賽富時 (CRM) 2005 Q3 法說會逐字稿

Good day everyone, and welcome to the salesforce.com third quarter fiscal 2005 earnings conference call.

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

For opening remarks and introductions, I would like to turn the call over to Ms. Joelle Fitzgerald, Vice President of Investor Relations for salesforce.com.

Please go-ahead, ma'am.

Good afternoon everyone, and welcome to salesforce.com's third quarter fiscal 2005 earnings conference call.

Management will discuss the results for our fiscal third quarter which ended October 31, 2004.

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

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

I would like to introduce Marc Benioff, Chairman and Chief Executive Officer, and Steve Cakebread, Chief Financial Officer.

Today's call would begin with Mark providing a brief overview of our Company and strategy, and then Steve reviewing the key financial results for the third quarter.

We will 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 regarding our business strategy, demand for our product, large client wins, certain projected financial results and operating metrics, the reliability and strength of customized on-demand applications created with our software, product development, market or business growth, salesforce.com becoming the standard platform for on-demand applications, our revenue run rate, investment activity in our business, visibility into our business model and results, R&D spending, our appraisal of our competitors and their products, our customers' success based on our technology, our ability to compete effectively, as well as other statements that may be made in response to questions that we do not now anticipate.

Forward-looking statements involve risks, uncertainties and assumptions.

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

Words such as expects, believes, anticipates, plans, illustrates, intends, estimates 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 reports filed with the SEC, including our Form 10-Q filed on August 25, 2004 for the quarter ended July 31, 2004, which are also available on our Investor Relations website.

We also intend to discuss some non-GAAP measures.

A reconciliation of GAAP and non-GAAP results is available on our website at www.salesforce.com/investor.

With that, I will now turn the call over to Marc Benioff.

We would like to welcome everyone to salesforce.com's conference call to discuss our fiscal 2005 third quarter results.

First, let me begin by saying we're very pleased with our third quarter results.

And we believe that we are seeing increasing signs that our on-demand model is going more mainstream than ever before.

The salesforce.com value proposition of a low-risk, affordable, on-demand customer relationship management service delivered democratically to companies of all sizes, from small and medium-size businesses to the largest multinationals in the world, continues to be received very well in the marketplace.

At a time when legacy packaged application software vendors are still struggling to simply grow, our Company and business model continue to thrive quarter after quarter.

And the third quarter was no exception.

As you read in today's press release, our third quarter's performance has exceeded our expectations, and we are again raising guidance for the remainder of the year.

Revenue for the quarter was 46.4 million, up 82 percent year-over-year and 14 percent sequentially.

Net income was $2.2 million for the quarter, a substantial improvement over last year's loss of $100,000, when excluding a $4.3 million one time non-cash gain related to a reversal of an accrued liability associated with a lease obligation.

During the third quarter we added over 1,400 new customers and 27,000 paying subscribers.

Our new customers included both small businesses with a few subscribers, and large businesses with thousands of subscribers, reflecting the democratic nature of our on-demand model.

As of the end of third quarter we had approximately a total of 12,500 customers and 195,000 paying subscribers.

While we're very pleased, and while we're extremely pleased with the third quarter results, the announcements that we're making and that we made at our Dreamforce User and Developer Conference a few weeks ago were even more exciting.

If you attended Dreamforce, you have experienced the energy and enthusiasm of our customers towards our model and service.

This year approximately 2,000 customers came to our conference from around the world.

This was over twice the attendance of last year's conference.

At Dreamforce we launched Winter '05, 17th generation of our service.

Our Winter '05 release expands our functionality lead in on-demand CRM, and is a major step towards our long-term vision of becoming the new standard for managing and sharing information on-demand.

The Winter '05 product line includes salesforce.com and supportforce.com which deliver the best of breed in CRM, allowing a 360 degree customer view, including sales and service, marketing, contracts, documents, calendaring and analytics and much more.

Announced earlier this year, or I should say announced earlier this quarter, supportforce.com is our on-demand service targeted at the call center, customer support market.

Launched in conjunction with industry leaders Alcatel, Aspect, Viacom, Cisco and Genesis, supportforce.com is fully integrated with salesforce.com.

And the functionality of our supportforce.com application is now in use with many of our customers.

We plan on doing for customer service and support help desks and call centers, the same thing we did for salesforce automation, making customers successful by lowering the risk costs and dramatically improving the ease-of-use.

