賽富時 (CRM) 2005 Q4 法說會逐字稿

Hello, everyone.

Thank you for holding, and welcome to the salesforce.com fourth-quarter 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.

Please go ahead ma'm.

Okay, thank you, Operator.

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

Management will discuss the results for our fiscal fourth quarter, which ended January 31, 2005.

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 will begin with Mark commenting on our Q4 results, business, and strategy.

And then, Steve will review the key financial results for the quarter.

We will then conduct a question-and-answer session.

Before we begin however, I appreciate your patience as I review our Safe Harbor statements.

Our discussion will include forward-looking statements regarding certain projected financial results including -- revenue estimates and earnings estimates; demand for our products; future expenses, strength and growth of our business; potential successful customer deployments; our business strategy, reliability and strength of customized on-demand applications created with our software; our position in the on-demand applications services market; industry growth and trends; demand for on-demand applications; salesforce.com becoming the standard platform for on-demand applications; changes in foreign exchange rates and our effective tax rate; number of shares outstanding; impact of new accounting rules, such as the proposal to expand stock options; as well as other statements that may be made in response to questions that we do not now anticipate.

Forward-looking statements involve risks and uncertainties and assumptions.

If any of the risks or uncertainties materialize 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 Securities and Exchange Commission, including our Form 10-Q filed on November 22, 2004 for the quarter ended October 31, 2004, which are also available on our IR website.

We also intend to discuss some non-GAAP measures.

A reconciliation of GAAP and non-GAAP results is available on our website.

I will now turn the call over to Marc Benioff.

Hello, everyone, and thank you for attending salesforce.com's fourth-quarter conference call.

It was a remarkable quarter and year for salesforce.com.

And our financial results are the latest indicator that we are in the next phase of the on-demand revolution.

A revolution that we at salesforce.com intend to lead.

Due to the strength of our business, we're raising our fiscal 2006 guidance to reflect our strong momentum in the market.

Let's review what we believe are the five most important numbers in our quarter -- revenue, net income, cash flow, customers, and subscribers.

First, our fourth-quarter revenue was $54.6 million that is 82-percent growth year-over-year and 18-percent growth sequentially from our third quarter.

This brings our fiscal year revenue to $176,400,000 or 84-percent growth from our prior fiscal year revenue of $96 million.

This is one of the strongest performances for any enterprise software company this year.

Second, our net income for the quarter was even stronger at $3.6 million, incredible growth from the $765,000 loss in the fourth quarter of our previous fiscal year.

Our total net income for the fiscal year was $7.3 million, an increase of over 109 percent compared to fiscal 2004 and much stronger if you back out the nonoperational one-time real estate transaction that added to our net income in the third-quarter fiscal year 2004.

Third, our cash flow -- from operations was $21 million during the quarter, a 244 percent gain from $6 million in the prior year's quarter.

While our full-year cash from operations was $56 million, an increase of 157 percent compared to fiscal year '04.

Fourth, we added over 1,400 customers in the quarter for a total of approximately 13,900 worldwide, representing sequential growth of 11 percent and year-over-year growth of 60 percent.

Finally, we added over 32,000 net paying subscribers for a total of approximately 227,000 salesforce.com subscribers, representing sequential growth of 16 percent and year-over-year growth of 79 percent.

To put that in perspective, we added more subscribers in the fourth quarter than any other quarter in the history of the Company.

And in January, we added more subscribers than in any single month in the Company's history -- 13,000.

Now, let's be clear that in this quarter alone, we added more subscribers than our nearest competitor has in their entire history in on-demand through all of their selling efforts, including the acquisitions of two companies and a marketing relationship with IBM.

Our market momentum is significant.

In fact, Gartner Group predicted this month that salesforce.com will be one of the top three largest CRM providers by the end of 2005, passing Oracle and PeopleSoft combined.

While our most significant benchmark will always be the continued success and loyalty of our customers, our products have been increasingly recognized for their technology excellence as well.

Salesforce.com received the highest rating of any on-demand CRM service, as reviewed by InfoWorld in their January 7, 2005 CRM shoot-out.

In fact, InfoWorld gave salesforce.com its "2005 CRM Technology of the Year" award as the best CRM product available on-demand or on-premise.

And it's not just a great product technologically.

An Infotech survey found that salesforce.com has the highest customer satisfaction rating among CRM vendors.

In addition to delivering a successful quarter, receiving an incredible rating from Gartner, or winning all these awards, we also won new large enterprise-wide transactions as well.

New members of our salesforce.com family include business objects, fully deploying salesforce.com for approximately 2,000 subscribers.

Kaiser Permanente who will be deploying salesforce.com enterprise-wide as their new CRM standard.

Cybase will be deploying salesforce.com enterprise-wide as their new CRM standard as well.

And we have contracted with a leading provider of business services for 1,200 subscribers.

We also won significant new implementations at Xerox, Sun Microsystems, Kellogg, and many, many others.

Perhaps more important than just winning deals, customers are experiencing tremendous success using salesforce.com every day to run their business.

