賽富時 (CRM) 2005 Q2 法說會逐字稿

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  • Operator

  • Good day, everyone, and welcome to the Salesforce.com second quarter 2005 earnings conference call.

  • As a reminder, today's call is being recorded.

  • For opening remarks and introductions I'd like to turn the call over to Ms. Joelle Fitzgerald, VP of Investor Relations.

  • Please go ahead, ma'am.

  • Joelle Fitzgerald - VP Investor Relations

  • OK.

  • Thank you, operator.

  • Good afternoon, everyone, and welcome to Salesforce.com's second quarter fiscal 2005 earnings conference call.

  • Management will discuss the results for our fiscal second quarter, which ended July 31st, 2004.

  • By now you should have received a copy of our press release, which was released after the market closed today and furnished on an 8-K-- Form 8-K with the SEC.

  • You can also access the press release and the detailed financials on our investor relations website at www.salesforce.com/investor.

  • I would like to introduce Marc Benioff, Chairman and CEO; and Steve Cakebread, CFO.

  • Today's call will begin with Marc providing a brief overview of our company and strategy and then Steve will review some key financial results for the second quarter.

  • We'll then conduct a question-and-answer session.

  • Before we begin, however, I appreciate your patience as I review our safe harbor statement.

  • Our discussion will include forward-looking statements such as statements regarding our business strategy, demand for our products, certain projected financial results and operating metrics, product development, customer satisfaction and retention, customer attrition rates, market or business growth, our revenue run rate, investment activity in our business, visibility into our business model and results, the effect of capitalized development costs, the democratization of CRM, the number of customized CRM web pages, spending on R&D, professional services and other aspects of our business, our appraisal of our competitors and their products and our ability to compete effectively.

  • Forward-looking statements involve risks and uncertainties and assumptions.

  • If any of the risks or uncertainties materializes or any of the assumptions prove incorrect, actual results could differ materially from those expressed or implied by the forward-looking statements we make.

  • Words such as ``expect,'' ``believe,'' ``anticipate,'' ``plan,'' ``illustrate,'' ``intend,'' ``estimate,'' and other similar words are also intended to identify such forward-looking statements.

  • These risks, uncertainties, assumptions, as well as other information on potential factors that could affect our financial results are included in our registration statement on Form S-1 and other filings with the SEC, which are available on our IR website at www.salesforce.com/investor.

  • With that, I'll now turn the call over to Marc Benioff.

  • Marc Benioff - Chairman and CEO

  • Thank you, Joelle.

  • We would like to welcome everyone to Salesforce.com's first-ever conference call to announce our quarterly results.

  • First, let me begin by saying that we are very pleased that we have delivered on our fiscal second quarter.

  • I'm sure all of you realize that is in stark contrast to traditional enterprise software companies, who continue to struggle.

  • Our unique value proposition of a low-risk, affordable, on-demand customer relationship management service has been received well versus the high-cost, high-risk enterprise software technology and business model still being sold by so many other companies.

  • As you're about to hear, our quarter's performance has exceeded our expectations and we are raising guidance for the remainder of the fiscal year.

  • Our second quarter revenues were $40.6m, up 88% compared to $21.6m for the same period last year.

  • Our net income was $1.2m, up from $122,000 for the same period last year.

  • Earnings per share were 1 cent per diluted share, compared to break-even for the same period last year.

  • And during the second quarter we added, on a net basis, over 1300 new customers and approximately 21,000 new paying subscribers.

  • As of the end of the second quarter, we had approximately 11,100 customers and approximately 168,000 total paying subscribers.

  • Our numbers speak for themselves.

  • As we announced on our analyst day on July 21st, Salesforce.com now manages the world's largest on-demand CRM installations, including ADP, Corporate Express, SunGard Data Systems, SunTrust Bank and Cisco Systems.

  • What is exciting about this is that we're not only successful with small and medium businesses, but now the world's largest enterprises, as well.

  • Previously, small companies had to choose ACT for their CRM.

  • Medium size business had to choose Microsoft and large companies had to choose Siebel, SAP or PeopleSoft.

  • Salesforce.com is the only company that has proven that it has the technology, business and distribution models to deliver its business solution across all customer segments successfully.

  • We continue to believe that this democratization of CRM across all industries and geographies has enabled Salesforce.com to become one of the fastest-growing enterprise software companies in the world today.

  • In July we also introduced two exciting new products -- Salesforce.com, summer '04, our 16th generation of our award-winning service, and our new Enterprise Edition 2.0, targeting the world's largest on-demand CRM implementations.

  • In fact, our new Enterprise Edition 2.0 service was chosen by Corporate Express for a phased rollout of 3000 subscribers and by ADP, who currently has over 3000 subscribers live with our service, which makes it the largest on-demand CRM implementation that we are aware of in our industry.

  • Most importantly, we have a tremendous level of success across our customer base.

  • Unlike traditional enterprise CRM software, which Gartner says has failed 50 percent of the time for customers, our customers are telling us that they experienced very high end-user adoption rates with our on-demand model.

  • As a demonstration of the extension of our product by our customers and its ability to scale to meet the demands for the largest users, during this quarter our service generated over 300 million customized CRM web pages for our worldwide subscribers and we estimate that over the next year we will generate over 1 billion fully customized pages for our growing customer base.

