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Operator
Good day, everyone, and welcome to salesforce.com second quarter 2006 financial conference call. As a reminder, today's call is being recorded. For opening remarks and instructions, I would like to turn the call over to Mr. Steve Cakebread, Chief Financial Officer at salesforce.com. Please go ahead, Sir.
Steve Cakebread - CFO
Thank you, operator. Good afternoon, everyone, and welcome to salesforce.com's second quarter fiscal 2006 earnings conference call. Management will discuss results of our fiscal second quarter which ended July 31st, 2005. By now you should have received a copy of our press release which was issued after the market closed today and filed on Form 8-K with the SEC. You can also access the press release 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 our Q2 results, business, and strategy. I'll then review the key financial results for the quarter, discuss guidance for the reminder of the year. We will then conduct a question-and-answer session.
Before we begin, however, I appreciate your patience as I review our Safe Harbor statement. Our discussion today will contain forward-looking statements regarding our projected financial results, business strategy, future service releases and their capabilities, and on demand and demand for on demand services generally. And our products, specifically, among other things. These statements are subject to risk, uncertainties and assumptions; and if such risks or uncertainties materialize or our assumptions prove to be incorrect, could result in our actual results differing materially from these forward-looking statements.
These risks, uncertainties, and 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 for the period ended April 30th, 2005, and our Form 10-K for the fiscal year ended January 31st, 2005, which are also available on our IR website.
We intend to discuss some non GAAP measures and a reconciliation of GAAP and non GAAP results as available in the press release and on our website at salesforce.com/investor.
Any unreleased services or features referenced in this discussion or other public statements are not currently available and may not be delivered in time or at all. Customers who purchase our services should make the purchase decisions based upon features that are currently available.
Now I'll turn the call over to Marc.
Marc Benioff - Chairman and CEO
Thank you Steve. I'd like to welcome everyone to today's conference call -- the one-year anniversary of our first call following our IPO. We are delighted to announce record revenues, profits, and net new subscribers and we are raising our guidance to reflect our continuing momentum in our business.
A lot has happened at salesforce.com over the last year. As of the end of our second quarter, we have increased the number of our customers from 15,500 to 16,900. And we have increased the number of paying subscribers from 267,000 to 308,000. It took us four years to reach our first 100,000 subscribers; a year and a quarter to reach our second 100,000 subscribers and now only three quarters to reach our third 100,000 subscribers. Quarter after quarter, the on-demand revolution continues to gain momentum and the evidence demonstrates that we are seeing the end of software.
Salesforce.com is leading and defining this revolution and we remain the clear marketed brand leader in the on-demand industry with our technology, best in class solutions and strong vision for the future of on-demand. We are still only in the very early stages of what we believe will be a tremendous shift in the way companies use and deploy enterprise applications.
Consequently we are continuing to invest in our technology to sustain our leadership position in the industry.
We will detail these investments in a moment but first let me review the highlights of the quarter; and then I'll talk about what is driving our industry-leading success.
Our results were solid across all key metrics both from a momentum and profitability perspective. First, the quarter's revenue was $71.9 million. That is 77% growth year-over-year and 12% growth sequentially from the last quarter. This is one of the very strongest performances of any enterprise software company this quarter and reflects a growing acceptance of our solutions.
Second, our net income for the quarter was even stronger at $5 million, up 331% from $1.2 million a year ago.
Third, we added over 1400 customers in the quarter for a total of approximately 16,900 worldwide, representing sequential growth of 9% in year-over-year growth of 52%.
Finally we added approximately 41,000 net new paying subscribers for a total of approximately 308,000, representing sequential growth of 15% and year-over-year growth of 83%. In fact, we added more subscribers this quarter, in the last 90-day period than Siebel has in total after their entire tenure in on-demand, including two acquisitions. That is an amazing fact and a clear demonstration of our leadership in the on-demand marketplace and we are about to announce a series of enterprise customers that further solidifies that statement.