This quarter alone, we delivered approximately 800 million unique customized pages and API requests to our subscribers at an average daily speed of less then 500 milliseconds per page, indicating the increased usage by our customer base who have come to depend on our reliability and quick response times.

And our largest implemented customer, ADP, has increased their usage to over 3,100 active subscribers.

Our vision going forward is simple.

Allow our customers to manage and share all of their information on-demand.

We have built and continued to enhance a suite of applications with salesforce.com and Supportforce.com, tools with our Customforce.com technology and platforms -- with our sforce product that allow our diverse set of customers to achieve this simple goal.

For example, using our toolset, Customforce.com, Time Warner has created a CRM application, specifically tailored to the way they do business, rather than shoehorning into a vertical application that does not truly reflect their actual practices.

Our tool strategy with Customforce.com and sforce is a key to expanding our share in the marketplace as a whole and within our larger customers.

For example, in a company like ADP, where we currently serve 3,100 out of 42,000 employees, our tools are helping ADP to customize the application, so it can be extended further into their enterprise.

And we can do this with all of our customers.

This is the power of our integrated tool strategy.

Finally, we are the only on-demand CRM solution to have proven to scale with multi-thousand subscriber enterprise implementations, such as those that I mentioned earlier as well as Staples, Nextel, ADP, Cisco, Corporate Express, SunGard, and SunTrust Bank.

Now, I want to turn it over to Steve Cakebread for a review of the financials.

Thanks, Mark.

As mentioned, total revenues for the quarter were $54.6 million, an increase of 82 percent.

Fourth-quarter subscription and support revenues were $49.4 million, representing 84-percent growth versus last year and 19 percent sequentially.

For the fiscal year, total revenue was $176.4 million, an increase of 84 percent, while subscription and support revenues grew 84 percent as well to $158 million.

Fourth-quarter professional services and other revenue was $5.2 million, growing 60 percent year-over-year and 7 percent sequentially.

For the fiscal year, professional services and other revenues were $18.4 million or an increase of 80 percent year-over-year.

Results were strong across all geographies, as we continued to invest on a worldwide basis.

The Americas delivered 42.9 million in revenue, growing 76 percent versus last year and 15 percent versus last quarter.

Europe reported 8.2 million in revenue and grew 112 percent year-over-year, while delivering 25-percent sequential growth.

Europe now represents 15 percent of our global business versus 13 percent in Q4 last year.

Asia-Pacific, which includes Japan, generated $3.5 million in revenues, growing 92 percent year-over-year and 34 percent sequentially.

We announced in the quarter that we hired a new Head of Asia-Pacific, Edmond Chuen, who will spearhead our initiatives in this very important region for us.

Overall gross margin for the fourth quarter was 82 percent, flat with last year and 81 percent last quarter.

Subscription and support gross margins for the fourth quarter were 91 percent, flat with last quarter and with Q4 last year.

ASP's obviously have an impact on gross margin.

But it's worth pointing out that our ASP has grown in each of the past 2 years, and it was stable to up in each quarter during fiscal year 2005.

In the fourth quarter, we actually saw the highest ASP in our history.

We calculate this using subscribers at the end of the quarter.

Services gross margin remained negative and below our long-term goal.

We continue to focus on growing our professional services business, but investment in our service organization and amortizing revenue consistent with the ITF-21 (ph) do have a negative impact on margins.

Turning to our operating expenses for the quarter, R&D expense in the quarter was 3.2 million, an increase of 46 percent year-over-year and up 28 percent on a sequential basis.

We continue to be aggressive in hiring developers and will continue to invest heavily in this area.

Sales and marketing expense was $28.4 million, an increase of 66 percent year-over-year and up 14 percent on a sequential basis.

G&A expense was $9.8 million, an increase of 89 percent year-over-year and up 18 percent on a sequential basis.

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

Also in looking at G&A expense going forward, you should keep in mind that we will incur a full year of public company costs, such as D&O insurance and Sarbanes-Oxley compliance in fiscal year '06.

Operating income was $3.2 million or 6 percent of revenues for the quarter, increasing substantially from last year's fourth-quarter operating loss of $744,000, which included a lease abandonment charge of $897,000.

For the full year, our operating income was 4 percent of revenue or $6.5 million.

If you exclude the one-time items, operating income would have been roughly breakeven for fiscal year 2004.

Operating income amounts also include a non-cash charge for direct stock compensation of $446,000 for the quarter and $3.6 million for the fiscal year.

Our effective tax rate for the fourth-quarter fiscal year '05 was approximately 13 percent.

Our fiscal '05 fourth-quarter net income was $3.6 million, a significant increase from the loss of $765,000 in the prior-year period, which included the one-time charge mentioned above.

For fiscal year 2005, our net income was $7.3 million or a gross of 109 percent compared to the prior fiscal year.

This 7.3 million in net profits is even more impressive relative to the roughly breakeven results we saw last year if you exclude the one-time non-cash items.