  • Salesforce.com's performance over the past several years, combined with these quarterly results and high customer success rates, illustrates that Salesforce.com is participating in what we call the end of software, a phrase we even trademarked four years ago.

  • We believe now as we believed then that enterprise software can be delivered more successfully to customers of all sizes in all segments and in all geographies through this new, on-demand model that we have pioneered.

  • We believe that corporations should not have to suffer the high-risk, high-cost model traditionally offered by enterprise software companies.

  • According to IBC, the on-demand application services market is now the fastest-growing segment of enterprise software.

  • IBC expects this market to grow at 41% annually through 2008, creating a $3.6b market opportunity for companies such as ours to deliver new on-demand solutions.

  • We look forward to the continued success of our customers through the exciting promise of on-demand computing.

  • Thank you and I'll now turn it over to Steve Cakebread to provide additional color on the quarter's results.

  • Steve Cakebread - CFO

  • Thanks, Marc.

  • Welcome, everyone, and thank you for joining us today.

  • Let's turn to our financial statements for the second quarter.

  • Please note that all the numbers we will discuss are on a U.S.

  • GAAP basis.

  • Total revenue for the quarter was $40.6m, a year-over-year increase of 88% and a 16% increase over last quarter.

  • This increase in revenue was driven by the continued strong growth in our customer and subscriber base, as well as the deliver of professional services to support those customers.

  • Subscription and support revenue was $36m.

  • This represents 84% growth versus last year and 16% growth sequentially.

  • Professional services and other revenue was $4.6m, growing 125% year-over-year and 23% sequentially.

  • Building out our professional services, both in-house and through partners is an important component of our strategy to assist enterprise-wide deployments such as those Marc mentioned earlier.

  • We've typically recognized revenue for services on an as-performed basis.

  • As we take on larger deals, we will see the associated service revenues deferred and amortized over the subscription term in order to comply with accounting pronouncement EITF-0021.

  • As Marc described, we ended the quarter with approximately 168,000 paying subscribers.

  • It's important to note that this number consists of paying subscribers for which we are recognizing revenue on our service.

  • This excludes a transaction we did with a national professional organization for 20,000 limited use licenses for which we will receive a nominal fee per users.

  • These users are not included in our published subscriber metrics.

  • We believe that excluding the 20,000 subscriptions provides a more accurate representation of our numbers.

  • Also, the 168,000 subscriber number excludes about 2000 paying subscribers who are using our product but for which we have delayed revenue recognition until specific new technology which the customers contracted for is completed.

  • Had we included these 2000 subscribers, our total subscriber count would have been approximately 170,000.

  • Going forward we will publish our monthly subscriber numbers during the latter portion of the quarter just as we did in the second quarter.

  • You'll be hearing from us again in early October when we'll report to you our subscriber numbers for August and September.

  • One of the positive aspects of our model is that this regular reporting of the subscriber numbers gives our investors greater visibility into the business during the quarter.

  • Moving on to revenue by geography, the Americas delivered $32,500,000 in revenue, growing 81% versus last year and 15% versus the first quarter.

  • Continued strong growth across all sizes of business fueled this increase.

  • Europe reported $5.8m in revenue and grew 116% year-over-year while delivering 26% sequential growth.

  • Europe now represents 14% of our global business versus 12% last year.

  • Asia-Pacific, which includes Japan, ended the quarter with $2.2m in revenues.

  • Year-over-year growth was 120%, with 20% sequential growth.

  • Asia-Pacific accounted for 6% of our revenues.

  • We believe international provides an exciting opportunity to continue to expand our business.

  • Overall gross margin for the second quarter was 80%.

  • This compared to 82% last year and last quarter.

  • This decline was primarily due to aggressive investment in our professional services.

  • We will continue to invest in the near-term in professional services, but we expect the overall gross margins to remain in its current recent range.

  • Turning to our operating expenses for the quarter, R&D expense was $2.1m, an increase of 23% year-over-year, yet down 3% sequentially.

  • We continue to be very aggressive in hiring developers, which accounts for the year-over-year increase.

  • When we develop new releases, we capitalize a small portion of our R&D, similar to what other software companies do.

  • We amortize these costs over three years.

  • As you know, we ha dour summer '04 release this quarter.

  • Because of the we capitalized approximately $161,000 of R&D expenses, which was $30,000 higher than the amount for the spring release, which was capitalized in Q1.

  • We amortized $95,000 in the second quarter, so the net impact on our P&L statement was only $67,000.

  • We've discussed before the leverage in our business model that allows us to run R&D in the mid to high single digits as a percent of revenue.

  • Unlike other software companies that have typically higher development costs, there's only one copy of Salesforce.com to support -- no platforms to port to or multiple databases and application servers.

  • This greatly reduces the cost of development.

  • Sales and marketing expense was $22,500,000 compared to $12,200,000 during the same period a year ago, an increase of 85% increase.

  • This increase was primarily due to a increase in hiring, particularly as it relates to our worldwide sales force as we continue to hire to meet our strong demand.

  • We also increased our marketing program spending to add more customer events, primarily in the U.S.

  • G&A expense was $6.6m, an increase of 76% versus the year and 19% quarter-over-quarter.

