☁️ Salesforce: All-in on AI at Dreamforce
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☁️ Salesforce: All-in on AI at Dreamforce
Key insights from the software giant's annual conference
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For those who’ve never experienced it, Dreamforce isn’t just another tech conference. Every year, Salesforce transforms San Francisco’s downtown Moscone Center into a buzzing tech hub that looks like a national park. It’s often dubbed the world’s largest software conference, drawing in over 40,000 in-person attendees in 2023 and hundreds of thousands more online.
This year, Salesforce pivoted with a fresh emphasis, proudly presenting it as the “largest AI event in the world,” with a speaker lineup featuring luminaries from the recent ‘Time100 AI’ list, like Sam Altman (OpenAI), Dario Amodei (Anthropic), Aidian Gomex (Cohere) and Clément Delangue (Hugging Face).
Founder-CEO Marc Benioff explained:
“We want to build the trusted AI platform for customer companies so that everyone is an Einstein and more productive. That is our mission around AI. We’re not looking at your data. Your data is not our product. We are here to do one thing. To make you better.”
So, let’s unpack the latest quarter and what we’ve learned from the Dreamforce conference that just ended.
Today at a glance:
Salesforce Q2 FY24.
Dreamforce Takeaways.
Key quotes from the call.
What to watch looking forward.
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1. Salesforce Q2 FY24
Income statement:
Here is a bird’s-eye view of the income statement.
Revenue has two main components:
🧾 Subscriptions and support (~93% of overall revenue).
Sales (22%): Manage and automate sales process from leads to opportunities to billing.
Service (24%): Deliver personalized customer service and support.
Platform & Other (19%): Automate processes and build business apps. This segment also includes Slack, acquired in 2021 for $28 billion.
Marketing & Commerce (14%): Plan, personalize and optimize one-to-one customer marketing journeys.
Data (14%), Analytics (including Tableau, acquired in 2019 for $16 billion), and Integration (Mulesoft, acquired in 2018 for $7 billion).
⚙️ Professional services and other (~7% of overall revenue).
Help customers achieve business results faster with Salesforce solutions.
Main highlights:
Current RPO grew +12% Y/Y to $24.1 billion. It represents all future revenue under contract for the next 12 months that has not yet been recognized as revenue. Slightly better than expected, thanks to the momentum in MuleSoft.
Revenue grew +11% Y/Y to $8.6 billion, a $70 million beat.
Subscription and support grew +12% Y/Y to $8.0 billion.
Professional services grew +3% Y/Y to $0.6 billion.
Subscription and support revenue growth by business segment:
Gross margin was 75% (+3pp Y/Y).
Operating margin was 17% (+15pp Y/Y).
Non-GAAP operating margin 32% (+12pp Y/Y).
Non-GAAP EPS $2.12 ($0.24 beat).
Cash flow:
Operating cash flow in the first half was $5.3 billion (+32% Y/Y).
Balance sheet:
Cash and cash equivalent and marketable securities: $12.4 billion.
Long-term debt: $8.4 billion.
Guidance:
Q3 FY24 Guidance:
Revenue of $8.71 billion or +11% Y/Y.
FY24 Guidance:
Revenue: $34.75 billion or +11% Y/Y ($150 million raise).
Non-GAAP operating margin 30.0% (+2.0pp).
GAAP operating margin 13.3% (+1.9pp).
So what to make of all this?
Revenue came ahead of expectations by $70 million. It was a modest revenue beat (1%), similar to the previous quarter.
Data was once again the fastest-growing segment (+18% Y/Y), led by MuleSoft. Tableau’s growth accelerated for the second consecutive quarter.
Margins have improved significantly. The Non-GAAP operating margin was up +12pp year-over-year and +4pp quarter-over-quarter. Lower sales & marketing expenses were the main driver. The GAAP margin was up +15pp Y/Y. Why? It was primarily a result of the recent restructuring. CFO Amy Weaver highlighted that Salesforce hit its margin targets three quarters early.