Our fiscal '05 fourth-quarter EPS was $0.03, a significant increase from a loss of $0.02 in the prior year, which included the above one-time charge.

And in fiscal 2005, our EPS was $0.07 or a growth of 78 percent compared to the prior fiscal year EPS of $0.04.

This EPS is even more impressive relative to the roughly breakeven results we saw last year if you exclude the one-time gain.

We added 88 employees in the quarter, up 73 percent from a year ago and an increase of 13 percent sequentially for a total of 767 full-time equivalent employees versus last quarter's 679.

Our fourth-quarter share account was 117 million, and our full-year share count was 111 million.

Let's turn to the balance sheet and cash flow.

We closed the quarter with $209 million in cash, cash equivalents and marketable securities, up from 188 million at the end of the prior quarter -- reflecting our very strong business.

Accounts receivable increased to 48.9 million from 37.5 million in the third quarter of this year, reflecting the strength of that business during the quarter.

Deferred revenue totaled 95.9 million at the end of the fourth quarter, an increase of 93 percent over last year and 29 percent over last quarter.

It is worth pointing out that we also have a significant amount of committed business with quarterly payment terms or multiyear deals, where customers are billed annually that is not reflected on our balance sheet.

In fact, the amount of committed backlog not on the balance sheet is greater than the 95.9 million reflected in deferred revenue that is on the balance sheet.

This is not a statistic we will plan on disclosing every quarter.

However, we want to give you an indication of the magnitude of our backlog that is not reflected on the balance sheet.

As Mark highlighted, cash flow from operations continues to be strong.

During the quarter, we generated $21 million as compared to 6 million in the comparable period a year ago.

By any measure, we had an excellent fourth quarter.

Before I turn to guidance, I'd like to spend a minute on the customer and subscriber metrics that we provided.

While we have provided monthly subscriber figures to investors to maximize the amount of transparency into our numbers, it is very important to point out that month-to-month customer and subscriber additions can bounce around significantly.

In taking one month as an isolated data point does not necessarily indicate a long-term trend.

We have received a lot of feedback from investors as to the frequency with which we need to provide this information and concluded that by providing this information more than once a quarter can be misleading.

As such, we will provide detailed subscriber and customer information only at the end of the quarter with our financial results, rather than do inter-quarter updates.

By doing so on a quarterly basis, investors will be better able to appreciate what the intermediate to long-term implications are in our financial results.

So, let's turn to the guidance for the first-quarter and fiscal-year 2006.

For the first quarter, total revenue we would estimate to be between approximately 58 million and approximately $60 million.

Gross margins should remain in the high 70's to low '80s.

And EPS should fall between $0.01 and $0.03 per share.

We are basing our guidance on assumptions that the tax rate will be at 25 percent, and share count will be 119 million diluted shares outstanding for the quarter.

For the full fiscal year 2006, we would estimate revenues of between approximately $282 million and $287 million.

This results in a higher guidance range for the year than our fiscal guide -- 2006 guidance provided to you last quarter.

We expect full-year EPS approximately $0.11 and $0.13 per share -- again raising our full-year EPS estimates from last quarter.

We base our guidance on assumptions that our effective tax rate for the full year will be 25 percent, and our full-year share account will be 123 million diluted shares outstanding for the year.

Just know that the EPS guidance does not include the incremental impact of the recently issued FASB stock option expense requirement that will become effective in our fiscal Q3 '06.

The current impact of the stock option expense is set out in the footnotes to our financial statements, and we will keep you posted as to the presentation we will make going forward.

Please note that this guidance depends on a number of risks and assumptions that are fully detailed in our SEC filings.

In terms of profitability -- we have said it before, but it is worth reiterating -- that it is our intentions to continue to improve profitability.

And on the long-term basis, we believe the Company will enjoy operating margins in the 25 -- 20 to 25-percent range when our revenue growth moderates into the 30 to 40 percent range.

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

Our guidance for fiscal year '06 reflects this continued strong investment in subscriber growth while continuing to improve profitability.

Even during this phase of hypergrowth and heavy investment, our cash from operations has grown to $56 million in the past 3 years, proving the scalability of our business model.

To conclude -- we had a very strong fourth quarter and a great fiscal year 2005.

We are entering fiscal year 2006 with rapid customer and subscriber momentum. salesforce.com is the clear market leader in a major new market opportunity.

With that, I will turn it over to the Operator.

And we will begin our Q&A session.

Thank you.

(OPERATOR INSTRUCTIONS).

Heather Bellini, UBS.

I was wondering if you could talk a little bit, either Mark or Steve, about the competitive environment.

There's been a lot of concern after I think people saw your first 2-month sub number that maybe Siebel was having an impact on your business and on pricing and a lot of talk about how you guys could potentially have to build out a data center for people who want -- don't want everything run in a shared environment.

Are there some comments you could share with us on both of those, please?

Let's take the last part of your question first.

In regards to our data center strategy, it hasn't changed since we started in the Company.

Because the way our application is built -- is exactly the same way as in Amazon.com or as in eBay.

We have a multi-tenant shared service.