  • This increase reflected expenses associated with the operations of a public company and spending on Sarbanes-Oxley compliance and FAS 70-related costs.

  • We added 76 employees in the quarter, up 66% from a year ago and an increase of 15% sequentially, for a total of 594 full-time-equivalent employees at the end of the quarter versus last quarter's 518 full-time-equivalent employees.

  • Operating income was a strong $1.2m or 3% operating margin for the quarter.

  • This is up from last year's second quarter of $132,000 and last quarter's operating income of $361,000.

  • Our effective tax rate for the quarter was 13%.

  • Net income totaled $1.2m compared to $122,000 in the second quarter last year and up from $437,000 from last quarter.

  • As Marc said, this represents diluted EPS of 1 cent versus break-even in the second quarter of last year and last quarter.

  • Our non-cash stock-based expense for the quarter was $1.1m versus $1m last year and $877,000 last quarter.

  • Let me turn to the balance sheet.

  • We closed the quarter with $172,500,000 in cash.

  • This includes approximately $113.8m in net proceeds from the IPO.

  • Accounts receivable increased to $29.9m versus $24.5m in the first quarter of this year.

  • The strength of our second quarter business was principally responsible for this increase.

  • Given our revenue recognition model and the flow of deferred revenue, we do not use traditional DSO as a metric internally.

  • We manage to cash collection goals rather than DSO goals.

  • Current deferred revenue totaled $61.6m at the end of the second quarter, an increase of 109% over last year and 18% over last quarter.

  • The deferred revenue balance includes the billing for some portion of a few transactions for which the revenue will be recognized only upon completion of certain new technology planned for late this year.

  • Cash flow from operations continues to be strong.

  • During the quarter we generated $14.9m as compared to $4m during the comparable period a year ago and $6.7m last quarter.

  • The increase from last quarter is from continued strength in our operating execution.

  • We are investing aggressively in the second half in a variety of areas such as facilities.

  • While we expect cash flow from operations to remain positive, it will be more modest in the second quarter.

  • I'd like to discuss a few more important factors related to our business model.

  • First of all, you will typically see an increase in the deferred revenue balance in advance of revenue recognition.

  • Subscription and support revenue is recognized on a ratable basis over the life of the contract, which is typically 12 to 24 months.

  • To the extent we invoice our customers in annual installments, we would place the revenue in our deferred revenue account as the customer pays us in advance for the usage and we recognize the revenue over the life of the contract.

  • However, it's important to understand a couple of factors relative to our deferred revenue account.

  • A portion of our business comes from small and medium-sized customers and is billed quarterly.

  • Also, a number of legacy customers are billed monthly, even though both are signed up for annual contracts.

  • Since we are only billing these customers for a portion of the total contract, the impact on deferred revenue is relatively modest because the unbilled portion of the remaining contract does not get placed in deferred revenue.

  • Similarly, for multi-year contracts, the second and third years are not reflected in deferred revenues because these periods have not been invoiced.

  • On a related topic, sales commissions are also deferred and amortized over the contract term but are paid in full to the sales person the month after the customer's service commences.

  • Last year we paid for all years of the contract in advance of our sales team.

  • For this fiscal year we pay for only the first two years of the contract in advance.

  • Therefore, you'll see a lower growth in the deferred commissions balance than in previous years, since this will not reflect the third year or beyond for larger, multi-year agreements.

  • So let me move on to our forward-looking guidance, which is intended to fall under the safe harbor provisions outlined at the start of the call and is based on preliminary assumptions which are subject to change over time.

  • Turning to our guidance for fiscal year 2005 that ends January, we would estimate the following.

  • Total revenues are expected to be between $165m and $170m for the full year.

  • This is an increase from our initial guidance for the year due to the strong performance in the second quarter and continued momentum in our business.

  • We estimate net income to be between $2,500,000 and $4m for the fiscal year, resulting in an estimated diluted earnings per share of between 2 cents and 4 cents for the full fiscal year.

  • Share count for the year is expected to be on a full-year average about 110 million shares.

  • For the third quarter we expect revenues to be between $43m and $45m.

  • We are estimating, also, for the third quarter diluted share count to be at about 115 million shares and a tax rate of 13% for the second half, as well.

  • We are very proud of our second quarter performance.

  • This concludes our prepared remarks and we're now happy to take your questions and I'll turn the call back to Joelle.

  • Joelle Fitzgerald - VP Investor Relations

  • Operator, can we begin the Q&A, please?

  • Operator

  • Thank you, ma'am.

  • If you would like to ask a question on today's conference call, please star-one on your telephone at this time.

  • If you're using a speaker phone, please make sure that your mute function is turned off so that your signal might reach our equipment.

  • We will proceed in the order that you signal us and we'll take as many questions as time permits.

  • Once again, that is star-one to ask a question.

  • And our first question today comes from Tom Ernst with Deutsche Bank.

  • Tom Ernst - Analyst

  • Yes, good afternoon.

  • Thank you.

  • I'm curious about the 20,000-seat deal you mentioned with the national services company.

  • Could you characterize that deal for us?

  • You said it was limited use and you said it was, I believe, nominal pricing.

  • What is the arrangement?

  • What is the use they're looking to get out of it?

