Salesforce Q3 2023 Earnings: AI Wins Amid ‘Measured’ Customer Buying
Customers and channel partners are still ‘somewhat measured in their buying environments,’ Salesforce co-founder and CEO Marc Benioff says.
Customer interest in generative artificial intelligence and preparing data for GenAI fueled Salesforce’s $8.72 billion quarter – but the vendor’s executives warned that they still see “measured” tech spending, with co-founder and CEO Marc Benioff acknowledging continued slowness experienced by channel partners.
Executives with the San Francisco-based customer relationship management (CRM) software vendor shared this update as part of Salesforce’s latest quarterly earnings report. The executives delivered the report for their third fiscal quarter, which ended Oct. 31.
“I don’t think we’re willing to say to you on the call, ‘Hey, we’ve turned the corner,’” Benioff told analysts Wednesday. “We want to. But we’re not sure because for a lot of customers they still are measured in their buying environments. You know that. You talk to these customers. You talk to the channel partners. They are somewhat measured in their buying environments.”
Salesforce Q3 Earnings
That measured buying environment has been described by many tech vendors and solution providers this year and speaks to less technology purchasing since the height of the global pandemic.
But during the latest quarter, Salesforce saw “a lot of green shoots,” Benioff said on the call.
“I would say people are a lot less measured than they were, is one way to put it,” he said. “There’s definitely a reduction in the measured buying environment.”
Salesforce has more than 11,000 channel partners, according to the vendor.
Salesforce’s stock traded at about $247 a share Wednesday after the market closed, up about 7 percent.
Salesforce GenAI Differentiators
GenAI fueled customer excitement across industries and geographies during the quarter, Benioff said. But customers are confused about what AI can and can’t do.
“That’s a huge opportunity for us to tell stories to our customers of what the success opportunities are in the enterprise with AI and also what the reality is for a lot of these customers,” Benioff said.
He shared an example of how multiple Disney entities – its online store, the Disney+ streaming network – use a variety of Salesforce products that, when the data within those products is put to use, could result in a personalized experience for a customer.
“When I walk in the park, I’m expecting the Mandalorian suit to come up to me and say, ‘Hey, what do you think of the episode last night?” Benioff said. “It hasn’t happened yet. I think we’re kind of on the cusp of delivering that full customer 360 for Disney. … These ideas of innovation of AI were not in place a year ago.”
A way for Salesforce to stand out in the growing AI market is through trust, Benioff told listeners. The industry still has “a lot of work” in making AI safe for customers.
“For a lot of customers, they realize that they’d like to just let this AI unleashed autonomously,” he said. “But it still hallucinates a huge amount. And it also is quite toxic. So we’re not quite ready for that revolution. But every day, it’s getting a little better.”
Salesforce will position itself as preventing customers from “getting taken advantage of” by next-generation large language models (LLMs) and foundation models.
These models “are so hungry for all of this data,” Benioff said. “They want our customers’ data so that they can grow. We’re not going to let them have it. We’re going to separate ourselves from those models through a trust layer so customers can be protected. This is going to be so important for the future of how Salesforce architects itself with artificial intelligence.”
The amount of data Salesforce products ingest is another potential opportunity for the vendor and its partners. Benioff told listeners that the vendor’s Data Cloud offering ingested 6.4 trillion records during the quarter, more than double year over year. It triggered 1.4 trillion activations, more than triple year over year.
Salesforce’s Einstein predictive and generative offerings do a trillion transactions a week and 70 percent of the Fortune 100 are EinsteinGPT customers, Benioff said.
“If you don’t have your data together in a company, you’re not going to deliver AI,” he said. “It’s not like companies are going to run their AI off of Reddit or off of some kind of big public dataset. They have to have their dataset together to make AI work for them. And that is why the Data Cloud is so powerful for them.”
Although Benioff didn’t call out any vendors by name, he told listeners on the call that copilots – a term for GenAI products used by Microsoft and other vendors – could backfire on customers without the right data.
For example, a customer wanting to write an email about a contract renewal that brings in login rates and other measures of success will need the vendor to already have some of the customer’s data. Salesforce’s Data Cloud and its presence in other Salesforce products will bring in disparate customer data for GenAI actions.
“They’re going to get frustrated when the copilots that they are given from other companies don’t have any data,” Benioff said. “They just have data grounded to maybe the application that’s sitting in front of them. But it doesn’t have a normalized data framework integrated into the copilot. … We’re just very fortunate to be a company with a lot of data.”
When it comes to GenAI competition, “no one company has a hold on this,” Benioff said. Open source models are as good as commercial and proprietary ones, which lowers the barriers to entry for GenAI and means the technology will evolve fast.
Benioff didn’t name the companies, but he said that two mobile operating system makers – presumably, Google and Apple – have cornered that market and “constrained” development.
“That’s not how this technology is being built,” he said. “This technology is highly federated across thousands of companies and thousands of engineering teams who are sharing this technology. And because of that, you’re ending up with a rate of innovation unlike anything we’ve seen in the history of our industry. And it is moving us to the areas very quickly that could become uncomfortable.”
Salesforce Q3 In Depth
Brian Millham, Salesforce president and chief operating officer, told analysts on the call that the vendor worked on training sellers to talk to customers about the broader product portfolio.
He acknowledged that Salesforce “stumbled” last year in “not understanding the buying process of our customers.” The vendor is continuing to simplify its go-to-market, improve pricing and packaging and find more routes to market, with Millham calling out Salesforce’s increased presence on Amazon Web Services’ Marketplace.
Millham said that the Salesforce ecosystem showed “amazing energy” with partners, global system integrators (GSIs) and independent software vendors (ISVs) looking to do more with Salesforce AI.
As for AI purchasing during the quarter, “a lot of our customers are starting to trial and use this technology to see the benefits around productivity and cost takeout leveraging the technology,” Millham said.
Customers also sought ways to “clean up and harmonize their data” to use AI, he said. Salesforce is also hiring “selectively” in Data Cloud, AI and other key growth areas.
Some data points the executives shared on the call include:
*The average size of deals greater than $1 million dollars was up 80 percent year over year, doubling net-new business in the segment
*Third consecutive quarter of add-on products like sales performance management, digital service and sales productivity grow annual recurring revenue (ARR) nearly 40 percent
*Data Cloud brought in 1,000-plus net-new customers during the quarter
*Data Cloud was part of six of its top 10 deals
*Nine of the top 10 deals included six or more Salesforce clouds
Salesforce itself eliminated 200,000-plus manual approvals in its quoting process through automation.
Salesforce reported $8.72 billion in revenue for the third quarter, up 10 percent year over year ignoring foreign exchange.
Its current remaining performance obligation (cRPO) was $23.9 billion, up 13 percent year over year. RPO at the end of the quarter was $48.3 billion, up 21 percent year over year.
Subscription and support revenues were $8.14 billion,up 13 percent year over year.
Professional services and other revenues were $580 million, down 4 percent year over year. Millham blamed macroeconomic trends for the decrease in professional services, Slack self-service and other segments.
Cash generated from operations for the third fiscal quarter was $1.53 billion, up about fivefold year over year. Free cash flow was $1.37 billion, up about twelvefold year over year.
Salesforce expects to bring in $9.18 billion to $9.23 billion in sales in its fourth fiscal quarter, which would be a 10 percent increase year over year.
Salesforce expects to bring in $34.75 billion to $34.8 billion in revenue for the full fiscal year, which would be up 11 percent year over year.