Both salesforce.com Winter '05 and supportforce.com Winter '05 are built on top of our two core technologies, the customforce.com Toolkit and the sforce integration platform.

Customforce.com, announced that at our Dreamforce conference, is a complete customization Toolkit allowing our customers to customize salesforce.com and supportforce.com, or even extend our application platform to manage and share information beyond CRM to automate other departments or divisions inside a company.

Customforce.com offers custom tabs, custom fields, custom page layouts, custom objects, custom controls, and other plural (ph) components for application development.

For the first time customers can access an easy to use and powerful tool for building their own on-demand applications for IT and HR and operations, finance and more, and have those applications tightly integrated with our applications.

Customers have asked us to provide this deep customization capability and we have delivered it to them with Winter '05.

Combined with our sforce marketplace of applications from third parties, we believe customforce.com represents a major step towards salesforce.com's on-demand service becoming the standard for customers to manage and share their information.

Many of you know that we believe that the concept of vertical applications is nonsense.

The idea that a high-tech vertical or a media vertical or a pharmaceutical vertical or some other type or vertical is when a company wants more than their own ability to fully customize the offering is not what our customers are saying.

Cisco, Macromedia, TIBCO, and AMD are, for example, all in a high-tech industry, but none of them want a high-tech vertical addition that is identical to what the other company in that industry is using.

And these are all very different companies with different types of requirements and needs.

You could say Cisco wants Ciscoforce, and Macromedia wants Macromediaforce, and TIBCO wants TIBCOforce, and AMD once AMDforce.

Well, a high-tech vertical version of salesforce.com is not the answer, but customforce.com is the answer.

Customforce.com lets these customers headed their way, exactly as they want it.

We believe in the end of vertical specific applications, exactly as we believe in the end of software.

Finally, salesforce.com, supportforce.com and customforce.com are all built on top of our XForce 5.0 client/service integration platform, allowing our customers to easily integrate desktop or enterprise applications.

Customers can integrate their desktop applications like Outlook or Office, or easily integrate their ERP applications like SAP, Oracle, PeopleSoft.

You know you can also use popular tools such as Borland's J-Builder or BEA's WebLogic workbench, or even Microsoft's Visual Studio to create custom client side applications that leverage the data, and application components and services inside sforce 5.0.

In fact, IBM keynoted our Dreamforce User Conference on how to use their exciting new tools, such as Websphere as a front-end to SForce.

Our Winter '05 release was made available to our customers on Monday of this week in 11 languages.

And all of our 12,500 customers and 195,000 subscribers are now successfully managing and sharing their information with these exciting new capabilities.

All customers, all of their customizations, all of their integrations have successfully migrated to our new Winter '05 release.

Unlike traditional enterprise software vendors, we will leave no customer behind.

With Winter '05 we're also releasing our crmsuccess.com website.

Our formula is simple.

Deliver the products that our customers want and make sure they are successful.

To that end, crmsuccess.com is a comprehensive best practices and community portal that leverages the critical mass of our 195,000 subscribers by allowing them to share on-demand best practices and success stories.

Crmsuccess.com is technology that provides intelligent evaluations of how our customers are utilizing our service.

We then have dedicated customers success managers to follow up and coaching to customers at no charge, helping them to take this data and turn it into valuable action for their businesses.

And this investment makes customers more successful, which ultimately makes us more successful.

We believe there is no other software company that goes further than salesforce.com to enable customer success.

And it is a key aspect of our competitive advantage.

And if you have spoken to our customers, I'm sure you'll agree.

You know while the end of software has been clear for some time at the small to midsize company level, we continue to see very positive trends at the large enterprise end of the market.

We're not only winning more large enterprise customers, but also are becoming the corporate CRM standard for large companies like ADP and Corporate Express and SunTrust Bank, and as well as many others that we have talked about in the past.

Let me highlight a few of this quarter's large enterprise wins now.

Quintiles, Quintiles is the world's leading provider of product development and commercialization solutions to the pharmaceutical and biotech companies, has selected salesforce.com as its global CRM standard.

Quintiles has already begun enterprisewide implementation of salesforce.com, which is expected to be about 2,000 user deployment.

The next enterprise win that I would like to highlight is Staples.

As you know, Staples is the world's largest office products retailer, choosing salesforce.com as its enterprise standard for 1,500 subscribers.

Staples migrated to salesforce.com for our feature rich product, proven scalability and professional services organization that can support thousands of customers.