  • Is this a distributor partner or any insight you can give us would be helpful?

  • Marc Benioff - Chairman and CEO

  • Thank you, Tom.

  • The transaction was 20,073 users.

  • Seventy-three users were what we would call normal users, power users, if you will, exactly the same that would you see at an ADP or a Corporate Express.

  • Twenty thousand users of the 20,073 are what we would call part of their volunteer organization.

  • You may know that as part of Salesforce.com's support of non-profits we run quite a few non-profits for free, of a modest size, groups in the March of Dimes, Easter Seals, Habitat for Humanity, many others.

  • You can look at the foundation website at Salesforcefoundation.org and see the detail on the program.

  • This organization came to us and said, we'll, we'd like to do that, too, but we have more than the typical number of users that you provide a non-profit.

  • We said, how many more?

  • And they said, well, about 20,000 more.

  • And we said, well, we're going to need to charge you a nominal amount for that.

  • It's a relatively small amount and because it's so small, we didn't feel that it would be appropriate to call those 20,000 regular subscribers.

  • So we're just telling you that we have those subscribers on contract with us now, but we do not include them in our subscriber total.

  • I hope that helps illustrate this for you.

  • Tom Ernst - Analyst

  • That does.

  • Thank you.

  • One related question is while I recently came across a large carrier that's using your product in a very unique way for their internal employee care, I'm curious as to how many of your customers are using Salesforce for other, non-traditional kinds of services like that?

  • Marc Benioff - Chairman and CEO

  • Tom, that's a very good question and you may know that in our spring release we introduced Salesforce.com Custom Tab, which complemented the Custom Field functionality that we had introduced previously.

  • What this means is that customers can now build a copy of Salesforce.com but exactly for them, with tab names that are customized to be the names that they want, field names with the names that they want, page layouts they want it and they can do this in multiple languages and geographies.

  • It's the-- we believe it's the most highly customizable CRM available today.

  • Some of our customers have gotten so excited about that they've built unique applications like the one that you described.

  • How many of them are doing that and where they all are, we're not completely sure, but we sure have seen a lot of that taking place.

  • Tom Ernst - Analyst

  • All right.

  • Thank you, again.

  • Marc Benioff - Chairman and CEO

  • Thank you very much.

  • Steve Cakebread - CFO

  • Thanks, Tom.

  • Operator

  • We'll now move on to Ross MacMillan with Morgan Stanley.

  • Ross MacMillan - Analyst

  • Thanks and congratulations on the quarter.

  • Marc Benioff - Chairman and CEO

  • Thank you, Ross.

  • Ross MacMillan - Analyst

  • A question -- you went through the balance sheet, deferred commissions and why that went down, because of the change relative to last year.

  • Can you help us, as we move forward and think about how this amortization schedule works through the cash flow, I guess it's been running in the sort of $3m to $4m range.

  • Is that the sort of range we would expect on a go-forward basis?

  • Or will that actually fall a little bit below that as we-- as we continue to see this, if you will, change in the capitalized amount on the balance sheet?

  • Steve Cakebread - CFO

  • Sure.

  • You know, that's-- in terms of going forward, that's hard to estimate because it's typically a function of the larger corporate deals that we get.

  • But you'll notice on history it's been in the $3m to $5m range and I'd say that would be a good estimate for your model.

  • Ross MacMillan - Analyst

  • OK.

  • That's great.

  • And then a followup.

  • You mentioned on the cash flow as we look forward into the second half of the year you're going to have some-- perhaps some additional expense that's going to impact the cash flow.

  • Are these going to be capital expenditures as you expand the operations, say, internationally?

  • Or will those actually be other expenses that are going to come into the operating cash flow items, so above that line?

  • Steve Cakebread - CFO

  • It's going to be a combination.

  • The point I wanted to make about Q2, as you could see, the $14m in cash flow from operations is extraordinary.

  • It's well above our normal run rate.

  • Certainly, if you look at our deferred revenue change and our accounts receivable change, you would draw the conclusions that we have.

  • Good execution has generated about $6m or $7m from cash flow through that.

  • There's others in terms of accrued liabilities and other expenses that we've started to incur because of facilities layout costs and changes that we will expense because we don't capitalize much.

  • We're leasing everything.

  • So that will have -- it's more of a timing impact than anything else.

  • But we do expect facilities expansion.

  • We do expect and are starting up the formal legal subsidiary so that'll take cash.

  • We are continuing to hire people.

  • So it's a combination, but most of it is on the operating side, not the capital side.

  • Ross MacMillan - Analyst

  • Great.

  • And maybe just one last one, just I wonder if you could characterize what you're seeing from a competitive standpoint?

  • And specifically it looks like your average price per subscriber was pretty stable with last quarter.

  • Any thoughts as you think forward as to pricing in general?

  • That came up-- has been coming up.

  • I wondered if you thought was going to stabilize here, if that's the right way to think about it, or is there any kind of potential for that to go higher?

  • Thanks.

  • Marc Benioff - Chairman and CEO

  • Thanks, Ross, for that question.

  • In the competitive situation, of course we see different competitors in different segments of the market place and also in different geographies.

