in how you're going to market there. Can you talk to us about sort of how those go-to-market motions are changing? Sure. Let's kind of let me just back up a little bit on some of the short-term and long-term restructuring we're doing. Sales is very important, and it's probably our most important area in that, but it is broader. Just going back a little bit in time, two years ago, a little more than two years ago, when I had been announced as CFO but hadn't taken the role yet, I spent two months really just doing a listening tour. With our shareholders. Went out and just said, "What's top of mind for you? What should be top of mind coming in for me?" I would summarize their advice to me as operating margin, operating margin, operating margin, and then don't forget about dilution. That's very much been the focus I have had coming in. Right. In terms of what we, what we need to do as a company. At that point, we were at 17.7% operating margin, and we were just hoping to hold onto that for the year. We just announced we were buying Slack, which we knew was going to be dilutive. Through some of the changes we're making, not only were we able to increase operating margin that year, but over the last two years, we've increased it by almost 500 basis points. We, as we announced last week, we intended to bring that up at least another 450 basis points this year and even higher to above 30% in the following year. In terms of how we're going to do this, we started talking a lot at Investor Day. We need every part of the business to be involved. Absolutely. If you compare our expense structure to some of our peer companies, you'll see that there's two areas that really stand out. One is G&A. We're making a lot of changes to automate and drive down those costs. The big one is sales and marketing. That has to be front and center with everything we're doing. I could not be happier about having Brian Millham in the role he's in, and I think you could hear the genuine excitement from him, both at Investor Day and on the earnings call, about what he's doing to drive this. It starts with efficiencies. It's restructuring he's doing. It's how you sell. It's gotta be something that makes it accelerate both the top line and the bottom line, so it's both productivity and efficiency, and he is just diving in in all ways. Right. Maybe to kind of refocus on sort of that operating margin. Sort of expansion trajectory on a go-forward basis. You made a very specific comment on the conference call that, like 30% is not the ceiling. Right. There's more. I'm gonna play devil's advocate a little bit. This was probably seven, eight years ago. I remember a Salesforce, Investor Day, I think it was, David Havlek at the time. Yes. Doing his professor shtick. and talked to us about cost to book versus cost to serve, right? I can picture the slide. Exactly. There's an efficient frontier. At different rates of growth, you should have different margin profiles. We utilize that a lot. We actually took that core sort of thought process and made it into something we call SaaS X-Ray. At a slower growth rate, you should have higher margins, was really the conclusion of that. How much of what we're seeing, like how much of 30% is just, hey, listen, now you're guiding to 10% growth, you're now guiding to 20% growth. Right. How much of that efficiency is just you're growing slower? How much of it is you're actually driving further efficiencies in that cost to book versus cost to serve? Okay, I think that's kind of the existential question that I've been asked over the last week. It's this idea that, okay, great, operating margin, we love it, but are you trading off revenue? Is this a choice? Now, I think in a company that is perfectly optimized, yes, at some point you're gonna hit. Right. A position where if you're taking away expenses, you're gonna be taking away revenue, if you're perfectly optimized. We're not perfectly optimized, and I don't know a company that is. I believe that we have incredible opportunities to change our expense structure without taking away from our revenue growth. In fact, when I look at things that we can be doing, I think the focus on discipline, the focus on efficiency, the focus on automation, those should actually be accelerants to growth, not detriments. Got it. Excellent. In terms of the, like sort of the mechanics of the restructuring, the upfront portion that we've seen thus far is the headcount reductions. Yeah. It's unfortunate any time a company has to kind of take down headcount, but it's often necessary to garner those efficiencies. Another part of the equation that you talked about, you took restructuring expense against. Yeah. Was the real estate portfolio. It seems like that's more on the come. That's something that takes. Yeah. Longer to come to fruition. Can you talk to us about sort of where those opportunities exist, and when will we start to see that on the income statement? When will the like the real estate portion start to show up? Sure. First, thank you for mentioning that, headcount reductions really are, they're difficult. They are tough situations, and I always think it's important to pause and recognize that. It becomes a little bit too easy sometimes to talk about these as spreadsheet exercises