And we're thrilled to have them as part of the salesforce.com family.

And finally, our third large enterprise win for the quarter that we would like to highlight on the call is Nextel.

Nextel is another customer and that has announced their decision to go with salesforce.com at our Dreamforce User Conference a couple of weeks ago for their enterprisewide roll out of salesforce.com CRM.

Now before turning it over to Steve, I would like to thank Magdalena Yesil for her service on our Board of Directors.

As stated in our 8-K filing today, Magdalena has decided to step down from service on our Board effective today.

And we will now begin a search for her replacement.

Magdalena has worked with me since really day one of the company and was our first Director.

And I would just like to say it really was even before day one when I first sat down with Magdalena and told her of our dreams for salesforce.com.

Of course at that time it was just me and her having lunch.

And well, she really was the first to believe that this could happen, and helped me to include our founders, and helped us to raise our capital.

And we are forever indebted to Magdalena Yesil.

She has a proven and accomplished track record here in Silicon Valley of growing a company from just an idea to become an industry leader.

Her intelligence, experience and creativity have help salesforce.com since it's very early stages.

And we want to thank for for her dedicated service.

We are honored to have her as part of our family.

And we are going to look forward to working with her and her other portfolio of companies as she now leaves our Board.

So thank you, Magdalena, so very much.

Now I would like to turn it over to Steve to provide additional color on the quarter's results.

Welcome everyone, and thank you for joining us today.

Let's review our financial statements for this third quarter.

Total revenue for the quarter was $46.4 million, a year-over-year increase of 82 percent and 14 percent sequentially.

Our growth was driven by the continued strong demand in our customer and subscriber base, as well as the delivery or professional services to support those customers.

Subscription and support revenue was $41,500,000, representing 84 percent growth versus last year, and 15 percent sequentially.

Professional services and other revenue was $4.9 million, growing 66 percent year-over-year and 7 percent sequentially.

As Mark described, we entered the quarter -- ended the quarter with approximately 195,000 paying subscribers and approximately 12,500 customers.

In the quarter we added 1,400 customers and 27,000 paying subscribers.

Breaking it down by month, we added 500 customers and 9,000 subscribers in August, 400 customers and 8,000 subscribers in September, and 500 customers and 10,000 subscribers in October.

Business was consistently strong throughout each month of the quarter.

While we're pleased with our Company's performance in the quarter, it should be noted that we would not normally expect to see such strength in the third quarter, and in particular during the month of August.

Also note that our reported subscriber numbers consist of net paying subscribers, on which we're recognizing revenue for the services.

But it excludes the approximately 2,500 paying subscribers who are using salesforce.com where we have delayed revenue recognition until specific new technology is completed.

Going forward we will continue to publish our monthly subscriber numbers twice each quarter, once in the middle of the quarter and once in our quarterly earnings call.

You will be hearing from us again in early January when we will report our subscriber number as of the end of the December.

Moving on to revenue by geography.

Results were strong across all geographies as we continue to grow on a worldwide basis.

The Americas delivered $37.2 million in revenue, growing 80 percent versus last year and 14 percent versus the second quarter.

Continued strong growth across customers of all sizes fueled this increase.

Europe reported $6.6 million in revenue and grew 107 percent year-over-year, while delivering 13 percent sequentially growth.

Europe now represents 14 percent of our global business versus 13 percent last year.

And Asia-Pacific, which includes Japan, generated $2.6 million in revenue, growing 63 percent year-over-year and 18 percent sequentially.

Asia-Pacific accounted for 6 percent of our revenues, level with last year.

Overall gross margin for the third quarter was 81 percent compared to 82 percent last year and 80 percent last quarter.

Looking at our operating expenses for the quarter, R&D expense was $2.5 million, an increase of 31 percent year-over-year and up 19 percent on a sequential basis.

We continue to be aggressive in hiring developers.

It is important to remember that we enjoy significant advantage over our competition.

Our development resources are dedicated to enhancing our functionality and expanding our footprint, while the competitors spend their resources supporting multiple platforms and versions of their product.

Sales and marketing expense was $24.9 million, an increase of 71 percent versus the prior year and 11 percent sequentially.

We continue to make significant investments in sales and marketing to fuel our industry-leading growth.

And we're gaining leverage as our critical mass increases.

G&A expense was $8.3 million, an increase of 92 percent versus the prior year and 25 percent quarter over quarter.