During the quarter, we added a significant number of new enterprises to our customer list. These included Merrill Lynch, which we already announced has signed with us for 5,000 subscribers. We also signed Aon Corp., who plans to roll us out to over 5,000 subscribers during the next year. We also signed enterprise-wide agreements with CIT Group for 1500 subscribers, and Citizens Bank for over 1400 subscribers as well, and a major technology company in the Bay Area for 2,000 subscribers. These are significant enterprise wins for salesforce.com.
Our international operations also delivered excellent growth, both in Europe and Asia, indicating increasing global interest in the on-demand model. In Europe, Nortel has become a major enterprise customer with a substantial European rollout to improve sales efficiency and effectiveness; and from Japan, Hitachi Software Engineering Corp. has joined us, starting with over 1,000 subscribers. Not only did we sign large new customers, our existing enterprise customers expanded as well.
ADP now has over 5,500 subscribers with us, expanding from their initial implementation of 1500 subscribers just 18 months ago. And we now manage 42 million records of information for them on-demand. It is our largest implementation, active subscribers in size and database. Corporate Express has expanded to 3,000 subscribers and plans to roll out Supportforce, our new customer service and support offering throughout their enterprise.
Cisco has now deployed salesforce.com to approximately 2,000 subscribers in 10 countries, including Australia, Belgium, France, Germany, Italy, Korea, Malaysia, Spain, Singapore and the United States. We anticipate Cisco to deploy over 1,000 additional users before the end of the year. We also want to announce that Cisco is a platinum sponsor of our Dreamforce Conference and will be joining me on stage in San Francisco for my keynote presentation on September 12.
Customers are responding not only to our fundamental value proposition of an affordable, easy-to-use and customizable solution but also to the opportunity of a fully articulated on-demand platform for success. We took that platform to a whole new level on June 21 when we delivered our summer '05 release. The 18th generation of our service is a significant leap forward in our tradition of rapid success-focused innovation.
Summer '05 includes Multiforce, our on-demand operating system for deploying a variety of on-demand applications -- our first entry as a platform provider. Customforce 2.0 is now released which includes over 100 prebuilt business processes for our customers and Sforce 6.0, a significant update to our widely used Web services API system that has over 150 partners who have built Sforce solutions and major advances in our flagship on-demand applications, Salesforce and Supportforce including new features like customizable forecasting, sales methodology and support, email case management and many many others.
As we found when we introduced Customforce back in November, our enthusiastic customer base continues to astonish us with their rapid and creative embrace of these new technologies. Customers like Advanced Micro Devices -- AMD -- have already used Multiforce to deploy four custom applications with 19 custom tabs and Magma Design Automation has built five Multiforce applications with 24 custom tiles; and our customer Ester (ph) has not only deployed Multiforce internally but they have ported their on-demand document management system to Multiforce and will be displaying it at our Dream Force Conference in September.
Customers are also creating what is known in the industry as matchups. This is a compelling new trend in Web services that unites popular Internet applications like Google maps, stipes (ph) and others to extend and complement our own Web-based technology.
Our soon-to-be released Smashforce technology will make these innovative application companies a natural extension of our application suite. The momentum of this early response demonstrates and validates our pieces about the long-term value of our platform to the future. We believe that Multiforce and Customforce together are fundamental differentiators for us. No other CRM, no other on-demand platform can match the ease with which our customers can develop, deploy and use applications and then scale them through their entire enterprise whether it is 10 or 100 or thousands of users.
This is the essence of what the on-demand revolution is about and the essence of how our customers are defining success in the on-demand era.
We have big plans for Multiforce, and at our Dream Force Conference in September that I previously mentioned, we will announce a significant extension of this technology that we are absolutely delighted with. We believe this will further expand our business opportunity.
We are expecting up to 3,000 members of our global community to join us in San Francisco during the week of September 12 and we are hosting a special day for investors and analysts on Monday the opening day of the conference just after my keynote.