and forget that they're real humans who have been impacted in that. Very tough decisions, but necessary, I think, in this case. On the real estate, a little less, a little less emotion involved in that. We did announce in January a pretty significant downsizing of our real estate. This, though, is something we have been doing over the last three years. Over the last three years, we've actually written off quite a bit of real estate. You've seen that in our financials. There's also quite a bit that you haven't seen, where we have opportunistically taken advantages of, you know, leases that came up or, you know, projects where we were able to mutually walk away without charge. We've been shrinking this for a while. This current write-off is focused mostly on consolidation within different cities. We have a lot of cities around the world where when we bought MuleSoft or Tableau, they also had an office that we may have kept for one reason or another. What we're trying to do right now is really get down to one office in each city. Not every city due to traffic patterns, where people live, but in general get down to one. As you pointed out, real estate takes a while to roll through the system, so we're really going to be seeing the charges hit over the next two years. We'll be seeing increasing amounts of benefit, though, over the same time and probably over the next, you know, five or six. Okay. Perfect. This is something that rolls out over an extended period of time. It really does. Creates additional leverage as we go along. Yeah. One of the other elements of what you talked about on the conference call, is addressing stock-based compensation. Yeah. I think this is probably the first time, at least that I remember, you gave a goal in terms of where stock-based compensation is gonna be. That's correct. It's gonna dip below 9% in the year ahead. You also talked about more kind of structural changes on a go-forward basis on how you utilize stock-based compensation. Can you dig into that with us to help us understand kind of where that stock-based compensation is gonna go over time? Because, I mean, on my math, it gets you guys to a pretty interesting kind of GAAP earnings perspective. Not too far off. Well, I think it's really important that we talk about stock-based compensation as we're managing it. Spent quite a bit of time in Europe in January, and I'll tell you, I did not have a single meeting with an investor where they did not bring up stock-based compensation. It's just taken as a matter of course there that they're gonna add that right back in, and we need to treat it as an expense. We need to manage it like an expense. We have usually been hit low double digits for our stock-based compensation. Last year, I think we finished 10.5%. We are guiding that we will get that down somewhere below 9% this next year. Now, it's tough to make significant changes in stock-based compensation in a single year just because of the accounting and how it rolls out over time. We are getting quite a bit of benefit from M&A that's rolling off. When you buy, you know, up-and-coming tech companies, you get their stock plans, and staff growing up and coming. Tech company kind of hand out options more like checklists. We're seeing that kind of burn off in our system. Right. We're also looking at, you know, how do we take a really thoughtful look at our equity plan, at the same time realizing There's still competition for talent. We wanna retain people. It has to be very careful. You'll see more about this in our proxy. I don't wanna get too far ahead of our compensation committee. We're looking at a number of different ways that we can attack it, both from the M&A side and from the annual grant. Right. I guess the bottom line is it's not just a, we're not doing M&A and that structurally lowers it. It's not just we're not hiring as aggressively. Right. But there's structural. Correct S ort of. Correct. Got it. I think that's important. Remind me, I think you talked about it at the Analyst Day in terms of dilution target. That still kind of sustains that under 3% dilution from stock-based compensation? Yeah. Got it. Well, let's stop on that for a moment because what I announced on this call is that we expect to fully offset dilution. With the. In August, for the first time in the company's 23-year history, our board authorized a stock repurchase of $10 billion. We jumped in. We bought back $4 billion already in the last two quarters, and the board just raised the authorization to $20 billion. With this new authorization, with the pace that we're currently on, I expect to fully offset all SBC going forward. Got it. One of the other things you talked about in terms of the share repurchase. At the Investor Day, I think you talked about a target of using 30%- 40% of your. Right Free cash flow for share repurchases. I think you've been exceeding that thus far. We have. Out of the gate, so, kudos for exceeding your target. Does that target change on a go-forward basis? Yeah, we have not officially changed that target. That really is what I expect on average over time. Last year, we used more than 60% of our free cash flow. In fact, close to 70%. This year, to offset, we will certainly be well above that target that I set. Got it. Got