This reflects increases in headcount, facilities and additional corporate costs.

We added 85 employees in the quarter, up 65 percent from a year ago, and an increase of 14 percent sequentially, for a total of 679 full-time equivalent employees versus last quarter's 594 full-time equivalent employees.

Operating income was $1.8 million, or 4 percent of revenues for the quarter.

Operating income this quarter increased substantially from last year's third quarter loss of $31,000.

This excludes the one time non-cash gain of 4.3 million that we recorded last year that was associated with the reduction of facility lease obligations.

As many of you will recall, last year we recorded a sizable one time non-cash gain in the third quarter reflecting the reversal of a liability associated with a lease of office space.

In August of 2003 we were released from the lease obligations for this space in connection with the landlord's lease of space to another tenant.

Accordingly, we recorded a 4.3 million one time non-cash gain in the third quarter of fiscal year 2004.

This one time event had the impact of improving our margins in the year ago period.

Our effective tax rate for the third quarter of fiscal year '05 was 13 percent.

Our fiscal '05 third quarter net income was $2.2 million, a significant increase from the loss of $100,000 in the prior year, again when you exclude the 4.3 million one time non-cash gain that we just discussed.

In our fiscal third quarter EPS was 2 cents per diluted share, up from a break even in a year ago period, again when you exclude the onetime non-cash gain.

Including the one time non-cash gain, net income was 3.8 million in the year ago period, and EPS was 4 cents.

Turning to the balance sheet and cash flow.

We closed the quarter with $185 million in cash, up from 172 million at the end of the prior quarter, reflecting strong business and cash collections.

Accounts receivable increased to $37.6 million from $29.9 million in the second quarter of this year, again reflecting the strength of our third quarter business.

Deferred revenue totaled 74,200,000 at the end of the third quarter, an increase of 116 percent over last year and 20 percent over last quarter.

Cash flow from operations continues to be strong.

During the quarter we generated $13.2 million as compared to 6.9 in the comparable period a year ago.

Cash flow was much better than we had anticipated driven by a couple of factors.

First, a strong third quarter business, and secondly, timing differences on facilities and other investments that we previously anticipated in Q3 and Q4 time frame of this year will now be in the Q1 and Q2 time frame next year.

By any measure we had an excellent third quarter.

With regards to the fourth quarter, let's turn to guidance for the remainder of the year.

The fourth quarter fiscal year '05 we estimate to be the following.

Total revenue for the fourth quarter we estimate will be between 51 and $52 million.

EPS we estimate will be between 1 and 2 cents per diluted share.

We expect the tax rate to be at 13 percent, and the share count to be 117 million diluted shares outstanding.

This than results in higher guidance for the year than our estimates last quarter.

For the full year, fiscal year '05, we would estimate revenues between 172 million and 174 million, with full year fiscal year '05 EPS to be between 4 and 5 cents personally share.

Again, these estimates are based on a 13 percent tax rate and 110 million shares for the full year average.

Let's take our very first look at fiscal year 2006.

We are currently in the process of finalizing our budget for the full year.

However, we believe it is appropriate to give you some direction as to where our thought processes are on a preliminary basis.

We will complete our '06 budgets over the next month or two and we will share our finalized forecast with you when we get together to announce our fourth quarter results.

Our early thoughts are in the range of current expectations, however, we need to provide more specifics on a few assumptions, like tax rate and share count, and provide you some insight into our direction for next year.

Our preliminary estimate of revenues for fiscal year '06 are between 275 million and 285 million.

While we have said it many times, it is worth reiterating that it is our intention to continue improving profitability, and on a long term basis we believe the Company will enjoy operating margins in the 20 to 25 percent range, because is when our revenue growth moderates.

In the near term, our primary focus is on growth and establishing salesforce.com as a standard platform for on-demand applications.

We expect to see more significant operating margin expansion when our annual revenue growth approaches 30 to 40 percent.

Also, in looking at expenses, please keep in mind that we will incur a full year public company cost such as D&O insurance and Sarbanes-Oxley certification costs in fiscal year '06.

We will also continue to invest in our operations as we increase our global distribution and sales through our international expansion of our global infrastructure.

Our EPS estimates for fiscal year '06 reflects these investments and are between 10 and 12 cents a share on a diluted basis.

This assumes a 25 percent tax rate and a full year average share count of 120 million shares.

The midpoint of this range would represent more than a doubling of EPS over our current fiscal 2005 guidance.