  • In the on-demand market place, which is the market place where we dominantly compete, it's difficult for us to assess exactly how we're doing because none of our competitors will tell you what their total subscriber and their total customer numbers are and when they report their numbers, they report gross numbers, they don't report net numbers.

  • For example, you probably know Siebel, I think, reported in their second quarter about customer numbers and paying subscriber numbers.

  • I think it was about 110 or 120 customers and maybe 2000-something subscribers.

  • But I think those were also gross adds and, you know, in the competitive situation overall we feel very good about our market share and our growth.

  • Perhaps Salesforce.com today is one of the fastest-growing enterprise software companies in the world, if not the fastest-growing publicly traded enterprise software company.

  • I would leave that up to you to actually decide.

  • So in the competitive situation, I would say we still see ourselves as doing quite well against our competitors.

  • In the pricing today, we see our price, mostly, I would say as stable.

  • If you look at it over a-- the last 12 months it really hasn't changed very much and so based on history, you know, we're-- we're using that as our guide.

  • Does that answer your question, Ross?

  • Ross MacMillan - Analyst

  • Yeah, that's great.

  • Thank you and congratulations, again.

  • Steve Cakebread - CFO

  • Thank you, Ross.

  • Marc Benioff - Chairman and CEO

  • Thank you, Ross.

  • We appreciate your support.

  • Operator

  • Our next question comes from Rick Vallieres with Credit Suisse First Boston.

  • Rick Vallieres - Analyst

  • Hi, Rick Vallieres, CSFB.

  • Congratulations.

  • Steve Cakebread - CFO

  • Hi, Rick.

  • Marc Benioff - Chairman and CEO

  • Hi, Rick.

  • Rick Vallieres - Analyst

  • How are you?

  • As you're selling to more and more customers, you have a large installed base, are you seeing a common thread of customization, maybe, within verticals that might warrant inclusion in the product as configuration options?

  • Marc Benioff - Chairman and CEO

  • Well, that's a great question.

  • You know, traditionally in enterprise software companies have had to put together what they called vertical solutions addressing a specific market place like pharmaceuticals or software.

  • When we looked at the market place, customers really lamented to us saying that they really didn't like those vertical solutions because once they got them, it was a great sales pitch, but they didn't really work very well for their specific business and as those companies updated and upgraded their software then they had to also get those updates and upgrades from those vertical solutions and sometimes they had customized them and they didn't fit right and it delayed their advancement of the technology.

  • So what we did was in-- over a significant amount of time was we rebuilt our product so that our customers could take it apart, if you will, to create their tabs exactly as they wanted them and with their name and so forth, kind of like what Tom was talking about where he saw a customer even take the application apart and put it back together that it didn't even look like a CRM system any more, it was managing data for a completely different aspect of somebody's business.

  • Manage all-- change all their fields, et cetera.

  • We put a lot of time and energy into that and we believe that what customers want is, you know, honestly ADP wants the ADP edition.

  • They don't want the payroll provider edition.

  • GlaxoSmithKline wants the GSK edition; they don't want the pharmaceutical edition.

  • And that's our approach and that is being very well received in the market place today.

  • Customers want to radically customize our system, but when they do that, we take those changes and then we put them into our data schema.

  • We don't actually store the page, per se, and then we generate the custom pages -- and you probably noticed I mentioned we generated about 300 million of those customized pages this quarter -- we then extract the changes the customer has made to the tabs, the fields, the page layout, whatever it is, and then give them that exactly page for that user in that language, in that currency.

  • And that's what the customer wants today -- highly customized, exactly for them, exactly for their user, fast and that's where we're putting our energy and also, when our sales person goes into an account, they're able to bring in a-- I would almost say something that looks very much like what the customer may even end up deploying.

  • They've kind of done the work in advance to maybe look-- make it look like a vertical edition, but it's not.

  • It's actually going to be exactly for that customer.

  • So I hope that gives you some color on that approach that we have.

  • Rick Vallieres - Analyst

  • That does.

  • That's great.

  • And maybe just a followup on Ross' question.

  • In the-- in the cases where you are facing a license-based competitor, have you seen any change in their behavior when they're facing off against you?

  • Maybe since the IPO, perhaps, in terms of pricing?

  • Marc Benioff - Chairman and CEO

  • Well, I think that one of the things that the IPO does is it gives us more transparency to our customers.

  • It lets them see how we're doing.

  • It give us, perhaps, more credibility.

  • It's harder for our competitors to say, oh, they're not doing very well, or they help, you know, to throw some FUD into the competitive situation because now that we're a publicly traded company on the New York Stock Exchange, we have a different set of characteristics in the competitive environment and so, yeah, I would say that it is different.

  • And I believe that is a substantial change, now that we are a public company.

  • Rick Vallieres - Analyst

  • That's great.

  • Thank you.

  • Marc Benioff - Chairman and CEO

  • Thank you very much.

  • Steve Cakebread - CFO

  • Thanks, Rick.

  • Operator

  • Kash Rangan with Wachovia has our next question.

  • Kash Rangan - Analyst

  • Hi.

  • Thank you very much and congratulations, as well, on your quarter.

  • Steve Cakebread - CFO

  • Hi, Kash.

  • Marc Benioff - Chairman and CEO

  • Thank you, Kash.