Please go to www.dreamforce.com to register for what promises to be one of the most exciting conferences of the year.
At Dream Force you can expect to hear from a strong contingent of customers and partners from around the world, including sponsors like Accenture, Cisco, Intel, Horizon wireless and Vetro (ph) to name a few. An unprecedented 125 customers are coming to speak and share their best practices with our community including a special breakout sessions for customers in very large organizations.
We are pleased to note that Kaiser Permanente, Air Products and PsiBase (ph) will be talking about their success with salesforce.com and the Enterprise. Dream Force is a conference that no one will want to miss.
At Dream Force we will also be previewing our upcoming winner '06 release that is built on our exciting new global data center architecture. This new level data center architecture called Mirrorforce is a $50 million strategic investment we are making and will include comprehensive mirroring and replication that we will -- we believe, will be a first in our industry.
Through this new Mirrorforce architecture, all of our customers' information will be mirrored and replicated between a new East Coast and a new West Coast data center, providing state-of-the-art sell over protection.
If one of our new data centers becomes inoperable the Mirror Data Center will continue to provide service to our customers with a virtually real-time rollover. Our new systems will be developed in a new third data center located on the West Coast which will support our expanded development organization here in San Francisco. We have already taken delivery of the majority of the software and hardware for this important technology expansion; and it is now being staged in our new data centers while our first systems continue to run with outstanding performance and reliability for all of our customers worldwide including at record levels this quarter.
We expect this new Mirrorforce architecture with the winter '06 release to be live by the end of our fiscal year.
Over the past three quarters we have added over 110,000 net banks subscribers or over 36% of what we have achieved in the history of salesforce.com. Clearly the momentum of the on-demand market with our business has been nothing short of incredible over the past nine months. We are expanding capacity to stay ahead of this growth.
The second area in which we continue to invest is our professional services and support area. During this quarter, we increased our professional services team by about 30%. We will focus on increasing utilization of our significantly expanded services team but the important factor for the long-term is we have already made the investment necessary to support our anticipated topline growth for the next several quarters.
In addition, Accenture began working with us this quarter, expanding the depth and breadth of the services available to our customers and serving as another validation of our offering model and our leadership position in the enterprise.
As our Company, our customer base and the demands on our technology grow, we believe we are well positioned for continued growth and global expansion. It is particularly gratifying to note that customers are not choosing our solution -- not just choosing our solutions but they are using our service more and more. In this quarter we delivered approximately 1.3 billion pages in API requests to our subscribers with an average speed of less than 500 milliseconds per page. Over the past two quarters usage has grown significantly.
This is another compelling reason for increasing our investment to infrastructure and services now.
In summary, the on-demand revolution continues to gain momentum and salesforce.com remains the clear industry leader and we are continuing to invest in the business to effectively manage our industry-leading growth. For all that we have accomplished in the past six months I personally believe that we are just beginning to exploit the potential of the on-demand platform that we are building. Most importantly our customers are just beginning to realize what success can mean from our platform.
With that let me turn it over to Steve to provide you with more details on the second quarter financial results.
Steve Cakebread - CFO
Thank you Marc. As mentioned to review for the quarter was $71.9 million -- an increase of 77% over the same period a year ago.
Second quarter subscription and support revenue was $65.6 million representing 82% growth versus last year and 13% sequentially. This continued strong growth reflected the addition of Merrill Lynch, Aon, CITA, Citizens Bank and a number of other large customers coming online this quarter. These large customers were a major driver for the extraordinary subscriber growth. It's worth pointing out that the success we are seeing with the enterprise customers can introduce more variability in the paying subscriber count, given that a single customer can account for thousands of seats. As a result, the timing of when those seats come online can skew quarter to quarter subscriber comparisons.
For Q3 we'd expect growth to be in the low to mid 30s for net new paying subscribers more in line with our trends.
In addition, our continuing focus on customers' success leads to strong adoption and retention of existing subscribers. We have seen subscriber losses at slightly less than 1% per month on total net paying subscribers over the last few quarters.