Again, these are preliminary estimates.

We would expect to provide more specific fiscal year '06 goals upon completion of our budget process, and report to you on them in the next quarter's results.

In closing, we're very pleased with our third quarter results and our world-class line up of products, salesforce.com, supportforce.com, customforce.com and SForce.

This concludes our prepared remarks.

And we are happy to take questions.

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

(OPERATOR INSTRUCTIONS).

Tom Ernst with Deutsche Bank.

(indiscernible) for Tom Ernst.

Just wondering if you could give us an update on supportforce.com and how this may have helped you in competitive situations?

Thank you for that question.

Well, as you know, during the quarter we formally launched supportforce.com, which is our solution to help companies automate their call centers, contact centers and help desks.

We were very fortunate to have a variety of industry partners at the launch.

I think I mentioned them, Cisco, and Aspect and Avaya and Alcatel and others.

And it represented actually I believe over 70 percent of the installed call center, contact center, hardware infrastructure marketplace.

The key to supportforce.com is that we want to be able to do to call centers and contact centers and help desks what we did for traditional salesforce automation.

A lot of our customers have come to us and asked us to move our technology in this area.

And we have found a lot of reception at our user conference.

A lot of our customers are very interested in supportforce.com.

And we believe it is an excellent differentiation as well as an amplification of the capabilities of our model to extend beyond simple salesforce automation.

And then also in terms of the three large deals that you highlighted, were these competitive deals?

And were any of them replacements of other CRM systems?

Thank you for that question.

In the three large transactions that we highlighted, which were Quintiles, Staples and the Nextel Communications, of course these companies all have very sophisticated and experienced procurement processes and so these transactions tend to be very competitive, and in some cases we are replacing existing CRM solutions.

Rick Vallieres with Credit Suisse First Boston.

Your subscriber account grew 16 percent from July to October.

That is the same percentage as in the previous quarter, and both above the year ago level.

Fiscal Q4 last year that rate actually accelerated from the previous quarter from that October to January.

But your guidance seems to imply I would say perhaps a lower growth rate from October to January, sort of on that sequential basis.

So I guess there's two questions there.

One, what has been driving that accelerated growth versus last year.

And then what accounts for sort of the slow down in your guidance?

I will start out, and all I will let Steve pick it up at the end.

I think the first thing is, number one, our model is more accepted today than it was last year, or even the year before that.

We have been able to show over the last year our ability to make customer successfully -- make customers successful democratically in small, medium and large sized businesses.

I think that has been a nice change.

And of course we're also now a public company, which creates a lot more awareness for our brand and our solution than ever before.

And so all of the things I think have contributed to that growth.

You know, last year the sequential growth we showed was very strong.

And we believe that will continue to deliver great results, but one has always got to be cautious about future expectations.

Okay.

And just are there any sort of year-end incentives for your sales and marketing folks that are maybe different from last year?

No, nothing of consequence.

And I will just ask one last quick one of Steve.

When I look at the sales and marketing line it was up 11 percent sequentially this year versus sort of 19 percent sequential increase last year.

So then how do we sort of think about fiscal Q4 Dreamforce?

It seems to be sort of a bigger event, and you had to pay for the President, so I'm wondering how sort of that plays out in Q4 as far as sales and marketing ramping?

I think that is clearly embedded in our expectations, 1 to 2 cents per share for the quarter.

We clearly continue to invest in our sales and distribution.

And with Dreamforce in November there will be expenses there.

So you will continue to see us invest aggressively in sales and marketing.

(OPERATOR INSTRUCTIONS).

Heather Bellini with UBS.

I was just wondering, Steve or Marc, if you could give us an idea of when we're modeling out your subscriber going forward, when should we expect you all to start seeing seasonality in your sub findings, more so then what we have been seeing?

I think, Heather -- that's a tough question, because we're clearly in -- every customer starts to accept the model.

We continue to attract new business in the U.S.

I believe though that seasonality will be in the future some time as we get a more normalized international business that does see some seasonality.

You saw sequential growth in the states in this quarter, a little but stronger than we saw in Europe, but we saw a great European business.

But that is where you're going to see more seasonality than in the U.S.

Right now though everybody is getting to accept the on-demand model.

And I think seasonality will start to show up later in our life.

But the most important thing remains for us to make customers successful.

To make sure that each and every customer and each and every subscriber is having the best experience with our service that they have ever of any product they have ever used in our category.

