賽富時 (CRM) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to Salesforce.com first 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 Mr. Steve Cakebread, Chief Financial Officer of Salesforce.com.

Please go ahead, sir.

Thank you operator.

Good day, everyone, and welcome to Salesforce.com first quarter fiscal 2006 earnings conference call.

Management will discuss results for fiscal first quarter, which ended April 30, 2005.

By now, you should have received a copy of our press release, which was available 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.

My name is Steve Cakebread, the Chief Financial Officer.

Today's call will begin with Marc commenting on Q1 results, business, and strategy.

I will review key financial results for the quarter and assess guidance for the remainder of the year.

We will then conduct a Q&A session.

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

Our discussion today will contain forward-looking statements regarding our projected financial results, business strategy, future service releases, capabilities, and demand for on-demand services generally and products specifically, among other things.

These statements are subject to risks, uncertainties, and assumptions, and if such risks or uncertainties materialize and our assumptions prove to be incorrect, could result in our actual results differing materially from those 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 & Exchange Commission, including our form 10-K filed on March 25, 2005, for the year ended January 31, 2005, which are also available on our website.

We also intend to discuss some non-GAAP measures and a reconciliation of GAAP and non-GAAP results is available in the press release and on our website at www.salesforce.com/investor.

Now, I will turn the call over to Marc Benioff.

Hello, everyone, and thank you for joining us today for Salesforce.com's first quarter financial results conference call.

On our previous Q4 call, we stated that we were at the beginning of the next phase of the on-demand revolution.

We believe that the continuing strength of our business and results, in contrast to what proved to be another challenging and disappointing quarter for traditional software vendors, is further evidence we are in the next phase of the on-demand revolution.

This revolution continues to gain momentum, and Salesforce.com is recognized as the pioneer and clear market leader.

As a result, we are raising our fiscal 2006 guidance to reflect our strong momentum in the market.

The market response continues to bolster our confidence in our model, and, at the same time, we realize how important it is to invest in a business with this much potential.

Assets will continue investing to fuel our industry leading growth.

Let me quickly review the highlights of the quarter, then I will ask about what is driving our success.

Our results were solid across all key metrics from both the momentum and profitability perspective.

First, our first quarter revenue was $64.2 million, that is 84% growth year-over-year and 18% growth sequentially from last quarter.

This is one of the strongest performances for any enterprise software company this quarter and reflects the growing acceptance of our solutions.

Second, our net income for the quarter was even stronger at $4.4 million, up more than 900% from $437,000 a year ago.

Third, our cash flow from operations was $17.9 million during the quarter, 169% gain from 6.7 million in the prior year's quarter.

Fourth, we added over 1,600 customers in the quarter for a total of approximately 15,500 worldwide, representing sequential growth of 12% and year-over-year growth at 58%.

And finally, we added over 40,000 net new paying subscribers for a total of approximately 267,000, representing sequential growth of 18% and year-over-year growth of 82%.

In fact, we added more paying subscribers in the quarter than our closest on-demand competitor has in total, and it was more subscribers than in any other quarter in the history of the Company.

Of this reflected a strong first quarter and subscribers coming online for bookings in for what was a very strong fourth quarter.

Our international operations registered excellent growth both in Europe and Asia, indicating increasing interest in the on-demand model internationally.

Our growth and our momentum are in sharp contrast to the vast majority of enterprise software vendors, most of which rely predominantly on the legacy-perpetual software model and on-premise approach.

Our success is being driven by two key factors -- one, the growing acceptance of on-demand solutions; and two, our industry-leading model.

There is no doubt that the on-demand model is hitting the main stream and the market share gains that the on-demand model is making relative to the traditional software model, are -- well -- dramatic.

In fact, during the quarter, AMR Research stated that Saleforce.com's focus on integration and customization is putting the Company in almost every CRM selection list regardless of customer size, and we're winning more and more of the high-end of the market as well.

Third-party industry analysts expect this on-demand growth trend to continue.

IDC expects the on-demand application sector to grow at a compound annual growth rate of roughly 40% over the next four or five years, compared to single-digit growth for traditional on-premise applications.

With the traditional software vendors searching for growth through consolidation and other various tactics that are reminiscent of any industry that's maturing, and the legacy CRM leader running into difficulties from multiple angles, we believe the move to on-demand has never been more appealing.

As always, it is the dramatic testimony of our customers that says it best.

In a posting on Fortune Magazine's website, Kaiser Permanente's CIO, David Watson says, and I quote, "Today, our sales force doesn't require a full implementation of web band--" I am sorry.

I misstated it; let me start again. "Today, our salesforce doesn't require a full implementation of people, which would have cost me 30 to $40 million and taken a year to deploy.

