Boomeranging back - a "modern version" of Salesforce delivers expectation-beating profit margins

Salesforce heads into its annual Dreamforce customer conference on the back of some stellar Q2 numbers released yesterday. Net income was $1.27 billion, up from $68 million for the comparable period last year, while revenue was up 11% year-on-year to $8.6 billion. 

Perhaps most significantly, the firm turned in a non-GAAP profit margin of 31.6%, above the 30% demanded by activist investors earlier in the year. The firm has also raised its guidance for the full year to 30%. CEO Marc Benioff commented: 

Our transformation drove our second quarter results, especially when it comes to our highest priority…profitability. And, look, we couldn't be happier to see these numbers. It's incredible to see the margin acceleration in such a short period of time. We've exceeded our own expectations…we are saying that we're going to deliver 30% margin for this year. 

That's an incredible goal. So while we thought we were going to do it next year, we're really going to do it this year. And it's an amazing achievement of our whole team. It certainly has been a lot of work. It's been difficult. In a lot of cases, it has been a struggle. But our teams are incredible, and what they have done has been nothing more miraculous to see, not only the delivery of the 31% plus growth for this quarter, but 30% for the year.

Some other stats of note: 

• Mulesoft momentum was cited by CFO Amy Weaver as a primary driver of revenue growth. 
• Multi-cloud deals are on the increase - more than 450 customers now invest more than $10 million annually and average seven Salesforce clouds.
• From a geographic perspective, Americas revenue grew 10% year-on-year, EMEA grew 13% and APAC grew 20%. 

Boomerangs

Benioff picked out so-called ‘boomerang employees’ for particular mention: 

Boomerang employees are employees who are employees, but for one reason or another, left the company, got recruited away, or went off to start their own companies or whatever. Well, a lot of these results have to do with not only our incredible employees that we've had in place, but a lot of folks have really felt the desire to come back and help us. And I just want to say thank you to all of them. It's been incredible to welcome them back. And the line is long out the door of people who have left Salesforce and want to come back to Salesforce, and we're welcoming all of them with open arms, especially across our sales, engineering, technology organization, proven winners, incredible leaders who got taken out of Salesforce because they were doing incredible things. 

Among the higher profile examples of such employees are Miguel Milano, who’s taken on the Chief Revenue Officer role, and Kendall Collins as Chief Business Officer. Meanwhile Ariel Kelman has returned after 12 years to take over the role of Chief Marketing Officer after stints at Amazon and Oracle. 

AI, baby!

With Dreamforce positioned as “the world's largest AI conference and the largest gathering of AI experts” this year, Benioff inevitably took time out on the post-results analyst call to talk about Salesforce’s commitment to the technology: 

Every CEO I've met with this year across every industry believes that AI is essential to improving both their top and bottom line, but especially their productivity. AI is just augmenting what we can do every single day. Just thinking about myself, I have spent so much time on Bard over the last week, it's incredible. I was just buying some flashlights and I couldn't figure out what flashlight I wanted to buy, and I was on Amazon trying to figure out, ‘What's the flashlight?’. And so I took a picture of the Amazon picture of what was happening on the app, and I gave it to Bard because Bard has this multimodal capability to ingest the photo. And it then ingested the photo, and told me not to buy the flashlight, that it was poor quality, and then recommended one that was better for me. It was incredible to see that I was once again working with a next generation of Artificial Intelligence.

That said, there are caveats, he added: 

Democratizing generative AI at scale for the biggest brands in the world requires more than just these Large Language Models and Deep Learning algorithms. We all know that because a lot of our customers kind of think they have tried. They go and they pull something off a Hugging Face…grab a model and put some data in it and nothing happens. And then they don't understand and they call us and say, ‘Hey, what's happening here? I thought that this AI was so amazing?’ and it's like, ‘Well, it takes a lot to actually get this intelligence to occur.’

But there are examples of AI’s transformative capabilities at scale, argued Benioff, citing Heathrow Airport’s use of Salesforce’s Einstein: 

Heathrow is a great example of transformative power of AI, data, CRM and trust and the power of a single source of truth. They have 70 million passengers who pass through their terminals annually. Heathrow is operating at a tremendous scale, managing the entire airport experience with the Service Cloud, Marketing Cloud, Commerce Cloud. But now, Heathrow [has] added Data Cloud, also giving them a single source of truth for every customer interaction and setting them up to pioneer the AI revolution. And with Einstein, Heathrow's service agents now have this AI-assisted generator applied to service inquiries, case deflection, writing case summaries, [with] all the relevant data and business context coming from Data Cloud.

Looking ahead, Benioff hopes that AI is going to “ignite a buying revolution” that helps to counter the macro-economic issues of recent quarters:

I think we've already started to see that with our customers and even some of these new companies, like OpenAI. And we certainly see that in our customers' base as well…We’ve definitely seen in the last several quarters a measured buying environment. That’s also been true, not just at Salesforce, but I think for the vast majority of our peers…I certainly expect that to abate, especially as customers begin to adopt these new AI technologies and understand they need to invest and grow to be able to achieve this kind of next level of productivity.

My take

That's the AI revolution coming at you, baby. So, get ready!

A bit of banter between Benioff and Salesforce COO Brian Millham on the analyst call, but it might equally be taken as the message that’s going to dominate Dreamforce this year. 

Meanwhile the Q2 numbers are, as noted, a strong launch pad into the conference. The margin achievement has come at a high price, through restructuring and layoffs and cost-cutting, but Salesforce looks a leaner and more operationally efficient organization as a result. CFO Weaver made the point that:

When we did the restructuring, it was never just for the bottom line. We also made changes so that we have the resources to invest in the areas that we believe are going to drive the highest growth for the company. 

So, is the headcount now stable? Benioff said: 

It's something the management team is talking about every single day because we are continuing to grow and invest in our headcount, especially in AI…you'll continue to see our head count adjust and move forward. I don't know if we can call this as a bottom exactly yet, but we're not planning any other major restructuring efforts in the company today, like what we saw earlier this year. We hope that that is ‘one and done’ and behind us.

That being the case, it’s onwards with a “modern version” of Salesforce, which the CEO defined as: 

This is about AI, this is about data, this is about CRM and this is about trust. Those four things have to come together as one thing. And that's what we call Salesforce. That's a modern version of Salesforce. It's AI plus data plus CRM plus trust. And I think that is really a moment that we have to really get clear and show that to customers.

Cue, Dreamforce!