And as we focus on that we have been able to basically expand that -- expand our subscriber count.

And we have seen some seasonality in that expansion at different times, at different fiscal years, but it has been very hard for us to predict.

So I think exactly what Steve said is true that as we move towards becoming a more mature company we will see more normalized operation.

Brent Thill with Prudential.

Congrats on a good quarter.

Marc, if you could maybe just o spend a couple of minutes giving us a sense of the competitive environment.

You probably see your success as breeding a lot of look alike strategies.

What are you hearing from your customers in terms of some of those new initiatives that have been unveiled?

I think it is a great question.

We are seeing a market emerge, which is of course our goal.

We want to destroy the enterprise software industry in its traditional sense.

But that means that there should be a market with a lot of competitors in that market.

Today I believe that we're the leader in this market and that our results demonstrate that.

Part of the problem that we deal with, and also part of the problem that you deal with, is that our competitors, even our public company competitors, won't give out their net customer or net subscriber numbers.

So we can't give you our relative rankings to them.

You look at Siebel and you look at kind of how they reported their on-demand model numbers last quarter, I mean, it is embarrassing, I think that they're not willing to say how they're doing.

I think that they've been in this market now for a year.

They've made a lot of very aggressive statements about this market, as you know.

And I think that I would like to see them put their money where their mouth is.

What is their net customer, net subscriber number?

Why are they so afraid of giving out this number?

This is a very easy number to report.

We do it, why are they not doing it.

And you cover them, so maybe you have some insight there.

And just a question for Steve.

There's a big looming question surrounding the share lock up December 19.

Any plans in terms of how you're going to deal that?

You're right, the lock up is December 19th.

The first trading day would be that Monday the 20th.

We are continuing to focus on delivering results.

We've got a couple of executives working on 10B5 plans that you'll hear about in the coming couple of months.

Beyond that we believe in the model, and we believe that will continue to drive our business.

So -- you can't do much about that.

Kash Rangan with Wachovia.

I will try an go through a couple of questions if I could.

Marc, one for you.

When you look at the large deals in the quarter, Quintiles, Staples, Nextel, my understanding is that all three of them happen to be Siebel customers.

Specifically, Staples I think had a -- there is this unit called SVD Teleservices that is a Siebel customer.

Can you talk to whether each of your wins with all these large customers specifically involved expansion of existing CRM topology or replacement of existing topology?

And I will follow up with it.

Well, without talking about any specific customer, I which just say that of course Siebel in its 10, 11 year history has sold in a lot of enterprise CRM software.

Unfortunately, a lot of that software is just on the shelf, unused.

The implementations have been failures.

There was a lot of money spent on software and hardware and hiring people.

And their technology and their model it just never made the customers successful.

So there's a lot of out there.

And when we're in there many times the customer says they have already used Seibel, they're not going to look at them again.

In some cases Siebel becomes a competitor in the situation.

Of course, they are a significant tough player in the market, and we have to be very cautious of them.

And we watch of course every situation very specifically.

But we have been fortunate to be able to close these three additional large enterprise providers, as well as a lot of other by the way small and medium companies who had that Siebel software, but they just never got -- never got it working.

And if you look at the pipeline, I know you don't comment on the pipeline per se, but are you seeing more of expansions to current CRM deployments were are you seeing replacements of older technologies?

I think you're saying both.

I think you're saying customers who are expanding their investment, and you're also seeing new customers come along to start new implementations as well.

My final question for you, Marc, is when you look at supportforus.com what kind of impact do you think it will have on the business mix of subscribers one or two years down the line?

Is it going to contribute to more addressable users or is it just going to contribute to a changing mix of the number of subscribers that you add on, that it is support versus sales, etc.

What kind of impact do you think it has on your subscriber volume and mix one to two years out?

You know that is a great question.

The way we look at this is, we look at a customer -- like we have a customer, for example, ADP.

And ADP I guess has approximately 3,000 subscribers with salesforce.com.

You probably know that.

You may have even met them at one of our events, or our user conference, or heard them speak on why they chose salesforce.com, even though they had already bought the Siebel product.

Well, the thing about ADP is that they have a lot more than just 3,000 employees, as you know.

And we look at that is our market share in ADP is very low.

And that is why we're looking at other products we can help deliver to ADP.

And I'm just using them metaphorically as an example of a customer.

And to all of our customers in terms of how to expand our market share in our customers.