All of this positively added to the exceptional growth in subscribers and contributed to the 41,000 increase.
Just note we will not always be providing the subscriber retention figures but we felt it is important to levels set for our outstanding performance.
That said we remain very pleased with our momentum on net paying subscriber additions.
Moving on to services. Second quarter professional services and other revenue was $6.3 million, growing 38% year-over-year and 5% sequentially. Total revenue remains strong across all geographies as we continue to invest on a worldwide basis. The Americas delivered $57.7 million in revenue, growing 77% versus last year and 13% versus last quarter.
Europe reported $10 million in revenue and grew 72% year-over-year while delivering 7% sequential growth, this despite negative foreign exchange fluctuations in Q2. And Asia-Pacific which includes Japan generated $4.2 million in revenue, growing 88% year-over-year and 9% sequentially.
The strength of the U.S. dollar against the euro (indiscernible) during Q2 reduced our revenues by roughly $1 million this quarter. We estimate the impact of the containing strength of the dollar on revenues to be approximately $1 to $2 million for each of the next two quarters. I'll talk more about that when I discuss guidance.
Overall, gross margins for the second quarter were 77% down from 80% last year and 81% last quarter. This decline is a result of the infrastructure and other investments Marc described earlier.
Subscription and support margins declined because of the increase spending in our data centers. This investment resulted in an increase of $2.4 million for subscription costs of sales in Q2 versus Q1. And we expect a similar spending increase of $2 to $3 million in Q3 as we ramp up our data center investments.
In Q4 we would expect to return to more normal spending growth rates in this area. Please keep in mind that a majority of these assets are at least over a three-year period.
Services gross margins were below our near-term goals, primarily due to an increase in our headcount. As Marc mentioned we increased our professional services hiring by about 30% during the quarter. It is going to take time to train these new employees and place them in billable roles. But we expect to see slight improvement in our services margin over the next couple quarters. While focused on improving services margins one must keep in mind that revenues to amortization consistent with the ICF 0021 does have a negative impact on our margins. We still believe that our gross margins will remain in our model of high 70s low 80s range.
Turning to our operating expenses for the quarter, R&D expense in the quarter was $5.5 million, an increase of 164% year-over-year and up 27% on a sequential basis. We continue to be aggressive in investing in this area focusing on augmenting our development resources so we can continue to bring our customers industry-leading on-demand solutions.
Sales and marketing expense was $34.7 million, an increase of 54% year-over-year. This reflects our continuing commitment to increasing our distribution organization and growing our business in all geographies.
G&A expense was $11.4 million, an increase of 71% year-over-year and up 21% sequentially from last quarter. This resulted in increases in headcount in facility investments around the world. Operating income was $4.2 million or 6% of revenue for the quarter, flat with the first quarter but doubling from 3% of revenues last year. Operating income announced also included a non-cash stock charge for based expenses for $938,000 for the quarter, which is up from last quarter's 856,000 and lower than last year's $1.1 million charge.
Our effective tax rate for the second quarter was approximately 20%. Our fiscal '06 second quarter net income was $5 million, a significant increase from the $1.2 million in the prior year. Our second quarter average share count was 118 million shares. Our fiscal second quarter diluted EPS was $0.04 -- again, a significant increase from the $0.01 a year ago.
Also note that we added 183 employees in the quarter, up 78% from a year ago and an increase of 21% sequentially, for a total of 1,059 full-time equivalent employees versus last quarter's 876 full-time equivalent employees. On a quarterly basis this was the largest headcount addition in the history of the Company. And currently, we would not expect this type of headcount growth in the third quarter as we absorbed a large number of new hires from Q2 and our new data centers.
On the balance sheet and cash flow we closed the quarter with $232.7 million in unrestricted cash, cash equivalents and marketable securities. Up from 217 million at the end of the prior quarter and reflecting our strong business results. Accounts receivable increased to $50.2 million from 42.4 million in the first quarter. This increase was still rather modest compared to the dollar growth we saw in deferred revenue and reported revenues.