With Salesforce.com, we did it in four months at less than $1 million."

We think that says it all about what customers want and the kind of success that we offer.

We want significant new implementations at Dupont, Air Products, Jefferson Wells International, A Division of Man Power.

In Europe, we want Vodephon, Italy, Amptico, GL Trade, Tyko, Fire & Security, and others.

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

In this quarter alone, we delivered approximately 1.2 billion unique-customized pages and API requests to our subscribers at an average daily speed of less than 500 milliseconds per page, indicating that the increased usage by our customer base who have come to depend on our reliability and quick response times.

Our vision going forward remains clear.

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

During the quarter, we continued to broaden our product and plan strategy to make sure this vision turns into a reality.

As you know, a key component to our overall strategy of differentiation and customization is Customforce, our point-click customization toolkit.

During the quarter, AMR Research provided Salesforce.com with innovation award for Customforce.

They stated that it was one of the top break-through technologies of the year, cracking the code on customization integration to change the game in on-demand CRM and address previously perceived as a draw-back to the on-demand model.

Moreover, TMC Labs evaluated multiple CRM on-demand vendors and gave Salesforce.com an "A" rating, stating that our Customforce tools sets the Company apart from other hosts and peers.

We continue to believe our strategy of letting customers customize our products in a quick and easy manner is what the market is looking for.

Our customers are able to rapidly tailor solutions to match their businesses processes, as opposed to delivering a cookie cutter, one-size-fits-all vertical solution with rigid functionality that forces the customer to change the way they do business to fit their software instead of changing their software to fit their business.

In March, we previewed Multiforce, a feature that allows users of our system to seamlessly switch during a single selection of sales automation, customer support, or even other custom on-demand applications that they bring to for our platform that maybe even others had written for our platform.

During the quarter, we also previewed other features of our summer '05 release, which will be the eighteenth generation of our solution sweep, which will be coming out in June.

Summer '05 includes the 6.0 release of Sforce, our modern web-services architecture, that let customers integrate their Salesforce.com applications with the rest of their enterprise applications and infrastructure.

The combination of Multiforce, Customforce, and Sforce have taken the software to a new level by creating a complete platform for customization and integration.

A platform that combines all the power of enterprise applications with the benefits of the on-demand model.

We plan to share even more details of our platform strategy when we unveil a variety of new and exciting products and technologies, as well as preview our summer '05 release and our new Customforce 2.0 technology at Customforce Day.

A Customforce Day will be next week, May 24, on Tuesday, in New York City, and we encourage you to join us for the exciting preview.

From a functionality perspective, our results indicate that we are the market leader in the on-demand Salesforce automation market.

In fact, Forrester Research recently announced that Salesforce.com was number one from both the product and market-presence point-of-view in the on-demand market for salesforce automation solutions.

From the high-end enterprise to the small business, the root of all of our success is the emphasis on customer satisfaction and customer success.

This is the result of five key factors -- the relentless focus on customer success, 100% dedication to the on-demand market, customization and integration capabilities through our Customforce and Sforce and, soon, our Multiforce platforms, an industry-leading ease-of-use that has set a new precedent in how customers use enterprise applications and solid and expanding functionality.

We believe customers are looking for a no-compromise, cost-effective solution that gives them the best chance at delivering successful business results.

Salesforce.com is the answer, and this is why we're the market share leader in the on-demand space, why we see the end of software becoming more of a reality every day, why our customers are our best sales people, and why we believe our market momentum will continue.

Finally, I would like to announce that Pat Sueltz has decided to leave Salesforce.com to pursue other opportunities in the industry.

We greatly appreciate Pat's efforts in having helped take the Company public and in establishing business practices and operations that will assist.

Salesforce.com as it continues it's growth.

Pat's professional approach to management provided outstanding leadership and career development to senior managers and other employees of the Company, and we wish her well in her future endeavors.

I would now like to turn it over to Steve Cakebread for a review of the financials.

Thanks, Mark.

As mentioned, total revenue for the quarter was $64.2 million, an increase of 84% over the same period a year ago.

First quarter subscription and support revenue was $58.2 million, representing 87% growth versus last year and 18% sequentially.

First quarter professional services and other revenues was $6 million, growing 61% year-over-year and 15% sequentially.

We believe that this strong growth reflects continued acceptance across businesses of all sizes of the on-demand model, which can be seen by the fact that our first quarter subscription revenue grew at its highest rate in the past two years.

Results remain strong across all geographies, so we continue to invest on a worldwide basis.

The America's delivered $50.9 million in revenue, growing 80% versus last year and 19% versus last quarter.