All 13,300 customers are hosted from our primary data center in Sunnyvale, California.

It is backed up onto a major disaster recovery network system.

And we're also in the process of opening our second data center, but that will be just an extension of our existing database.

No customer is run independently from our single-shared service.

Secondly, let me address the competitive dynamic for you.

I think one of the things that is especially interesting about our competitive situation is that our competitors are very good marketing people and also very close with the media and have a history of making aggressive statements.

But we are also fortunate that our competitors are false prophets.

And look at for example, the most recent results from Siebel, which Heather, you have been following for long time.

They announced in their last call that the number of on-demand subscribers that they have is 28,024.

Now, 28,024 subscribers -- now that includes subscribers they bought in their UpShot acquisition; that includes subscribers they bought in their Aneto (ph) acquisition; that includes subscribers that they got through their IBM relationship and the tens of millions of dollars that they spent advertising; and that also includes all of their selling and marketing efforts that they have made over the last period of time since they entered the on-demand market.

But through all of that, they have only been able to aggregate 28,024 subscribers.

So let me make that very clear.

In the last 90 days, we added more subscribers than they have in total.

So that is something I think that they left out on their call.

The other piece is -- other competitors that we have, which are meach (ph) competitors or smaller competitors or where they will get out into a press release or something.

It might be good for a headline here or there.

But notice, where are their major competitive wins?

Where are their thousand-plus subscriber implementations?

Where is there history of customer success?

And where are the awards and technology presence that they have been able to aggregate?

So I have certainly gotten a lot of feedback from the analysts about the competitive situation.

But I have yet to see the competitors come forth with the results.

And I guess, Mark, just a quick follow-up -- you seem to be being increasingly successful in getting 500,000 type seat deals.

I was running if you could kind of give us your outlook on how you are slowly building out that strategy to kind of penetrate the enterprise in a more significant manner?

Well, you know, we have a lineage of strong success, Heather, as you know, in the small and medium business markets.

And certainly, our brand to these customers is (technical difficulty) a success.

It is a brand that means low-cost.

And it also is a brand that is a champion of them.

And so, it draws them to us.

The most interesting thing that has happened in the last call at 18 months, since we have had Siebel come in and validate the market for us and the enterprise.

Where Siebel has said, yes, we agree finally, it is the end of software and all customers should be evaluating the solution.

We have seen a lot of their customers come to us and say, we want to move to this on-demand model.

And that is why we have been able to begin a slow, relentless, increasing pace of adding these larger subscribers.

So when we talked about our Corporate Express with multiple thousands of subscribers or ADP or NextTel or some of these traditional enterprise gold standard customers.

That is -- these are the customers of the Oracle, PeopleSoft, SAP, and Siebel market.

This is an indication that the on-demand model is moving towards the enterprise.

And this is very, very exciting to us because it gives us this democratic success, not only in small and medium but in large and extra large as well.

Ross MacMillan, Morgan Stanley.

I just had one question for Steve.

Do you have a footnote on the supplemental information that suggests that you are not recognizing revenue on 2,000 subscribers in July and 2,500 in October?

And I remember from your early January release, you talked about 2,000 that had been included, previously excluded from the number.

So, my question is -- in the net 32,000 editions for the full quarter, is there anything in addition to the 2,000 that you previously disclosed where you weren't recognizing revenue on those 2,000 with --

Now, everything is pretty much cleared out, Ross.

We have delivered our technology.

We always have some small amount of subscribers in that bucket, depending on timing of professional services etc.

But obviously, nothing as significant, nor as important as Cisco was at the time.

But we have pretty much cleared out all of those transactions now.

They are in all of our numbers.

We are recognizing the revenue.

But keep in mind that yes, we are counting those subscribers.

The revenue is recognized over the remaining life of the contract.

But no, there is nothing of any significance or importance that we are holding back right now.

And there is nothing incremental to the 2,000 in the month?

Well, Cisco will continue to add subscribers over time, but nothing incremental there at the moment.

Okay.

And then just on the pricing -- I hear what you are saying.

And if it is the same calculation that actually looks like the SP was up -- could you help us understand kind of what is driving that?

Is it success in customers where you're actually having enterprise seat delivery?

Your high-end pricing scale -- are you starting to find more customers basically moving that way?

Just because a lot of the -- obviously comments that one could find in the market suggests that it is a pretty aggressive pricing environment out there.

Well, the reality of that is -- that when customers choose a product and they choose a company to deliver that product, unlike in enterprise software, this is a marriage not a one night stand.

We are focused on a level of commitment to our customers that they previously have not seen.

And our customers have demonstrated a desire to pay a premium to our Company for that level of success that we have been able to demonstrate to other customers.

You know, Ross, we are not the cheapest product in the market.

I will not tell you that.

And many competitors may come in and say, we will give you a cheaper product.

We will give you a cheaper product.

We will give you 50 percent off, 75 percent off, 90 percent off.

You now, as soon as that happens, customers back up and say, wait a minute why are they doing that?

Why are they giving me 50 percent off?