  • Kash Rangan - Analyst

  • You're welcome.

  • Just a couple of questions here.

  • One is, how did the enterprise segment of your business do?

  • We've been seeing some weakness in the larger enterprise software companies.

  • I'm just curious how that segment of the business did, if you can quantify that 21,000 new subs that you added in terms of how you saw the flow between enterprise versus small versus medium business?

  • And I have a followup or two.

  • Thanks.

  • Marc Benioff - Chairman and CEO

  • Thanks, Kash, for that question.

  • You know, when we look at our market place, we look at it as a democracy.

  • And I don't just say that because it's an election year, I say that because we see ourselves participating in a substantial part of the total market -- small companies, medium companies and even the largest enterprises.

  • Well, you can look at some of the deals that we've announced over the last year, companies like ADP and Corporate Express and SunTrust Bank and SunGard and Cisco Systems, and I would suggest to you that those are some of the larger CRM deals that have been done, really, by any vendor.

  • Most companies don't really disclose the size of the deals or the rate of the implementations like we have, but what's interesting is that we have seen us being able to participate in this large size of the market as well as the small.

  • And in terms of our percentage of subscribers in all markets, over the last, I would say, couple of years it really hasn't changed that much.

  • It's very much broken down to be about a third, a third and a third.

  • It's not exactly that.

  • I think its like maybe 40% in the small to very small companies, which we've categorized as 200 employees and less, and maybe about 30% on the very big companies, which we characterize as $500m and more.

  • But, you know, mostly it's been the same.

  • But I'll tell you the one change, perhaps, that's most interesting is that, you know, really a year ago, 18 months ago, we didn't really have any customers with more than 1000 users and now we do.

  • So you're seeing this model being accepted on these larger transactions, which is very encouraging.

  • Steve Cakebread - CFO

  • And I think for this quarter, the second quarter, we announced some very large enterprise deals in a period of time where other software companies were really struggling.

  • So I think that's a good indication, as Marc said, across the board of acceptance of our on-demand solution for our customers in a tough time.

  • Kash Rangan - Analyst

  • All right.

  • In terms of the enterprise segment of the business, looking as far as the pipeline is concerned, on a go-forward basis, how do you feel about that business?

  • Is it starting to get more predictable, especially with the hires that you've been bringing on board and how are they coming on the learning curve?

  • Marc Benioff - Chairman and CEO

  • Well, you know, we don't really comment, per se, on our pipeline.

  • I would tell you that Q2 was strong in all areas of our business and we, you know, saw in Q2 continued success in our enterprise business.

  • If you-- if you look at our business, I would say that because we're one of the-- maybe only vendor that has this real success rate with this democracy, we're very fortunate to have a play in all segments and from our view, all segments have a lot of activities.

  • Kash Rangan - Analyst

  • Got it.

  • And maybe one question on the financial side.

  • Steve, I'm wondering if you could comment on deferred revenues and how that might trend in Q3 and Q4.

  • Is there any [inaudible] that we should be-- overall, how should that number trend with bookings in Q3 and Q4?

  • Steve Cakebread - CFO

  • Well, deferred revenues were, as you know, very strong in Q2 and-- but keep in mind, some of that is contracts we invoice that we're not going to recognize the revenue until later this year because of technology deliverables.

  • We're looking for and continue to see good momentum.

  • We released summer '04 and so we think we'll have good momentum into the second half of the year with that product.

  • We feel very positive about it.

  • That's why we changed our guidance.

  • Kash Rangan - Analyst

  • But specifically, directionally, how should we look at the deferred revenue number to trend up?

  • Should we expect the same kind of growth that you saw from Q1 to Q2?

  • Steve Cakebread - CFO

  • I think we've seen overall we have-- you know, we get into this kind of seasonality component where Q4 and Q2 are going to be strong and Q1 and Q3 are going to be a little bit more modest.

  • I definitely think we'll see growth.

  • It's just the magnitude during the summer quarter is always an opportunity for us.

  • Kash Rangan - Analyst

  • Got it.

  • Thanks a lot.

  • Congrats, again.

  • Steve Cakebread - CFO

  • Thank you.

  • Marc Benioff - Chairman and CEO

  • Thank you so much.

  • Operator

  • And we'll now move on to Brent Thill with Prudential.

  • John - Analyst

  • Hi.

  • This is John in for Brent Thill.

  • Marc Benioff - Chairman and CEO

  • Hi, John.

  • John - Analyst

  • All right.

  • Nice delivery on the quarter.

  • Marc Benioff - Chairman and CEO

  • Thank you.

  • Steve Cakebread - CFO

  • Thanks, John.

  • John - Analyst

  • Looking again at the deferred revenue and, you know, in terms of looking at booking trends and so on, could you give us a sense of, you know, the length of the contracts that you typically sign in a quarter?

  • Is there a certain trend and where it is?

  • I mean, you mentioned 12 to 24 months, but is there-- can you give a little more color on that?

  • Steve Cakebread - CFO

  • Well, yeah.

  • Keep in mind that because of the GAAP requirements, we can only put into deferred revenue on the balance sheet just what we've invoiced.

  • So what you see on the balance sheet today, the $61m or $62m of deferred revenue, is stuff that's invoiced for the current year.