Europe reported $9.4 million in revenue and grew 103% year-over-year, while delivering 15% sequential growth.

Europe now represents 15% of our global business versus 13% a year ago.

Asia-Pacific, including Japan, generated 3.9 million in revenues, growing 107% year-over-year and 10% sequentially.

For the quarter, our international business was 21% of our total revenue, up from 19% in the prior year.

Overall gross margins for the first quarter were 81%, down only slightly from 82% reported both last year and last quarter.

Services gross margins remained negative and below our long-term goal, however, we continue to focus on growing our professional services business, and investments in our services organization and revenue amortization consistent with the ITX 0021 do have a negative impact on margins.

Investments in our on-demand infrastructure and services is a major focus for this year.

Turning to operating expenses for the quarter, R&D expense in the quarter was $4.3 million, an increase of 102% year-over-year and up 36% sequentially.

We continue to be very aggressive in our investments in this area.

Sales and marketing expense were 34.5 million, an increase of 69% year-over-year and up 21% on a sequential basis.

This, again, reflects our continuing commitment to increasing our distribution organization and growing our business in all geographies.

G&A expense was 9.4 million, an increase of 69% year-over-year and in-line with G&A costs on a sequential basis.

This includes increases in head count and facilities investment.

Operating income was $4.3 million or 7% of revenues for the quarter, increasing substantially from last year's first quarter operating income of $361,000.

Our Q1 operating income also included a $285,000 related reversal of accrued liabilities from December 2001.

Operating income amounts also included a non-cash charge for stock-based expenses of $856,000 for the quarter, this was in-line with last year's first quarter charge and up $400,000 sequentially.

Our effective tax rate for the first quarter of fiscal year '06 was approximately 20%, an improvement from our guidance due primarily to geographic income mix and our ability to use more of our past net operating loss carry-forwards.

As well, we expect this rate to remain at 20% for the full fiscal year period.

Our fiscal 2006 first quarter net income was $4.4 million, a significant increase from the 437,000 in the prior year period.

Our fiscal '06 first quarter diluted EPS was $0.04 a share, a significant increase from the break-even amount a year ago.

We added 109 employees in the quarter, up 69% from a year ago and an increase of 14% sequentially, for a total of 876 full-time equivalent employees versus last quarter's 767 full-time equivalent employees.

Our first quarter average share count was 116.4 million shares.

Looking at the balance sheet and cash flow, we closed the quarter with $217 million in unrestricted cash, cash equivalents, and marketable securities, up from 206 million at the end of the prior quarter and reflecting a strong business and focus on cash from operations.

Accounts receivable decreased to $42.4 million from 48.9 million in the fourth quarter last year, due primarily to a focus on cash collections.

Deferred revenue totaled 104 .6 million at the end of the quarter, an increase of 100% over last year and 9% over last quarter.

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

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

During the quarter, we generated $17.9 million, as compared to $6.7 million a year ago.

By any measure, we had an excellent first quarter.

Let's look at our guidance for the second quarter and for the full fiscal year 2006.

Focusing on the second quarter, total revenue we would estimate to be between approximately 68 million and approximately $70 million.

This is a result of the continued momentum in our business and extraordinary subscriber growth in the first quarter.

Gross margins should remain at the historic level at high-70's to low-80's, but keep in mind that we're investing in our on-demand infrastructure and our services business.

Thus, while gross margins will be in our range for the second quarter, they will likely be somewhat lower relative to our performance in the first quarter.

From an operating expense perspective, we're going to continue investing aggressively to expand our market leadership position.

This is a right thing to do given our strong momentum.

These investments, combined with our revenue forecast, should lead to an EPS between approximately $0.02 and $0.04 per diluted share for the second quarter.

We're basing our guidance on assumptions that the tax rate will be approximately 20% and a share count will be approximately 119 million diluted shares outstanding for the quarter.

Guidance for the full fiscal year 2006 we are raising estimate from our last time with respect to the full year based on our Q1 results and a continuing acceptance of the on-demand solution.

We would estimate revenues of between approximately 297 million and $302 million in revenue for the full fiscal year '06.

We expect full-year EPS of approximately $0.11 and $0.14 per share.

Again, raising our full-year EPS estimate from last quarter, but being mindful that we're continuing to invest aggressively in our growth.

We're basing our guidance on assumptions that our effective tax rate will be approximately 20% and our share count approximately 123 million diluted shares outstanding for the year.

Please also note that the EPS guidance does not include incremental impact of recently issued stock option expense requirements that will become effective for us for fiscal year 2007.

The current impact of stock option expense is set out in the foot notes of our financial statements.