it. Perfect. On the other side of kinda the capital allocation, on the conference call, you guys talked about disbanding the M&A committee. Yeah. On the board t hat sounds pretty drastic. I'll be honest, I don't quite sure what that means, but it seems like you're not gonna be able to do M&A on a go-forward basis. Can you talk to us about sort of the reality of what it means to disband a M&A committee? Sure. I think, I will share with them that you thought it was drastic. I think they will enjoy that. Disbanding just sounds very. Disbanding. Actually, I had far too many people listening to that kind of, you know, with half an ear, and they thought that we were disbanding our entire M&A team at Salesforce, which I think came as a shock to our M&A team at Salesforce. No, what we've done is, you know, Salesforce, like many companies, spins up different committees at the board based on, you know, issues that you regularly have coming up that you want a committee to do a deep dive on before it goes to the board. When I first joined the company, there was an IT committee because we were involved in a lot of IT issues. That was disbanded. We had a real estate committee for years when we were, you know, very involved in building out our real estate around the world with some very significant towers. That's since been disbanded. M&A is kind of the same way. We had been doing M&A at a very regular pace, where you really needed that going on. This does not mean that we cannot do M&A in the future. If we were gonna do that, you spin up an ad hoc party or a committee. There's no need to have something where it's meeting on a quarterly basis. We just don't think that that's a good. Got it. Use of the time. It's really a signal of priority. It completely is on priority. You have a committee that comes around for a priority. Yeah. Now M&A is just very low enough on the priority. Very low. List that, it's not necessary to have that. Yeah. Got it. I want to shift gears a little bit to market dynamics and then kind of what's going on in the market for Salesforce. We talked a lot about industry clouds. We've talked a lot about multi-cloud solutions. I think in a lot of investor minds, it seems like the focus of Salesforce has kind of really up-marketed. Yeah. It's just the enterprise. Where does the mid-market stand in here? Is it still a focal point for Salesforce or still opportunity for Salesforce on a go-forward basis? Mid-market is what we call CMB or commercial business at Salesforce. I always feel like it winds up being a little bit like the forgotten stepchild. You know, enterprise gets all the big, flashy deals. We talk about it on the earnings call. SMB, you know, there's usually a shout-out to something going on in SMB. No one ever talks about commercial. That is really a very powerful and important engine for Salesforce. It always has been. These are the customers, some will always be commercial. Many of those are the customers who go on to be our enterprise clients, so very important focus, and that hasn't shifted. Got it. Is there a difference in, like, the go-to-market or the distribution strategy for going to CMB? The CMB b ase versus kind of that motion that you have in place for the enterprise base? Yeah, there are slight differences. With our sales team, you know, we have different regional, slightly different regional nuances. We have different ways of selling to very small businesses versus enterprise. You know, mid-market, as you imagine, somewhere there in the middle. Every time we do try to tweak how we go so that we're doing it in the most appropriate way to sell to that customer and approaching them how they wanna be. Got it. It is something of a pointed question, but. We can hear those. It's kinda my job. When I talk to investors, the 30% operating margins and 30%+ operating margins. Yeah. In and of themselves are very interesting. What would make it even more interesting is if, Salesforce came back to being a market grower. When we look at your end market, 13%-15%. Yeah. Depending on how you cut sort of the IDC or the Gartner data. What people look at on the other side, is there anything structurally that's changed in Salesforce that's not gonna let them get back to that growth? I'm gonna ask you that question. Like, the two structural impacts is, one, competition. Yeah. Any change in the competitive environment that you think is gonna make it difficult for you guys to, what has been a market share gaining story basically over the past 20 years, to sustain that on a go-forward basis? Yeah. Short answer, no, I don't see any huge structural difference. When I look at competition, the competition that worries me the most in this market is competing against doing nothing. You're competing against customers deciding not to do a deal at all, to delay a deal, or to try to build something in-house. That's a form of competition that we don't talk about as much. It's not tracked as well. You don't have people ask about it on earnings calls. When the markets go down, that's what you're really competing against, and that's something, you know, that we have to figure out the right plays on, and it tends to also clear out when the markets clear out. Got it. The other side of the equation that investors