Deferred revenue totaled 117.3 million at the end of the second quarter, an increase of 91% over last year and 12% over last quarter.
Cash flow from operations continues strong. During the quarter we generated $14.1 (ph) million. This was relatively flat to last quarter and last year but this reflects our investments in growing our business and is still close to 200% to level of net income for the period.
Once again by any measure, we had an excellent second quarter.
Now to guidance for the third quarter and for the remainder of fiscal year 2006.
For the third quarter total revenue we would estimate to be between approximately 78 million and $80 million. This is the result of the continued momentum in our business and the extraordinary subscriber growth that we see. Gross margins should remain near Q2 levels and within our model range of high 70s, low 80s as we absorb the cost of our investment in new data centers and resource our services business.
These investments combined with our revenue forecast should lead to EPS of approximately $0.02 to $0.04 per diluted share. We are basing our guidance on assumptions that the tax rate will be approximately 20%, and share count will be approximately 120 million diluted shares outstanding for the quarter.
For the fiscal 2006 full year we are raising our full year fiscal '06 revenue range to be between approximately $298 and $303 million. This reflects a net impact of an increase in our bookings expectations for the full year, combined with a negative impact of between $3 and $5 million in foreign currency translations compared to the last time that we provided this guidance.
We expect full year EPS of between approximately $0.13 and $0.16 per-share again raising our full year EPS estimates from last quarter.
Again we are basing our guidance on assumptions that our effective tax rate will be approximately 20% and our average share count will be approximately 120 million diluted shares outstanding for the year.
To conclude, we had an outstanding second quarter and our momentum continues due to the growing acceptance and strong interest in our on-demand platform and the leadership we continue to demonstrate and bring in the best solutions to our customers.
Salesforce.com is a clear market leader in a major rapidly expanding market opportunity. With that, I will now turn it over to the operator and we will begin our Q&A session.
Operator
(OPERATOR INSTRUCTIONS) Peter Coleman, Thinkequity.
Peter Coleman - Analyst
Nice job. Marc, I was wondering if you could expand a little bit more on this. Obviously you highlighted it this quarter, record sub number had a lot to do with some (indiscernible) transactions. I'm wondering if there is anything you can tell us with regard to the bread and butter business where the strength is or isn't. I know last quarter if I remember correctly, the record number that quarter didn't have a whole lot of large deals. I'm just wondering if there is anything else we can glean from these last two quarters?
Marc Benioff - Chairman and CEO
In our fourth quarter of last year we did about 32,000 subscribers as you are aware and prior to that we had about four quarters where the subscriber numbers were in the 20,000s. Then we had a huge leap in our first quarter to 40,000 scrubbers which surprised everybody, including us. That 40,000 subscribers in the first quarter is very seasonal because of -- it's aligned with the end of our fiscal year where a lot of our business comes in in January where our sales reps are kind of completing their compensation plans.
Then we tend to get a large uptick in January -- I'm sorry -- in February from those January deals. So what we saw in our first quarter and the February March, April quarter was a lot of transactions that came in from the success of that fourth quarter bookings.
This quarter was different, however. We didn't have a big tail in the first quarter like we had in the fourth quarter. This quarter we achieved our record subscriber number of 41,000 net subscribers through large enterprise deals. And as I mentioned this was an incredible quarter for enterprise traction at salesforce.com. We saw Merrill Lynch which we had already announced and we also signed AON for 5000 and CITA for 1500 and Citizens Bank for 1400 and a technology company in the Bay area for 2000 and Hitachi for 1000 and so forth and so on. That really was surprising to us. But let me also address your other question.
Our small and medium business continued to be extremely strong as well. We felt a tremendous brand that means success to these customers -- something they have not experienced from other software companies or really even from other CRM providers. And these small and medium-size businesses -- this continues to be a very strong part of our business. As you saw we added over 1400 customers in the quarter.