  • There is an off-balance-sheet component.

  • We'll talk about that on occasion.

  • That's not something we'll talk about at the moment, but all the contracts that we announced in July, the ones that you'll see press releases on in the future generate some amount of deferred revenue.

  • So the multiple year components, so year two, three and four on some of these longer enterprise deals, show up off-balance-sheet.

  • So what you're seeing on that is what's going on and what's capable of being booked or revenue recognized for the remainder of the year.

  • There's also a strong component that Marc talked about, the democratization in the small business arena.

  • There's a lot of quarterly billing that flows quickly through that, as well.

  • So I think you can take from the fact that deferred revenues grew from Q1 to Q2 a good sign of the strength of our business.

  • You can look at the subscriber growth, very strong subscriber growth, quarter over quarter, as well, and that translates into our operating results.

  • John - Analyst

  • OK, great.

  • If I can ask another one, in terms of the technology deliverable you've talked about, is there more than Cisco involved in there?

  • And is there some sort of timing you can get into?

  • Is it fiscal Q3 or fiscal Q4?

  • And is that built into the guidance for the full year?

  • Steve Cakebread - CFO

  • Cisco is the majority of it, but there's one or two other small contracts.

  • We're going to have these where we have some professional services work we need to do or a deliverable.

  • It's not that significant, though.

  • Just keep in mind-- keep in mind any particular deal, even some of the larger ones, in any given month or quarter, don't have that material an impact on the business.

  • The thing I just don't want you to do is drive out and say, gee, their deferred revenue went up so Q3 revenue is going to go through the roof.

  • Because, again, it's amortized over a period of time, typically a year, and there are one or two of these contracts that have technology or other contingencies that we have to deliver on before we'll start recognizing the revenues.

  • So it's a very conservative stance, but I think it's appropriate.

  • We've got a great business.

  • It's a developing business and we just want to make sure we're fiscally conservative here.

  • John - Analyst

  • Great.

  • And a couple of quick last ones.

  • Can you give us a sense of the tax rate for next year?

  • And then lastly, any thoughts on some of the open-source competition that seems to be showing up?

  • Steve Cakebread - CFO

  • I'll address the tax rate.

  • I have-- I mean, I do have an idea, but we're not talking about '06 until later this year.

  • You know, we have net operating losses, so they'll last for a little bit of time.

  • But we'll get into that in the next quarter or two when we give you our insights into '06.

  • The open source I'll let Marc address.

  • Marc Benioff - Chairman and CEO

  • Well, open source has been a tremendous boon for Salesforce.com because we've been able to build our solution with much lower cost components than we would have prior to this model.

  • A number of components in Salesforce.com are built with some of the best [inaudible] of the open source phenomenon, in application servers, in text search and many other areas.

  • And so it's been a very positive trend for us and we believe that it will help us to keep our software development costs in check going forward.

  • John - Analyst

  • Thank you.

  • Steve Cakebread - CFO

  • Thank you.

  • Operator

  • Laura Lederman with our next question from William Blair.

  • Laura Lederman - Analyst

  • Yes.

  • Just a few questions.

  • Thanks for a very solid quarter.

  • Following up on the competitive question, how often do you see Siebel these days in bids against you and how aggressive are they being on price?

  • Marc Benioff - Chairman and CEO

  • Well, I think Siebel said in their conference call that they see us about 6% of the time and in terms of how often we see them, it's kind of hard to gauge.

  • You can kind of see the number of customers and subscribers they delivered, which was about a tenth of what we did and I-- you know, they've run a huge advertising program last year.

  • You probably saw that.

  • They've done a tremendous amount of marketing, but honestly, they just have not delivered in our market or, as far as I can tell, any market, software on demand.

  • So from our perspective, no one else is delivering the level of success in on-demand computing that we have been able to provide today and, you know, we would love to have, you know, our competitors tell you what their total net subscribers were and what their total net customers were.

  • I think it would help you, Laura, if you had those numbers.

  • You could see what our market share exactly was.

  • I occasionally, you know, hear rumors or innuendoes about other companies, but, you know, I don't really know because they-- they won't disclose their numbers.

  • And Siebel-- you know, Siebel won't even let their product be reviewed by independent test centers and by ``PC Magazine.'' You probably-- you probably saw we just won the ``Editor's Choice Award'' for the third year in a row.

  • Siebel would not even allow their product to be reviewed.

  • In fact, I think in the history of-- Siebel's history they've never allowed anybody to review their product as an independent technology test center like ``PC Magazine'' or ``InfoWorld'' that you would normally see review a technology product.

  • So, you know, we feel that we have a very competitive product from a technology standpoint and we think that that's one of the reasons that we're able to generate this success and why we had a strong second quarter.

  • Laura Lederman - Analyst

  • Shifting gears to a Steve question, it was a very strong quarter.

  • It doesn't look like the months were any more back-end-loaded, but I thought I'd ask the question anyway.

  • Was there any change in terms of the amount of business you kind of do at the very end of the month versus--?

  • Steve Cakebread - CFO

  • No, our sales team works very hard, as you know, Laura, every month.

  • July was extraordinary for some of the deals that they brought in that we'll certainly talk about in the future, but no changes in linearity.

  • Laura Lederman - Analyst

  • OK.