To conclude, we had an excellent first quarter, and our momentum continues due to the growing acceptance and strong interest in the on demand platform.

Salesforce.com is a clear market leader in a major new market opportunity.

With that, I would like to turn it over to the operator, and we'll begin our Q&A session.

Thank you very much, sir.

[OPERATOR INSTRUCTIONS]

Our first question today will from Peter Coleman with ThinkEquity.

Good job, guys.

First question, I want to try get a better feel on thinking about sub count going forward.

You obviously did a phenomenal job in the quarter.

If you look historically, it had been somewhere between the 4 and 6% sequential improvement.

These last several quarters have been phenomenal.

How should we think about that going forward in your capacity to continue to add subs at this type of rate?

It is a very good question, Peter.

This was the spectacular quarter, 40,000 subscribers added in the quarter, eight times more than our nearest on-demand competitor added in their quarter, as you well know.

In fact, we added more subscribers this quarter than that competitor has added in their total 10 years in on-demand computing, including two acquisitions and spending a huge amount of market, we added more subscribers in the last 90 days than they have added overall.

This quarter also reflects subscribers, of course, that came through deals in our fourth quarter, which was a very strong bookings quarter for us, and as we go forward, the way that we think about it is we look at the last 12 months and the last four quarters , and we look at the overall trend line.

We don't see adding -- because we added X subscribers this month, we're going to add exactly that many subscribers the following month.

We see this more as a long-term trend, and we look at the trend line more than we look at the specifics for the quarter.

To be honest with you, I couldn't have predicted 90 days ago that we did 40,000 subscribers this quarter.

It's really looking at a variety of factors.

This is an exceptional -- an exceptional quarter for us.

The subscriber number is a blowout number.

In terms of how that looks going forward, that's as much as we can really say.

Maybe just to add onto that a little bit -- how much of it at this point is just pure momentum of brand new customers and the fact that you have been doing so well over the last several quarters that you're starting to get a fair amount of that sort of follow-on business from existing customers?

I am wondering how much -- you can tell us -- is just brand new business and how much coming from install?

That's a very good question, and as you saw, we did add quite a few new customers this quarter.

Now, what we've seen, Peter, is something that our add-on business and our existing customers is increasing, and we don't have a lot of data around it right now because it's a relatively new phenomenon for us.

When we look at some of our new products we've introduced over the last year, specifically Customforce, we see customers being able to do more with our product, be it to create new tabs, new fields, new applications.

That's why we've also created Multiforce, so they can run multiple on-demand applications.

Our goal is to increase the number of subscribers that we have in each customer.

We've talked about this before.

When we look at a customer like ADP who has -- I think they have-- approximately 45,000 employees, we have I think about 4,300 subscribers right now at ADP, we may have a little more than that, I haven't checked in the last couple weeks, and that's roughly about 10% of their employees or subscribers in salesforce.com.

We would like to see that increase.

We would like to look at other applications or other data that inside that customer that's not yet automated.

We think that customers have mostly been let down by a lot of the technology that's client-server or very hard to share information with these PC-based tools.

We think our system is very, very good for that, and we're trying to use that as a strategy, and insofar as how that strategy will work or being able to predict on terms of how that will go -- look going forward -- it is very hard to do.

We are really pioneers in this area as you know, and our dream is we would like to see more customers have more applications of ours running inside their companies, more than just Salesforce.com, more than just support force.com, which is our call center, contact center, and customer service product.

We want to see them building their own applications.

We've demonstrated, for example, in our company, we've written a recruiting application.

As you know, we're hiring a lot of people, managing and recruiting is very difficult.

All the people coming in, getting the resumes off the website, the calendaring and scheduling around the Company, getting the contacts, doing all the EOTC reporting, the analytics reporting -- there isn't any really good recruiting applications, but we took Multiforce, and we built a recruiting application in Salesforce.com.

Our development organization is built with bug-tracking systems in Salesforce.com.

We've built project management systems in Salesforce.com, and we're new deploying those with Multiforce, so we can easily switch between them using the Multiforce desktop, and soon our customers will be able to do that as well when we release the summer '05 edition in June.

I hope that answers your question.

That's helpful.

Thanks a lot.

Good quarter, guys.

Thanks, Peter.

Our next question will come from Ed Maguire with Merrill Lynch.

Good afternoon.

Could you talk about the size of some of the larger bookings you did during the quarter?

I just want to get a sense of whether you're really reaching some critical mass in terms of large bookings?

Thank you very much for that question, and I really appreciate it.

As you know, we did have quite a few new additions during the quarter.

You saw that we added a variety of customers -- about 1,600 customers as I previously mentioned -- in a variety of new wins.