Of course a vast majority of those are small and medium businesses and those customers are coming to us, either because they used us in a prior business or because they heard about us from a friend or they went to one of our seminars or found us on the Web; and that business continues to the very very strong. These two trends, strong bread and butter business combined with outstanding performance in the enterprise, allowed us to exceed even the Q1 number. And as you know from our Q1 call we did not expect this quarter to be over 40,000 subscribers. But we are shocked that it is. We are delighted that it is.
But this time it is not because of the tail from our fiscal year; it is because of strong enterprise traction with salesforce.com. Those small- and medium-sized customers just love our product and I'm sure you know they are also deploying a lot of our new technologies like Customforce and Multiforce; and they are really getting into what we have delivered to them which is a platform for deploying on-demand applications throughout their whole enterprise and at our Dreamforce Conference we will demonstrate the next level of our strategy.
Peter Coleman - Analyst
One real quick for Steve, if I could? Steve, there have been some issues (indiscernible) that relates to your data center and what that may mean to EPS upside. Obviously you have raised your guidance and it doesn't seem to an issue. What I'm wondering is is, where are you really managing the costs to be able to absorb it? And should we be concerned at where you might be holding back on some areas to observe it as it relates to the business growth overall?
Steve Cakebread - CFO
We continue to invest in growth across the board. It -- clearly, this coming quarter, too, we are focused on investing in the data centers and you saw that in the uptick in cost of sales and subscriptions in Q2. You are going to see that again in Q3. I also mentioned in the prepared remarks we had an outstanding hiring period in Q2. We are going to slow that down in Q3 to absorb both all the new hires but also make sure that we manage through our earnings in Q3 and Q4 in the hiring.
Operator
Laura Lederman, William Blair.
Laura Lederman - Analyst
Just a few quick questions. Steve, for clarification, you talked about the churn being 1% a quarter. But I didn't get the qualifications. How do you calculate that? Can you talk a little bit about what's behind that number?
Steve Cakebread - CFO
We are looking at 1% a month in terms of subscribers on our total subscriber base and so we are looking at that. And then also obviously focused on retention and focusing on keeping those subscribers as well. But is slightly less than 1% and we look at that, as the number of subscribers particularly as we mentioned before, in small business you always have some amount of churn. So we are measuring that against our total net paying subscribers of the 308,000.
Laura Lederman - Analyst
Second question, which is, on the data center you are talking about the ones you are building here domestically. I'll assume that over time they'll have to the same thing in Europe and the same thing in Asia. So, can you talk about the data center type investments you would have to do next year or the year after vs. the ones you're making this yea? And I'll go ahead and pass it on to the next person. Thank you.
Steve Cakebread - CFO
We are making the substantial investment and exciting new Mirrorforce technology which we are deploying now into these new data centers. These new data centers, as I mentioned, we have already taken delivery of the majority of the software and hardware for are in addition to the data centers that we have and they are significant. When we expand into Europe and Asia, we would anticipate that we will have smaller data centers. Honestly the majority of our subscribers as you know are in the United States and their requirements for this kind of capacity are very significant; and it's at some point in the future and we do anticipate having both European and Asia data centers, these will be smaller investments of the Company.
Laura Lederman - Analyst
So maybe I'll follow up to that question for Steve. So, the margin improvement should somewhat accelerate next year particularly on a gross margin basis since the investments are heavy this year and if you were to add Europe and Asia next year it would be much much smaller investment?
Steve Cakebread - CFO
One is as Marc said, the investments won't be nearly as rich and two is, these will be spread out over time. And keep in mind that we have a lot of opportunity. Like I said we hired dramatically in Q2. We need to absorb those and back off from Q3. We will return to normal hiring in Q4 and I think our normal growth expectations and momentum will help us stay in our margin ranges of high 70s, low 80s where we've been traditionally.
Operator
Jason Maynard, CS First Boston.