worry about is kind of saturation in your end market. Yeah. Salesforce has been the market share leader in overall sale, CRM. In some areas like Sales Force Automation, you have the mid-30 share. There's a cyclical and a secular concern. There's a cyclical concern that there's a lot of investment in front office during COVID, but even like the years prior to COVID. Maybe we've reached to a point where your customers just need to digest that they've consumed a lot of front office, and now they have to try to make sure they're making the best use of it. Do you see any, does that ring true to you at all, that there's any kind of digestion period that needs to take place? You know, I hear that a lot. A lot of questions about, "Well, hold on, Salesforce is everywhere. You must be in every Fortune 500 company. Right. I think there's some truth to that. I think we may actually be in every Fortune 500 company or close to it. That's actually a good thing because it means we have got a toehold, and that's where we go back in on the multi-cloud. Maybe they have a lot of Sales Cloud. That's our opportunity to go in with Tableau. It's our opportunity to go in with Genie, with Service Cloud, with marketing. I feel really good about that multi-cloud in our more saturated markets. We also have all of international, and I still go view international as an important accelerant to our revenue over the future years, largely because there's just so much white space. Right. Got it, so p lenty of opportunities still ahead. Yeah. I just wanna take a moment to see if there's any questions from the audience before I go on with my questions. Excellent. One up front. Yeah. This delay that has been going on about, you know, going to the CFO level. Yeah. At the same time, we see that the economy is not slowing down. What's your sense, at what point if the economy doesn't slow down, does the CFO level say, "But we cannot delay the spend anymore and we just need to catch up"? You know, I think that's always the debate. I think that this has been such an unpredictable macroeconomic situation. No one's seen anything quite like it. We have high inflation, yet we have still a booming job market. The biggest problem is actually hiring, even in the middle of layoffs. We have a situation where foreign exchange isn't acting the way that it traditionally does. It's very hard for any CFO in any company to make a lot of predictions based on history in terms of what's going on or how long that this is going to last. I think that the situation with CFOs and the power that they have on deals, maybe I'm saying this selfishly, is here to stay. I think that it's very important that they will stay involved. I do think that there is people are getting impatient. People do wanna jump back in. They do wanna do the longer term projects, and I think there is a realization that there's a new normal, and we've got to adjust to that, and that includes making commitments to spend. Excellent. Good Good question. Any additional questions? I wanna talk about Slack a little bit and kinda where we are with that. I mean, to be perfectly honest, that was not an acquisition that investors are really favorable on, and I think there's still work to be done in terms of selling them on that value proposition. Can you talk to us about why you guys are still confident? Yeah. That Slack is a good fit for Salesforce and is gonna, t hat investment will yield, basically? Yeah. Actually, I'm very excited about Slack. Slack's an incredible product. It truly becomes kind of this engagement layer from an entire company, all of your employees, all of your application base. You can extend it now through Slack Connect to outside third parties, which makes it even more powerful. One of the reasons I think it's so powerful is customers love it. I mean, there is people have this very, this attachment to Slack that you don't see to emails or other communication systems. It's interesting, IBM is a big Slack customer. In fact, they've gone wall to wall with Slack. I was just shocked. I was looking at some usage statistics the other day. On an average day at IBM, employees sent 9.2 million Slack messages. Whoa. Even their CEO uses Slack for his monthly Ask Me Anything sessions. They actually just signed up for Slack Connect, so they can now do this with their customers as well. I think this opportunity to really get into companies in this wall-to-wall way is incredible. The other thing that makes me very excited about Salesforce is Salesforce, I am very excited about Salesforce. About Slack as well is the new leadership. In December, Lidiane Jones became the CEO of Slack, and Lidiane, a longtime experienced tech executive. She had about 12 years at Microsoft. She then went to Sonos, came to Salesforce four or five years ago. She's now the CEO there, and not only is she an incredible tech leader, but she's bringing kind of Salesforce DNA together with Slack. I think that this is going to help us continue to integrate more deeply. I think it's gonna move us forward faster in technology. It really gives me a lot of optimism for Slack in the future. Outstanding. Unfortunately, that brings us to the end of our allotted time slot. Amy, thank you so much for joining us. Great to be here, Keith. Thanks.