Companies like Dupont, Air Products, Jefferson Wells, International, et cetera.

Now what I need to tell you is that a lot of our customers, for example, don't like us to disclose how many subscribers we have inside their organizations because they don't want their competitors to know how many sales people they have.

Also, we have customers that we can't even disclose their name where we have significant implementations, but what I can tell you is a company, for example, like Air Products that I mentioned, has about 1,000 subscribers now with us.

That is a significant implementation for any enterprise company, and we have seen that with a lot of our customers.

As you know, we have major enterprise implementations in quite a few large companies today.

I mentioned ADP, but, of course, we've previously talked about Nextel, Staples, Sun Guard, and Business Objects, Kaiser Permanente, and so forth and so on, and -- but in terms of the specific numbers, sometimes our customers do give us permission to talk about those.

If you go to our home page, sometimes we rotate a flash goes through those numbers.

We have quite a few large multi-thousand user implementations, and we have a fully Democratic customer base, small customers, medium customers with multi-hundred user implementations, and than we have very large implementations as well.

I hope that answers your question, Ed.

It did.

Thanks, Mark.

I guess as much as it can.

With the departure of Pat Sueltz, when are your plans to replace or shift around her duties going forward?

You know, of course, we have a very strong management team, as I am sure you know, and I am sure you have met with a variety of those executives.

Of course, Jim Steele who is our President of Worldwide Distribution, Steve Cakebread, our Chief Financial Officer, Ken Jester who is our Executive Vice-President of Legal and Business Development, Parker Harris who is our Executive Vice-President and Co-Founder and who runs my technology organization, myself, and under them, we also have very strong executives in each major area.

As we look at the transition now, as Pat leaves the Company at the end of this month, and as we go on to re-organize accordingly for this next stage of growth that we're experiencing, we think we have a very strong line-up, but we will continue to bring new players in and continue our aggressive hiring.

Our next question from Heather Bellini with UBS.

Miss Bellini, your line has been opened.

You may want to check your mute function.

All right, and hearing no response, we will move on to Ross MacMillan with Morgan Stanley.

Thank you.

Very good numbers, guys, very strong.

Question on costs here -- I couldn't help but notice that the CapEx spend in the quarter doubled or so from last quarter, and your obviously talking your gross margins coming down a little bit here in the second quarter.

Steve, can you outline the sort of investments that you're actually making here on the infrastructure, and maybe outline specifically where the additional CapEx is going in the quarter?

Thanks.

Yes, Ross, in terms of gross margin, it will stay in the range.

I feel comfortable with numbers going forward.

We are obviously investing in all aspects of our technology infrastructure.

That means everything from hiring people, adding more technology in our data centers, and expanding those as we go forward.

It is pretty much across the board.

You will see some of that start to show up in CapEx.

I think the good position was we increased our capital spending this quarter, and you saw little or no impact in cash flow from operations, the net income line, gross margins, et cetera.

We're going to continue to make investments to go meet our customers needs and make them successful and that includes not only in development, where we had significant growth in R&D and the head count there, but also in the subscription line, which reflects the data centers expansion of memory, adding of all kinds of applications to monitoring and software.

And, then, just to follow-up -- on the R&D spend, Marc, it does sound like, at least internally, you guys have developed applications, and I don't know whether those become publicly available or not, but I guess looking at 7% of sales in R&D, I know the on-demand model has I object inherent efficiencies in development spend, but it is still lower than the average software company.

I am just curious to get an update from you guys on how you're thinking about other applications beyond the customization and configurability of the platform that you have clearly been rolling out with Sforce and Customforce.

Any new specific application details that we might be looking toward?

Thanks.

Thanks for the question, Ross.

It is a great question.

As you said, there are tremendous efficiencies in this model.

We're not maintaining old copies of Salesforce.com, we're not porting multiple copies of Salesforce.com to multiple operating systems and multiple databases and multiple application servers, and then maintaining all of those old versions and all of those old iterations.

This is really a lot more efficient than the enterprise software model.

When I was at Oracle, we maintained so many copies of Oracle on so many operating systems in so many countries around the world, and on and on and on.

There is a huge matrix.

It was enormous of all of these configurations, and is when do they start and when do they stop, we don't have any of that.

We have a development team that's singularly focused right on, for example, delivering our December '05 release in June.

The other thing that I think is really important is that -- and I am sure you've seen -- that Salesforce.com is not just loved by it's customers and users -- and I am sure you've spoken to them -- but we've also won almost every single major technology and analyst award this year -- PC Magazine's Editor's Choice, N Technology of the Year, and on and on.

Our competitors, Seibel Systems, they won't even allow their product to be reviewed.