It is very important to us.

So supportforce.com is one strategy to do that to get more users than ADP, for example.

Custsomforce.com is another example of another product that could get more users to build custom applications, to help automate other departments and divisions that we previously haven't been able to get too.

SForce is another strategy.

We what we want is more and more subscribers.

That is our total consciousness here at salesforce.com.

That is why I specifically commented that way with Brent.

I think that the key to this model is knowing where you are in terms of the number of net subscribers that you have.

The net subscriber number is the key.

And so we are trying to expand our net subscriber number inside each and every customer.

We have 12,500 customers.

We want to expand our market share in each one of those customers, as well as add more customers.

And doing that we think will bring us to our grander strategy, which is to increase our net subscribers.

So everything you're seeing us do is putting the wood behind that arrow.

Got it.

And if there's time for one question, Steve, the fiscal '06 EPS is that for pro forma or GAAP?

And if it is GAAP, it looks like it is a significant step up in operating profit targets for next year.

Any reasons behind that?

That is it.

Thanks.

It is GAAP.

There is no one times or anything in there, so that is all GAAP.

Like we said, our agenda is to grow this business dramatically.

So we're certainly focused on improving our international operations, growing our infrastructure, etc.

At the same time we respect the fact that we need to continue to improve our bottom line, both on the operating margin as well as net income and EPS.

So you're seeing I think hopefully a good balance between continued focus on revenue growth but respect for the fact that profitability is important as well.

And, yes, I think our original -- and again this is very a preliminary look, but that we feel strongly that we continue down a good strong path of that balance right now.

Ross MacMillan with Morgan Stanley.

Steve, just on that cash (indiscernible).

So that number excludes what we would call compensation awards, right?

You know, the accounting bodies have said that we have to disclose it, and there is many ruling to include it.

And so we have not adopted any FASB in terms of stock-based compensation.

Having said that, keep in mind that we do include and did include about 1 million 1 in direct stock compensation for what people normally term cheap stock charges.

So that has been always in our numbers and continues to be there to this day.

In fact, I said that for Q3 we had about $1.1 million of cheap stock charges.

And that has been pretty much our quarterly run rate, and we would expect that into next year.

But in terms of FASB and all the debate about stock option expense, we have not adopted it.

It is not contemplated in those numbers.

Yes -- it was actually cheap stock charges (technical difficulty).

Cheap stock charges are always in our numbers.

That makes sense.

Great.

And then a follow up.

Obviously 195,000 subscribers, you're still to my knowledge you are running out of one data center.

Can you just give us an update on the expansion plans from a data centric perspective?

Thanks.

We, of course, have our primary data center, which is in Sunnyvale, California, which is our primary operations.

And we also have, of course, a fairly elaborate disaster recovery system that we filled with SunGard Data Systems that we've tested and run multiple simulations with.

And is very solid and fully integrated as part of our network.

Those two environments, our primary environment and our SunGard DR environment is -- will be complemented by other data centers and other expansion as we evolve our technology forward.

And we are very countable right now where we are.

And you have probably noted in our various reports exactly our strategy for expanding our data center coverage.

Maybe just one last one.

As we look into next year, and obviously, Steve, you commented obviously on (indiscernible).

You're going to continue to expand on sales and marketing but also on R&D.

I guess this year from an R&D proportion of sales you've been running -- I haven't got the exact number in front of me, but probably something like about 7 percent.

Is that going to fall next year or should we continue to see it sort of run at that sort of level?

What do you think?

Right now we are in around the 5 percent range, if you look at year-to-date and by quarter.

And it in our various tours and commentary I have often commented on, and there's been no change here, we should run in the mid to high single digits as a percent of R&D.

The R&D team is obviously very important to the success of this Company.

They need to continue to hire, and we continue to give them resources.

So what you see on an actual basis is 5.

I don't believe will go below that.

And like I said, our expectations are in the mid to high single digits.

Laura Lederman with William Blair.

Good quarter.

Just a few questions.

Talking about the competition, what percentage of deals are competitive?

How often do you see Siebel?

How is Siebel acting on price?

Right now apparently came up with a product shortly -- just a couple of months ago.

Are you seeing that at all?

Just under generally who you're seeing more of and less of in the competitive environment, and how they are acting in terms of pricing?

In terms of the competitive environment, as I said, we participate in a market.

It is a market of multiple competitors.

We found in geographies in the world where we have multiple competitors it is better for us.