Why are they giving me 90 percent off?

The customer becomes very scared and concerned and is wondering why is that provider doing this?

Is it out of desperation?

Can they not get the sale done at 100 percent?

What provider goes in and offers 50 percent off?

If you are going to go in to a Porsche dealer -- and you walked into one Porsche dealer, and they said, yes, here is this great car.

And then you walked into another dealer.

And they were selling maybe a used one, and it was 50 percent off.

You would probably be a little bit concerned.

And the reality is that once you check into these two products, they may look similar on the outside.

They may have a similar color paint job or something like that.

But customers start to look at -- what is the level of success that this vendor has had with other customers?

What kind of customization capabilities do they have?

Can you add tabs?

Can you add more forms and reports dynamically?

What kind of integration capabilities do they have?

What kind of Web services support do they have?

What kind globalization do they have?

What reviews have they won?

All of these things start to add up.

And look -- the customer is already getting a tremendous value based on the last paradigm.

You know, if you look salesforce.com's prices compared to SAP, yes, we are a lot cheaper, you now?

The customers are already feeling good about the value that they are receiving from our Company.

I'm sure when you talk to our customers, Ross, they would tell you that.

But I can assure you -- some of these marketing tactics that these competitors have made -- oh well, attention all salesforce.com customers 50 percent off.

That has done terrible things for their brand and just look at the acquisitions that they have announced since those announcements.

So, pricing is an interesting thing.

It tells a lot about your brand.

It tells a lot about who you are and what you're doing for that customer.

And the most important thing is to make your existing customers successful.

Because you want to know what, Ross?

That is where your future customers come from.

Just one quick follow-up then -- you obviously are expanding from a R&D perspective.

Can you give us any indications as to which directions you might be making more significant investments in -- just from a product functionality standpoint?

Sure.

We are very focused, and I talked about this at our Dreamforce Conference in November -- about a very simple concept, which is giving our customers the ability to manage and share information on-demand.

Today, most of the information that we share on-demand is customer information.

And that is what most customers do with us today.

But you may remember a question on the conference call that I think was two conference calls -- that one of the analysts said, gee, you know, I was talking to one of your customers, and they are using your product for managing and sharing information that is not customer information.

In fact, it was employee information.

Or it might have been manufacturing information or inventory information or something else.

Well, we are seeing that.

We are seeing customers come to us and say, we love how your system runs.

And we love the ease of use and the success rate and the adoption that we have.

We can't believe it how much the users love using your application.

But we want all of our applications to be like this.

And you know, some of these client server vendors have saddled with us technology that was written in the late '80s or early '90s for client/server computing.

You know like -- products like Microsoft Access that were written by my good friend, Adam Bosworth, which is the leading data management tool probably in the world today.

Well, as he wrote that in 1988, 1989!

I mean that is amazing!

You know that that is still an offering today.

So customers come to us and say, gee, you know, you can customize all of these things.

And you can create these incredibly customized applications -- but very easy to use.

Why can't you do that for all of our applications?

And so, that is a major focus for us as a company.

Not only providing the best CRM in the world, as demonstrated by our InfoWorld review or other customer satisfaction surveys, but also the ability to build lots of applications for our customers.

You know, we have 13,900 customers now.

And you know, those customers -- they are saying, how do we expand this in our company?

Like I mentioned in the script, a company like ADP -- we look at.

Gee, they have got 40,000 something employees.

And yes, we have 3,100 subscribers, but what is our wallet share inside ADP?

How do we grow that and how to expand it?

And we meet with their executive team, who we have a very good relationship with.

And we say, what are you using to build and deploy applications?

What other systems can we build for you?

How can we expand beyond this phase that we already have with ADP.

And they are very receptive to this idea.

And that is why if you go to Customforce.com, which is our tools site, you can see the emergence of the next generation of salesforce.com, which is much more than a CRM application.

But it is a CRM tool that lets you build your own applications in a non-programmatic way -- and also the emergence on sforce.com of an on-demand platform.

And that is how we see the future of our Company, as an applications, tools and platform provider for on-demand computing.

Because we believe that it is time for the end of client/server software.

And that we have to continue to be the leader in the vision and execution in this model.

And as a reminder, due to time constraints, we ask that you limit yourself to one question today.

Tom Ernst, Deutsche Bank.

Looking forward here, one of the common pushbacks I get from investors -- is that you're growing so rapidly.

As you're getting bigger and bigger, the concern is can you keep managing such rapid growth?

I'm wondering if you look at the pieces of what goes into being able to manage such high growth rates you been putting together, do you feel like the salespeople or the incremental ads and the sales force are still as productive?

When you add more salespeople, are they far enough apart that they can continue to contribute on the contribution margin side?

And what else are your general thoughts about managing the high growth and when you feel like you're hitting the barriers of the high growth rate?

Well, that is a great question.

And you know, when I was -- I started at Oracle in 1986 when we were $50 million in sales.

And I remember a lot of conference calls and questions from investors in '87 and '88 and '89 that were exactly the same question.