Their percentage of R&D is a lot higher.

If their product is so great, and if they're so proud of it, why will they not let PC Magazine review it?

Why will they not let anyone see it?

Not even you, Ross, could right a review of Seibel or any Seibel product, by the way, in their entire history, they've never let anyone even look at their product.

If you wanted to right write a review of it, they wouldn't let you do that.

The reason why is their product -- we think -- is not very good, and we think our products are really outstanding.

We think that we've done a great job building our products and our technology.

You're seeing a tremendous growth in our product line.

You've seen the additions, as I mentioned of Customforce, of Sforce.

You've seen the addition of now Multiforce, which is coming out in June, and with that, you will see customers, not just us, be able to build and deploy and share applications, and we think this is going to be a tremendous boom to what we can deliver to our customers.

We'll now move to Heather Bellini with UBS.

Hi.

Great.

Sorry about that.

I was wondering, Marc or Steve, if you could talk about the increase in subs that you had in the quarter?

Are you seeing increased penetration among larger customers?

And if you could also talk a little bit about whether you're developing better relationships with people like Excentre, in order to drive that business or this still the deal, kind of the bread-and-butter, the small and medium-sized business angle?

We are seeing growth in all areas.

Salesforce. com, of course, traditionally , has seen traction in small companies, in medium companies, in large companies.

What Salesforce.com has really seen recently is that we have seen larger deals happen in the last 12 or 18 months that in our first couple of years in business, we did not see.

So when we look at, say some of the large transactions we have characterized over the last 18 months, that has been exciting for us.

It all started with Sun Guard Data Systems, which was our first deal with 1,000 subscribers, but now we have so many companies that have more than 1,000 subscribers with us.

We've gone through those with you before.

I guess, then, as a follow-up, Marc, if you don't mind -- the 40,000 subs were much better than even the highest estimates.

Was there anything in that sub number that would lead you to believe that maybe you'd experience downward sequential growth in subs next quarter, or should we expect the growth in subs to continue as you're expanding your sales force?

As I mentioned previously, this was a blow-out quarter for us.

We didn't expect it to be 40,000, and we're excited that it is, and we're excited that we have over 267,000 subscribers overall.

We're looking -- the way we look at it, Heather, we're looking at a trend line over the last 12 months, and we're looking at the next quarter on that trend line.

If you look at that trend line, that trend line would never -- 40,000 it would have given a number below that.

I think -- what was the number that we had last quarter in terms of subscribers net adds?

Was it 32,000?

Is that right?

We added 32,000 subscribers last quarter and 40,000 subscribers this quarter.

You probably would have expected something in between those numbers.

That's what I would have expected, and so I would have expected for the next quarter, something in that range, but we're in a growth cycle in the Company, and so some of these numbers, even we can't predict.

We're excited about what has happened, but exactly what will happen in terms of the specific subscriber going forward, we don't know.

This quarter, we really did get a lot of benefit by having hugely strong fourth quarter , so that gave us a little bit of a -- that gave us a little bit of a boost as well, and what will next quarter look like?

I would look to the trend line for that.

Laura Lederman with William Blair has our next question.

Thank you.

Not to beat a dead horse on this, but the sub count was very high, and there were rumors running around of potentially some very large deals -- so was the quarter skewed by a few large deals?

I am putting it point-blank.

To be specific, no large -- there was no transaction -- no specific transaction added more than --

It was our normal business.

We just had strong business across the board, and as Marc said a couple times, the on-demand models are just coming to us.

We didn't have any large deals, and as you guys know, it's been pretty consistent quarter-over-quarter like that.

Can you talk a little bit about competition?

Obviously, you're doing quite well against Seibel, but beyond that, who are you seeing more of, who are seeing less of right now as we roll to that last quarter because they dropped their pricing?

Are you seeing them any more right now?

Just a general sense of what the competitive environment looks like?

You know, to be honest with you, right now, we don't really see at all.

I even wouldn't say they're in our top ten competitors.

It doesn't show up that way for us.

Of course, Seibel has traditionally been the largest CRM provider in the world, and they are our largest competitor day in and day out.

We have been very fortunate to have an environment with Seibel Systems where, because they have disappointed so many customers over such a long period of time, coupled with their disappointing financial results and their change in management, that has created our perfect storm for being able to secure deals against them.

In terms of the other competitors, I don't think there really is an especially strong competitor out there.

You have a lot of people who put out -- including people that put out -- press releases that they won this deal against us or that deal, and the ones that -- I always take a look although those of course and -- they have secured a deal with five users and they put out a press release, or eight users?

Seibel put out a press release yesterday that they won a deal against us called Gulf Pact.

I think they have eight sales people.