We believe we have a superior technology solution.

And we believe that is one of the reasons that we're winning all of these large transactions, as well as so many small and median transactions.

In the areas of the world where we don't have competitors, and we don't have tough competition it actually hurts us surprisingly, because we don't have a market consciousness.

I feel that today, if you look at the Company and how we're doing, and you look at our subscriber growth, all of those things are interesting.

But I think that what our customers say is more important than any of that.

And it doesn't matter what our competitors say.

It is what the customers are saying.

And it is what the customers are doing with their experience.

They're having, in my opinion, they are having a fabulous experience with salesforce.com.

Recently at our Dreamforce conference, which I know you attended, the experience of the customers was very energetic, and I would say evangelical in many cases.

I believe that there was a couple of news reports that it was a type of a revival.

Words not typically used in the enterprise software environment, as I am sure you know.

And we think this is a fabulous indication of the quality of our product.

The last time I checked Siebel's user conference was not a revival.

So that is my current take on the competitive situation.

Okay.

Shifting gears a little bit to Europe and Asia.

We are clearly your last market (ph).

Can you talk about generally your plans to increase penetration there?

Or is it just a function of adding salespeople?

Is that a big plan to ramp up those areas, just generally plans for Europe and Asia?

Yes.

Thank you for that.

Of course we have a fabulous management team in Europe, one of the, I think, best in the enterprise software industry.

Our European operations are very strong, and we've had a lot of success in Europe.

A couple of things that are interesting with the company that have happened in Europe is the Quintiles deal, which we're announcing today with 2,000 subscribers, actually started well over a year ago in Europe.

It started with Innovex Pharmaceuticals, a division of Quintiles.

And it was very closely watched by Quintiles' headquarters and then they expand it.

You probably know that we recently won Cisco for their worldwide deployment of all of their sales representatives and their partners.

And that deal also started in Europe, of all places.

And so it is very strategic for us, so we have a strong team in Europe that they are doing well.

And we believe we have a very competitive situation in Europe.

In Asia we are very strong in Japan where we have a team that has been in place for several years.

And we have a strong leader there.

We're also looking at now expanding into Asia.

We have added a general manager into the Asian area.

We will be based out of Singapore.

And as you know, the service already runs in Chinese and Mandarin and simplified.

We run in Korean as well as Kanji.

And we would like to expand our business in the Asian area.

And that is something that we're really thinking very seriously about and getting more excited about.

And we hope to give you some reports of how we're doing there.

We have a lot of users there.

When you look at some of our large implementations and some of our -- or even midsize implementations.

Like Nokia for example, we run users for Nokia in these Asian countries, but our business with Nokia is here in the United States.

We have also been very successful in Australia.

But Asia continues to be a place that we would like to see us get stronger in.

We will take our last question from Denise Rush with Roth Capital.

Great quarter.

I just wanted to ask about your overall headcount in terms of the new adds in the quarter.

Can you break down how many were in enterprise sales?

And then just an overall break down of how your sales force is segmented, large deals versus small business, and also by geography?

You know that is an area -- one is we have invested in all the areas, and you can see that in our spending increase.

But we're not giving break downs of headcount at this point.

Okay.

Then could you just comment broadly on your up sell opportunity as you migrate all the customers over to supportforce?

And just to clarify are all customers now live with supportforce?

In terms of -- let me try to take it apart and explain that.

What do you mean what upgrade opportunity?

I mean up sell in terms of expanding?

Upsell opportunities?

Yes.

Yes.

Unfortunately we have no upgrade opportunities here because we have only one upgrade, and it happened on Monday.

So all customers have been upgraded.

And we don't charge them for that, by the way.

They receive that as part of our service to them.

All the customers have received all of the Winter '05 technology new features and functions at no additional charge.

So there is no upgrade opportunity.

In terms of (indiscernible) expand with supportforce.com, we're very excited about supportforus.

If you go to the Website, www.supportforce.com, you'll see a list of our customers there that we have signed up.

That list I anticipate will continue to grow and expand.

And as we add more supportforce customers and wins for supportforce we will keep you posted on those on a regular basis.

And that does conclude today's question-and-answer session.

I will turn the call back over to Ms. Fitzgerald.

Thanks everyone for joining today's call.

A replay will be available through midnight Eastern on November 20, 2004, and can be accessed by dialing 719-457-0820 or 888-203-1112.

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And that does conclude today's conference.

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