And you now, managing growth -- you're right, is a difficult experience.

But that's why as I have built this management team, I wanted to build a management team who is a) experienced this hyper growth like I have before -- but also who can help us to manage through it.

What it gets right down to is that -- who are the people that you have?

Who are the people on your team?

I am very fortunate to have a CFO like you heard on the call -- Steve Cakebread, who was the CFO of Autodesk before this for several years.

I think it was 4 or 5 years.

And before that, he was at SGI for 4 or 5 years, and before that he was at Hewlett-Packard for 18 years.

He has experienced a tremendous amount in his tenure in the industry.

And I sought that capability out in our financial team -- or also here at our table is our new Executive Vice President of Legal and Business Development, Ken Juster, who before that ran an organization of over 400 at the Department of Commerce and who was Undersecretary of International Relations and reported to Don Evans, the Secretary of Commerce.

And of course, you know our other members of our management team that I'm sure you met as well.

And I hunt for these people and bring them in, not just that my level but also below them and below them.

I mean that is the people who run our U.S. sales force and the people who run our Southwest region, okay -- and the people who run Europe and the people who run -- or the person who is running our telecenter in Ireland or the person who is running Japan for us.

Each person is hand-picked to be able to scale during this growth stage.

And that is the key.

I can't do it alone.

I need a broad team of people with a tremendous amount of expertise and leadership capability.

And I have been very fortunate to be able to find those people and bring them in.

And if you go to our website, you'll see that leadership team.

And it is, I believe, as good as any management team in the software industry.

And Tom, you know those management teams.

We have some great executives who have some deep experience.

Laura Lederman, William Blair.

Just a few quick questions -- one, can you talk about the competition in terms of who you see the most?

Who you are seeing more of?

Who you are seeing less of?

And separately, can you talk about how common pricing is out there?

You mentioned that there are some competitors discounting 50 percent, 70 percent -- do you see that just once in a while?

Or do you see that frequently -- and just customers understand that they get what they pay for?

Thank you.

Well, I think the number one issue in terms of the competitive environment is -- of course, the CRM market is a large market.

It is a democratic market.

It is in the small-business market; it is in the medium business market, the large business, and the extra large.

And then, it is also the size of implementations at each segment.

In each of these segments, there is a dominant player.

And this player has been there because they have made their name and software, okay?

And when we go into a segment, and you know each of the segments well, Laura -- and we go into the small segment or the medium segment, we come up against that competitor.

So you know, when we go up -- and for example, let's say we are going into the medium competitors segment.

Of course, we are going to bump into a company like Microsoft.

But what is Microsoft doing for the CRM market?

You know, they just announced, yes, they had a release about 2.5 years ago.

And now, they have delayed that release again -- that it will be 3 years in between releases.

And who are their success stories?

And where are their competitive capabilities against today's model?

Where is their Web services story?

Where is their multi-platform story?

Where is there access or heterogeneous devices?

Where are their winning reviews?

And so our job is to compare and contrast our on-demand model and its success rate against these entrenched competitors -- software competitors in each of these four markets.

For example, we have to be able to show that this market has changed -- that there is new technology.

That customers want new things.

They demand a radically different interface.

And they want access from devices that some of these manufacturers have never even thought of including in their capabilities because maybe 3 years ago when they designed their product, it did not even exist.

So we have a tremendous capability to differentiate ourselves.

And also, we get our customers, as you know, selling for us.

We try to limit our sales, our selling, because customers don't believe vendors anymore.

Every vendor has got a story to kind of bring forth some of the earlier questions.

Every vendor has got a story about something they've got -- a discount or a new feature they are introducing.

But you know what?

Companies are making decisions today; they want to talk to other customers.

If you are working on a 1,500 user deal, they want to talk to another customer who's got 1,500 users.

They are working on a 500 user deal; they want to talk to another company with 500 users.

You know, when we closed Kaiser Permanente, we did not sell them our healthcare industry vertical addition, right?

They talked to our other customers in health.

And they talked to other large customers who gave them the success messaging.

And that is what made the difference there.

And so yes, the competition will always be a factor.

But the only way to negate that is with customers telling them the way it is.

And you know, we see that when we get into a deal, honestly, and this is a great example like the deal I just mentioned, you know?

What is the customer going to choose -- the company that has the most successful references and the most successful implementation and the highest competitive capability and is not afraid to let InfoWorld and these tough independent test centers review their product?

Or a company that comes in and slashes the price to 50 percent -- no, buy us!

I assure you, Laura, that those companies are making those decisions based on deep due diligence, and they are making the decision based on what their peers in the industries that they represent are saying.

And I do not have to tell you what those companies in those industries are about telling about some of our competitors.

You probably know.

They don't have a golden reputation.

Their brand value is not about success.

They have seen that vendor before.

And that vendor left them with not a great experience.

So that is what we come across.

And our job is to then make that transaction happen on our terms at a rate and capabilities and a relationship that will make a win-win relationship.

And that is a message that the customer responds to and says, yes, we want to choose salesforce.com!