Why would they -- what does that mean?

What does this mean about them?

That that is what they're doing.

Or you see a competitor that puts out a pricing press release or a price incentive -- those are generally tactics of desperation, when you're in a very difficult situation, where you don't have any other way to differentiate yourself or you don't have any substantial wins.

You want to put out a press release, put out a press release that you have won a 5,000 subscriber deal or 3,000 subscriber deal or like we've done here, we won Dupont or that we have Air Products -- these are big, significant companies.

So I don't really know.

I think we're very fortunate to be in the leadership position, and I think companies prefer to deal with the leader, which is who we are today.

Tom Ernst with Deutsche Bank has our next question.

Good afternoon.

Thank you.

Marc, one thing Wall Street has been fearing or anticipating is a fall-off in your average pricing, and the last two quarters, I guess it depends on how you calculate it, I think, no matter how you calculate, we've seen an uptick in your average price per subscriber.

What is driving this, given that we all expected you getting these large deals next where the customers get volume discounts?

Tom -- I'm going to have Steve give you the introductory comment on that.

A lot of it is just business mix.

You have to keep in mind that we do business with a lot of different customers.

There is a good mix-up between team and professional and enterprise, and that mix -- we talked about this from day one --

Our revenue portfolio is very, very strong.

It serves a lot of different industries.

It serves a lot of side businesses.

We have a good flow of -- from team addition to enterprise addition as people learn and grow with the product, and they grow their business.

We have good flow with our add-on business with the Customforce capabilities, Multiforce integration force.

It takes them into arenas that we wouldn't sell into necessarily, but that they get subscriptions for.

So all of those have a good, stable impact on our ASP's.

They have, as you noted , picked up a couple quarters, but they're also in a range we said we expected them to be.

One of the things that I see is that our competitors will tour through the financial analysts or tour through the market analysts and say, "Well, the way that we're going to compete against Salesforce.com is on price.

That's what we have.

We have price.

Because we have price, we're going to do X, Y, Z to them, and then, it creates kind of this group-think around an issue.

We've seen some of that in not just this area, but in a lot of different areas, where, in the market reality, we haven't seen that.

The other issue that's come forward is that customers do not want to buy from the lowest-price provider.

We're not -- companies want to buy from the vendors who have the best products and the most customer success, and vendors who put out price press releases that say, "You can buy from us, and we'll give you a 50% off discount," or, "We'll give it to you for free," nobody wants that.

Customers see right through that.

They want to buy from companies that are going to deliver value to them and that offer them a reasonable price that's affordable and represents the value they're receiving, and when I see some of this stuff in the market, I think -- as someone who is very conscious about the brand of this Company, I would never in my career, associate that kind of marketing and positioning with our brand.

Can you imagine what that would do to our product?

Customers want to know that we are the premium product, and they're going to have to pay more for our product, but they're going to get tremendous value.

Even today, nobody has anything like Customforce.

They have nothing like Sforce, and soon, there's not going to be anything like Multiforce either, and customers are willing to pay for that value because it gives them more adoption and more success, and that's what we're all about.

Moving on, we'll take our next question from Brent Thill with Prudential.

Marc you talked about winning more deals at the high-end of the market.

Give us a sense of how your distribution methodology may shift.

Are you seeing a number of these deals where you're not having to go into the field?

Where the customers are able to go up on the product without a direct sales rep in the field or do you think we'll start to see that shift?

You'll have to put more direct sales in the field?

We have, as you know, we have a bifurcated distribution strategy, and we handle different types of customers in different ways.

These increases from subscriber counts are not coming from larger customers closing, so if I said something that implied that to you, Brad, I did not mean to say that.

I want you to know that we're having success in all areas of the market, which is why we saw this as a blow-out quarter, and we're also seeing more customers successful than ever before, which is also what's helping the subscriber number.

No particular deal was represented as far as I know, and I am going to -- I will come back to you.

No particular deal represented 3 or 4% of the subscriber number for this quarter or -- Steve is saying less than that, maybe 2% -- so, that's not what did it.

What did it is we have 15,500 successful customers, and those 15,500 successful customers are successful and they are -- either bought Salesforce.com or they're buying more users.

Then we added 1,600 more customers, which is what got us to 15,500.

We got an additional subscribers from them, and I think also, by the way, the economy is improving and that helped.

I think there are a lot of contributing factors.

As I said three or four times on this call, we didn't expect this number, nor did any analyst expect this number to be 40,000, especially when you looked at the horrific performance of Seibel, but we had a really great quarter.