Salesforce repurchased $2.1 billion of CRM stocks (stable). As a reminder, the company announced a share repurchase program of $20 billion earlier this year. Management has shifted from diluting shareholders to returning capital.
The earnings guidance raise was noteworthy. Management raised the full-year revenue by $150M and increased the non-GAAP operating margin from 28% to 30% and GAAP EPS from $2.68 to $3.51 (+31%).
If you are an investor in cloud software businesses, Salesforce shows that operating leverage can be a reality at scale—if you give it decades. After all, there is a pot of gold at the end of the rainbow.
Is the business sustainable?
The company has always been cash flow positive since going public in 2004. Salesforce generated $7.6 billion in free cash flow in the past 12 months (23% margin). So, there is no concern for the continuity of the business.
Note that stock-based compensation (SBC) has declined recently following the restructuring (currently at 9% of revenue in the trailing 12 months), an improvement in line with expectations set by management earlier this year.
The chart is a beautiful thing to see. Free cash flow has been expanding while SBC has been declining, resulting in an even faster growth in the FCF net of SBC. We explain why that’s a good thing in our breakdown in our article on how to analyze a cash flow statement.
Salesforce is only one of 74 companies (!) covered in our latest monthly earnings visuals report. In case you missed it, check it out here. 👇
2. Dreamforce Takeaways
Marc Benioff’s message has been clear. He wants Salesforce to help its customers gain productivity with an AI they can trust.
I kept track of the major announcements of the conference, so you don’t have to:
Einstein 1 Platform: This new AI platform combines Salesforce Data Cloud, Einstein AI, and Salesforce’s metadata framework. It allows the safe connection of any data for building AI-powered applications, facilitating vast data storage and actionable insights.
Einstein Copilot: This is Salesforce’s take on the out-of-the-box conversational AI assistant pilot. Integrated within every Salesforce application like Slack or Tableau, it understands natural language queries and provides answers rooted in secure company data. It automates tasks from email generation and contract clauses to SEO metadata creation and code vulnerability scans.
Einstein 1 Copilot Studio: Slated for a pilot release in the fall, this feature empowers users to create custom AI-powered applications. With unique prompts, skills, and AI models, it offers faster business solutions and real-time interactions across various consumer-facing channels, including Slack and WhatsApp.
Google Partnership: Salesforce will be the inaugural partner for Google Workspace’s Duet AI extensions framework, allowing users to sync Salesforce with Google productivity apps and utilize Google’s large language models within Salesforce’s Einstein Copilot Studio.
AWS Partnership: A pilot series of integrations is set for next year between Salesforce and Amazon Web Services (AWS). This will enable the smooth sharing of data lakes and large language models, emphasizing security and efficiency.
Databricks Partnership: The strengthened partnership will simplify the merging of Salesforce Data Cloud with Databricks Lakehouse Platform data, emphasizing security, trust, and zero ETL. Users can interchangeably access data between the two platforms for AI model training and gaining immediate insights.
Deloitte Integration: Deloitte Digital introduced new integrations with Salesforce, bringing Einstein AI to its DigitalMIX platform and announcing services for biopharmaceutical organizations. DigitalMIX will now provide enhanced automation, personalization, and analytics, while their BioPharma collaboration aims to expedite innovative therapies and introduce novel engagement models in healthcare. Industry-specific products are increasingly important (more on that in a second).
From new AI products to deeper partnerships with hyperscalers, Salesforce has set the tone for accelerating growth. But this growth will take a while to materialize. Let’s dig deeper.
3. Key quotes from the earnings call
CEO Mark Benioff talked about the five priorities of the company:
Restructuring: Adapting for both short-term and long-term prospects.
Performance culture: Emphasis on productivity, operational excellence, and profitability.
Core innovations: Enhancements to the core platform, including data cloud upgrades, new versions of Einstein, and integrating acquisitions into the core.
Investor relations: Strengthening ties with investors, seeking and integrating feedback.
AI transformation: Leading in AI innovation for both Salesforce and its customers, transitioning to become the top’ AI CRM’ platform.