And look at our record at that.

Thank you, Laura.

Ed Maguire, Merrill Lynch.

A question for Steve -- could you comment on the off-balance sheet backlog -- the characteristics?

How much of that is maybe renewals?

And how much may be multiyear?

And I guess just a general question as well.

How much of the opportunities -- the large deals we're seeing are just placement and how much are greenfield opportunities?

I will talk about the off-balance sheet.

Unfortunately, I'm not going to characterize it as (technical difficulty) of everything.

But what we wanted to do was convey the momentum and strength of this business by demonstrating that our deferred revenue on the balance sheet and off the balance sheet -- both are very, very strong at this point.

So I won't go into more details than that.

Marc can probably talk about our larger deals and how much is greenfield versus whatever else.

Fair enough.

The large deals -- to a large degree all of them start small and as Marc said, we get good customer references and then we grow within the organization that has been part of our selling and doing business practice here.

And I think that is the customer success that we demonstrate when we get involved with an account.

Yes, we call that our "Johnny Appleseed strategy."

Our "Johnny Appleseed strategy" is to go out and make every single customer successful, whether they are a 1-user customer or a 5-user customer, or a 10-user customer.

You know, I get emails all the time from customers.

They may have only 10 users, and then they would say, ah, will you please help us?

And I would say, we are struggling here on this issue or that issue.

And we'll deploy an entire team to work on a 5-user customer to make them successful, okay?

And the reason why that is this -- is because such a huge percentage of our business comes from our existing customers.

The average half-life of the sales rep in a company today is probably less than 24 months.

So those 227,000 subscribers out there on average in 2 years -- they won't be in their jobs.

So they are out there, and they are spreading that message.

So we want to make sure that every single one of them is spreading the message of success.

And you know as an example, we recently had a situation where we had a customer who was the head of sales at AOL, where we run their sales force.

And he went to another company to become the CEO; it was Musak.

And we had never worked with Musak before.

And we got a call from them.

And he said, you know what, I have no CRM here.

Will you please come over here and help me?

And we went over.

And at that point, it's a no contest.

They have that experience.

Yes, they will look at other competitors.

They will look at the competition.

They will do a full evaluation.

But there is nothing that closes the deal faster than the customers' previous success with us.

And that's just 1 of maybe 100 different examples that I can give for you.

Kash Rangan, Wachovia.

Congrats on the quarter.

Just a couple of questions -- one for you, Mark.

As you have started to develop the market option for Customforce and let your customers develop customer applications, what kind of farmer-type sales force are you starting to put in place?

Vis-à-vis the hunters that go and land the new CRM opportunities with the new customers.

And then, I have a follow-up for you, Steve.

Well, that is a great question.

And you know, we have put in place a relationship with the customer that we hope will transcend from a hunter into the farmer as the same sales executive.

We believe strongly that we have built a total ecosystem here to be able to support the customer.

The sales executive is only part of that ecosystem.

There is of course consulting and support systems.

There is executive support.

There are people that we call "customer success managers."

There is a variety of people all helping that customers to a) be successful -- their initial implementation and then expand that.

You know, Kash, I don't know if you've had an opportunity to look at one of our other Web properties, it is called CRMsuccess.com.

And in CRMsuccess.com, it's a total best practices site, where all of our customers can come together to find out about how to make their salesforce.com implementation successful and then grow it.

And it is a community site.

There are presentations there that customers make to other customers.

And we have found that to be a tremendous way to help these customers learn how to make this salesforce.com technology spread through their organization.

That combined with the sales executive that is assigned to their account -- we feel is the winning formula.

And we don't expect to have a hunter sales force and a farmer sales force.

We see ourselves with one relationship -- with that customer.

And Kash, the other question?

Is he gone?

He is.

Brent Thill, Prudential.

Marc, can you talk a little bit about the adoption rate of support force?

I know you bundled it into the main pricing.

But it is -- do you give a sense of some of these bigger deals that are coming on?

Are they starting to move just away from us just saying, take the service and then click "fall for Steve?"

Well, thanks for that question, Brent.

I'm sure that you have gone to Supportforce.com and seen that we have a multi-channel support offering that complements salesforce.com.

It also has Customforce.com built into it.

And it is built on our sforce platform.

Also there's quite a bit of CRMsuccess.com content for Supportforce.

Now I want to tell you that we have recently hired Bonnie Crater, who I worked with at Oracle for 10 years and then who went out over to Genesys, which is the division of Alcatel responsible for CTI software.

You may know Bonnie.

She was a real tremendous leader at Genesys, as their SVP of marketing and then later as their VP and GM of other groups.

She has now joined us as our VP and General Manager of Supportforce.com.

And we are very excited about our progress today, even though it's only been really out and about since we start talking about it in October.

We have a number of customers including Magma Design Automation, Phoenix Technologies, RL Polk & Co., Inceta (ph) Software via ImageWare, Neoforma, and in fact, I was at a large Web company yesterday that we have worked very hard with Avaya to deploy their very first call center.