Steve, if you can address two questions -- One, average contract length -- Seibel Systems has given that number recently -- and the second churn , there has questions from the investment community you have other companies out there like Web Ex, CableVision, Cox, have at least hinted to churn -- and I know you have not chosen to comment on it -- but maybe give us a sense on both those metrics, if you could/

We're still not talking about that because we're in the growth stages here, and we're certainly not in the same category as Cox and a few others.

With regards to -- and your second question, sorry?

Mr. Thill, if you could please re-queue.

Brent?

Just one moment.

Sir, your line has been reopened.

Steve, average contract length?

I am sorry.

I didn't get that noted.

It is hard to talk about because we've got such a diverse space, but it is still -- the larger customers are still taking multi-year agreements in that two to four year range and the small business guys are still on the one.

There is no fundamental changes other than people love this model and are coming to us in all size businesses.

Thank you.

We'll now take a question from Mark Murphy with First Albany.

Thank you.

Marc, does the ASP increase feel like a sustainable trend line to you for the next few quarters here?

As a second question, can you give us any type of sense for the adoption rate of some of your newer products like Sforce, Customforce and Supportforce?

At Customforce Day on Tuesday 5-24, we will be giving metrics in regards to a number of customizations that have happened, and we will be disclosing that to you then.

As you know, Customforce is only available to our enterprise-addition customers today, and we will be making it available to our professional-edition customers with our summer release, and we're very excited about that.

And, in regards to the ASP and so forth, and you know, Steve, do you want to comment on that?

Mark, we don't plan on ASP's going up.

Our goal is to get our customers into value products we offer.

We haven't raised prices.

We don't intend to.

It is just a mix and an opportunity issue around the customer, but we're always planning in the range, we've said -- in the high 60's, in the high-60, 70, low-70 range.

I don't see anything there I would plan around differently.

Just a final question, Marc.

Can you give us insight into the rate at which you're finding customers are building custom applications at this point or perhaps none CRM-type of applications?

With our enterprise-addition customers, we've seen a lot of creativity in the base, and we see them coming to us and asking to deploy new kinds of functionality that they've built.

We haven't given them that framework yet to be able to deploy multiple applications, that will come with Multiforce, and we think that it is such an exciting break-through.

Multiforce is our on-demand operating system.

It supports Sforce, which is our on-demand database and integration platform.

Customforce is our tool that runs on that, and of course, Salesforce and Supportforce are two killer app's that are on the top of that stack.

When we look at what customers want to do, they are coming to us and showing us things that even we never anticipated.

If you came to our Integrationforce Day, you saw a company called Magna Design Solutions that built a complete product management system with our service.

That was not something we expected, and we're seeing that with other customers as well.

We think that the problem is that client-server vendors have failed the industry.

They haven't moved the model forward.

They're stuck in their old business model.

They're stuck in their old technology model, and companies have -- they're hungry for the next generation, and we are doing our best to build that as fast as we can and deliver to them.

Patrick Mason with Pacific Growth Equities has our next question.

Mine is more shoring up the trend in your G&A line -- last quarter is roughly 18%, significantly down percentage-wise.

Can we expect it to stay down below 15%?

Can you give me color on -- directionally -- where that might go?

We're continuing to grow international, that is going to bounce around as we turn subsidiaries on and expand our administrative costs.

It's all about keeping up with the business and -- that and facilities.

It should stay in the same range it's been in relatively speaking.

And then, as far as talking about investing and I assume that's -- obviously, R&D was up significantly from one quarter to the next.

In absolute dollars, do you expect similar increase potentially?

We're investing in all areas whether it is R&D for our infrastructure, services, so you can continue to anticipate people adding head count.

Again -- you've heard me say this before -- we don't have offices in certain key locations not only in the United States, but throughout the world, so we've got a feedback.

R&D is on a roll with the technology, and Parker's team is doing a great job.

So look for us all to continue to invest in this growth over the next -- at least for this year as we move forward.

Thanks a lot.

That is all the time we have for questions today.

Mr. Benioff, I'd like to turn things back for you for any closing comments.

First of all, before I turn it over to Steve, I just want to thank everyone for attending the conference call today.

We're looking forward to seeing all of you next Tuesday in New York City, and we will have some very exciting new product announcements, as well as some technology demonstration, and we may even have another couple -- few -- surprises for you up our sleeve.

We're also happy to meet with you there and answer any of your questions during our webcast of our event that will happen at that time.

Thank for joining today's call , everybody.

We do appreciate your time.

A replay will be available until Friday, May 27, and can be accessed by dialing 719-457-0820, or 888-203-1112, with the pass code 408-1123.

There will also be a replay of the webcast available on our investor relations site at salesforce.com/investor.

We thank you all very much and look forward to seeing you next week in New York City.