  • And also, types of contracts, mix of yearly, multi-year, versus month-to-month billing, versus--?

  • Steve Cakebread - CFO

  • Pretty much-- everything is pretty much as we expected and within our norms.

  • Laura Lederman - Analyst

  • OK.

  • Thank you so much.

  • Steve Cakebread - CFO

  • Great.

  • Thanks, Laura.

  • Good to talk to you.

  • Marc Benioff - Chairman and CEO

  • Thank you, Laura.

  • Operator

  • We'll now move on to Heather Bellini with UBS.

  • Heather Bellini - Analyst

  • Hi.

  • Thanks, Marc.

  • A question for you.

  • I guess this would go to Steve.

  • In terms of the deferred revenue balance, those 2000 subs that you said have a contingency on them.

  • Is it safe to assume the same ASP, average ASP, for those subs as for the rest of the subs that you signed up in the quarter?

  • And then I have a followup.

  • Steve Cakebread - CFO

  • I would just use your own models for ASPs for that, Heather.

  • Heather Bellini - Analyst

  • OK.

  • And in terms of-- you know, I guess, Marc, a question for you, is how much of your sales activity do you think is coming from companies that are frustrated with their existing on-premise solutions and frustrated with the upgrade process, if you could give us an idea there?

  • Marc Benioff - Chairman and CEO

  • Well, I think that's a great question, Heather.

  • I think companies are sick and tired of the kind of high-risk, high-cost technology that has been fed to them by these big enterprise software companies and that's why you're seeing such resistance to future purchases from these companies.

  • These companies have sold products that GartnerGroup says have failed more than 50% of the time, at least in the CRM market place.

  • You know, that, Heather, is like you going to your-- the CEO of UBS and saying, we're going to build this great new office building for $100m, but there's only a 50% chance that you're every going to move in.

  • There's no other failure rate that's tolerated like-- that has been tolerated in enterprise CRM software in any other industry, in any other category.

  • It's amazing what these companies had to put up with and I think that they have started to put their foot down and say, we don't want this.

  • They're seeking out viable alternatives.

  • I think on-demand computing is one viable alternative.

  • Open source is another viable alternative and there are others.

  • And I think that's one of the reasons that companies look to us, because they see that we have, perhaps, one of the highest success rates in implementations of any CRM provider.

  • And we do that, as I've said now, democratically, and that's what companies want today.

  • Heather Bellini - Analyst

  • So is there a ballpark in terms of the number of customers that you typically sign in a quarter, a ballpark of what percentage of those are just throwing in the towel on their on-premise solution?

  • Marc Benioff - Chairman and CEO

  • Well, I don't have an exact percentage, but, you know, of the large customers that we've talked about here, I think almost all of them have already bought an enterprise CRM software package.

  • If you were-- I think you were at our analysts day on the 21st.

  • Quite a few of them talked about they had already bought it.

  • You know, they'd already bought the product from one of those providers and they never got it working and that's-- you know, that's-- that's one of the reasons that we think that we've been able to go into this market and generate momentum, because these customers are looking for viable alternatives.

  • Heather Bellini - Analyst

  • Great.

  • Thank you very much.

  • Marc Benioff - Chairman and CEO

  • Thank you, Heather.

  • Joelle Fitzgerald - VP Investor Relations

  • Operator, we have time for one more question.

  • Operator

  • All right, ma'am.

  • We'll take our final question today from Tom Ernst.

  • Tom Ernst - Analyst

  • Yes, one quick followup.

  • I'm getting a lot of questions about-- about the possibility of insider selling following the lockup.

  • I just wonder if you can help us characterize any thoughts you have on perhaps organizing a secondary or how the structure of the ownership of the shares might-- what the selling patterns might be once the lockup period expires.

  • Steve Cakebread - CFO

  • You know, Tom, as you know, we're locked up until the end of December and then we're into quiet period.

  • Right now there's no indications one way or another.

  • If there is, we'll let you guys know.

  • Tom Ernst - Analyst

  • Can you talk a little bit about the structure of who owns the shares and if you do-- if you anticipate that there'll be a need to sell shares?

  • Steve Cakebread - CFO

  • Yeah, there's-- you know, a lot of that's in the registration statement.

  • I think that's probably the best place to get that at the moment.

  • Tom Ernst - Analyst

  • OK.

  • Fair enough.

  • Thank you, again.

  • Marc Benioff - Chairman and CEO

  • Good.

  • Thank you, Tom.

  • Steve Cakebread - CFO

  • Thank you, everyone.

  • Operator

  • That is all the time we do have for questions today.

  • I'd like to turn the conference back to Ms. Fitzgerald for any closing remarks.

  • Joelle Fitzgerald - VP Investor Relations

  • OK.

  • Thanks, everyone, for joining us this afternoon.

  • A replay of the conference call is available-- of the webcast is available at www.salesforce.com/investor.

  • You can access that until midnight on August 30th, 2004, and a replay of the conference call, if you'd like to dial in, will be available until midnight on August 23rd and can be accessed by dialing 888-203-1112 or 719-457-0820, access code 365871.

  • Thanks, everyone.

  • Operator

  • That does conclude today's conference.

  • We do thank you for your participation.

  • You may now disconnect.