It has been a huge success for them.

And we do feel very optimistic about this as a growth opportunity for us.

We think call centers, contact centers, managing FAQ's on Web sites, self-service customer, service and support and other areas is a logical growth area for us.

We feel very good about our progress so far with Supportforce.com.

Steve, if you could just address seasonality last year -- subcon was flat Q4 to Q1.

If you could comment on what you expect this year.

And then also, if you could just talk about what capital expenditures were '04 and what you expect in '05?

Let me address the capital expenditures.

As you all know, this is pretty much a people-intensive business.

So there's no significant changes year-over-year, other than to meet the needs of the people and our customers.

Now, we still lease a majority of the hardware that we invest in and the offices and everything, so CapEx isn't really a big area for us other than we continue to invest to meet our growth in our customer success.

With regards to seasonality, I think the growth rates continue as we demonstrated in 2005 to overcome any seasonal effects that one might see.

So Brent, it's a little early for me to make too much commentary there.

We obviously had a very strong Q4.

We're giving guidance for a very strong Q1, I think.

And we will just have to see how that goes.

It's very tough right now, given the growth and the acceptance of our customers of this business model to talk much about seasonality.

Michael Wang, ThinkEquity.

So in terms of your '06 guidance, could you help me understand the assumptions for ASP, competition and product mix?

Unfortunately, that is not information that we've provided.

And right now, we are just giving the revenue growth for '06, which I said was between 282 and 287 million and earnings per share of $0.11 to $0.13, up dramatically from this year's 7.

But a lot of those details - I'll just encourage you and other folks that are new to following the Company -- the trends and the data that we have posted on our Web pages is very helpful to understand those.

Peter Goldmacher, SG Cowen.

Marc, it's a little hard to tell if you're excited about the business or not.

I guess I will just have to read between the lines.

Can you give us a little bit more of how you guys are thinking about the larger enterprise business versus the low-end business -- companies under 250 million in sales?

Thanks.

Well, you know our story there has not changed since we started the Company.

We believe that we can have a single offering, salesforce.com, that -- without offering multiple versions for different market segments can serve very, very small customers and very, very large customers.

And you know, perhaps one of the most exciting things that has happened in the last 18 months is proof that that is true.

We are very excited about the $250 million company and below, and we are very excited about the $250 million company and above.

When I was at Oracle and we thought about who we were going to sell our ERP applications to and our CRM applications and our MRP applications, our market space was very, very limited to a very well-defined, discrete set of companies.

You know, at salesforce.com we want to sell to those same companies but a lot more than that.

And so, our job at salesforce is to build and deliver a solution that goes democratically.

And this, I believe, is the most exciting aspect of our business.

We don't want part of the market; we want all of the market.

We don't want to have success in one segment; we want to have success in all segments.

You know I'm talking today on a Polycom speakerphone.

Polycom, which is that kind of that triangle-shaped thing in the middle of a lot of conference rooms, is a customer of ours.

They have a few 100 subscribers on us.

They are a very solid, very successful mid-sized technology company -- a great company.

I love their products.

And we're also very successful for a company like Zagats, who has maybe 10 or 15 subscribers on us that sells those little red books to you in the restaurant.

And we're also very successful for a company like Corporate Express, who has maybe now 2,500 subscribers with us and growing.

And you know I recently was able to have a conversation with Mark Newhall, who runs sales force automation for Corporate Express.

And as we talked about their rollout of salesforce.com throughout the United States and now into Europe and Australia and as a worldwide solution for them, they found more success with us than any other offering they've had.

Any they've tried them all.

And so that is our opportunity -- is to be able to execute democratically as a solution and as a sales organization, as a marketing organization, and as a company.

And that is our primary directive here.

Robert Schwartz, Jefferies & Company.

I appreciate being able to get in.

Steve, you mentioned the ASP's were up, but I didn't catch what those numbers were and how much --

You know, everybody has their own methodology in calculating.

So if you'll use yours and take a look at the webpage, you'll get the detail.

All I will tell is by any method you calculate ASP's, they were highest this quarter than we have ever had.

And they have been continuing to improve.

Marc talked about the customer success, the enjoyment of using the product, the fact that people both continue to expand their usage as well as move from different editions from Team to Professional to Enterprise.

And that continues to help our ASP.

It's not about price in this transaction with us.

Just to add onto that -- as analysts, I know that you are very, very good at meeting and talking to customers.

A lot of times you just meet those users randomly on an airplane or in a conference.

Think about how many salesforce.com customers or users that you personally know -- people that you have interacted with or spoken with.

You know, that you called to find out how they liked the new release or whatever it is.

Now, think about how many of those customers or users you know of our competitors.

And I think that that is what really separates us from everybody else.

We have a large sales force -- not of our employees.

Our large sales force is of our customers and subscribers who are out there.

They are our evangelists.

And they are our best message that salesforce.com will be successful for you.

At this time, I'd like to turn things back over to Ms. Fitzgerald for any closing comments you have today.

Thanks, everyone, for joining today's call.

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