On AI investments:
“We are at the dawn of an AI revolution. And as I've said, it's a new innovation cycle that is sparking amounts of tech buying cycle over the coming years. It's also a new tech investment cycle. We've been involved in the earliest rounds of many of the top AI start-ups.”
On Trust:
“This AI revolution is a trust revolution. Everything Einstein does has also delivered with trust and especially ethics at the center. […] Einstein trust layer […] enables our customers to maintain their data privacy, security, residency and compliance goals.”
We often discuss how incumbents may be well positioned to succeed in AI because they have a data advantage from the start and the infrastructure to satisfy the security and compliance needs of their enterprise customers.
COO Brian Millham on the growth strategy:
“It's three-pronged, one around expanding our multi-cloud customers and with new technology like AI and Data Cloud. […] International acceleration […] And then finally on industries. You heard me say eight of our industry clouds grew greater than 50% in the quarter. It's remarkable the impact we're having with our industry products. So deeper investments in industries as well will continue to propel the growth of this business.”
The opportunity size in industry products is significant, as illustrated by Veeva Systems ($33 billion market cap), a CRM focused on pharmaceutical and life science industry applications.
CFO Amy Weaver touched on the fact that some non-recurring AI investments are expected to lower margins in the second half of FY24, making the increased adjusted margin guidance to 30% all the more impressive:
“I really believe 30% annually is a floor, not a ceiling.”
On the impact of AI products on guidance:
“Those opportunities really take a while to roll through our customer base, particularly on pricing as we look to renewal.”
So, don’t expect a significant impact from AI on the top line in the short term. It could take more than a year to materialize.
4. What to watch looking forward
Einstein Copilot Pricing
AI features and their respective pricing model remain something critical to watch.
In July, Microsoft announced that Microsoft 365 Copilot would be available for commercial customers for $30 per user per month. That was a significant uptick compared to the $57 per user per month for Microsoft 365 E5, let alone the $36 per user per month for 365 E3.
As discussed in our review of Microsoft’s quarter:
“According to Jefferies analyst Brent Thill, if half of the roughly 115 million E3 and E5 Microsoft 365 users adopt Copilot, it could generate over $20 billion in incremental revenue, representing approximately 53% growth from fiscal 2023 for Office 365. He believes it could help double Office 365 Commercial revenue in the next 4-5 years.”
Shortly after Microsoft’s announcement, Salesforce unveiled its pricing for Sales GPT, at $50 per user per month, alongside a “limited number of credits for Einstein GPT.” Service GPT is also $50 per user per month. So, the cost will add up for customers and Salesforce’s top line.
Now, we have yet to hear the pricing for Einstein Copilot. But it’s safe to say that customers will have to pay up. The pricing, business model, and conversion of this product suite could significantly impact Salesforce revenue. So we’ll have to keep our eyes peeled.
Salesforce Venture
In June, Salesforce announced it would double the size of its generative AI fund to $500 million. The company was part of 🤗 Hugging Face’s $235 million round in August at a $4.5 billion valuation. Hugging Face is an open-source platform for creating, testing, and deploying machine learning.
Salesforce has been very active in the generative AI space with investments in Anthropic, Cohere, Typeface, and more. The Data stack is another critical area of the fund, with high-profile companies like Databricks, Snowflake, and many more.
As Slack, Mulesoft, and Tableau illustrated in recent years, Salesforce has been acquisitive. Future acquisitions will likely come from this pool of companies. I would not be surprised to see a significant acquisition in the AI space.
All these AI announcements can feel overwhelming or repetitive since all companies have joined the AI hype train in unison, from Microsoft to Google. I chuckled when I read an analyst calling it “AI propaganda.” There is some truth to it, so we always want to look under the surface. But office productivity is already proving that the AI use cases are no fluke and will dramatically impact our lives and productivity.
As best put by American rapper Will.I.am on stage during the Dreamforce conference:
“This is the most exciting time to be creative and doing shit.”
That’s it for today!
Stay healthy and invest on!
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Disclosure: I am long AMZN, CRM, GOOG, and VEEV in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members here.
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Author’s Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization’s views.