Jason Maynard - Analyst
Congratulations on the quarter. Marc, could you talk about Multiforce and also the platform ecosystem opportunity, and how can we think about your ability to monetize this new offering? I'm not trying to get in front of Dreamforce too much but I'm curious. Maybe you can talk a little bit about where you think that growth is going to come from?
Marc Benioff - Chairman and CEO
I am obviously very excited about Multiforce because what we initially delivered with the Company -- our first strategy with salesforce.com that was a radically new technology and business model for the enterprise software industry. It has been a hip product; it's very successful. We've also now built and deployed a Supportforce.com. Then of course our customers started to ask us how will we start building more applications and deploying more applications? And we have delivered more technology, significant amounts of new technology prepackaged.
But we also have delivered this platform and it's this platform that really has captured the imagination of our customers. If you talked, if you've spoken to them, they are building custom tabs, custom fields, custom reports, custom screens, custom tables in our database and they are building their own applications. The things that we can never have imagined. As they build these new applications they are expanding past the sales force and into other departments. Legal, finance, marketing, G&A, on and on and on.
We are really excited about that idea. We think that this idea that existing customers can expand behind their sales -- beyond their sales operations is really excellent.
We also believe there is another level past that; and we think that is encouraging developers and I mentioned Ester as one but we are going to encourage a lot of developers to start building their Multiforce applications and helping our customers to inherit those applications. In that announcement and that technology, that will be our most significant new technology and business model announcements since we started the Company and we will make that announcement on September 12.
That will really help to codify, I believe, for both our customers, our partners -- and others in the industry like yourself -- the true power of what we're trying to do with Multiforce in what we call the platform strategy and salesforce.com.
Jason Maynard - Analyst
If I could maybe quantify that with a follow-up question. If you just take Customforce and Multiforce within the enterprise do you have any idea what magnitude opportunity that might be bigger than just the pure sales and support size of the market? And if you look at the ISD (ph) maybe built on sales force ecosystem opportunity, how much larger do you think that opens up your available market?
Marc Benioff - Chairman and CEO
As you know, before I was at salesforce.com, I was at Oracle and we found a tremendous opportunity in the ability to build custom applications for companies of all sizes. This idea that not all companies want prepackaged apps but they have an additional requirement for apps that maybe no vendor can build for them but they need to create on their own, this turned into a pretty big opportunity for Oracle. We would like to see that as well at salesforce.com, but because it is both new in terms of on-demand as well as new for salesforce, it is kind of hard to predict exactly what is going to happen with Multiforce. But the initial signs are extremely exciting and at Dreamforce I think you are going to see a lot of Multiforce action, which is kind of surprising even to me, because -- don't forget we just released it for the first time a couple of months ago now.
But you can talk to our customers and ask them what they are doing and see what applications they are building. I've seen a wide variety already myself. I was with a customer yesterday. This customer runs a large electronic news organization here in San Francisco and this customer is very successful. We run, I think, 3 or 400 salespeople for them and they built an application to run their legal department. That was surprising honestly.
I was with a large customer in Europe about a month ago and they manage about 1000 users with us in their sales and support operation and they now have built a product management application. Again that was very surprising and it goes on and on. I've seen a lot of very interesting examples but it's bringing us into areas that we would not normally be in and it's helping those new divisions and those new departments and those applications be as successful with salesforce.com's model as the sales force has.
If you're interested in this area you should go to our main website salesforce.com, click on our products tab and on the right hand side you'll see a link called Custom Applications. There is some very good information including a couple of Breeze presentations. Macromedia Breeze. And you will get a good solid walk-through of what is possible.
Operator
Ross MacMillan, Morgan Stanley.
Ross MacMillan - Analyst
Steve, a question on pricing. If I look at the pricing based on a revenue number, it clearly takes down across the base this quarter but that maybe this is a bit misleading because it doesn't really capture the net new business coming in. If I look at it on a booking space and constantly do the math because I don't have the element of sitting on the balance sheet within the kind of protracted revenue. So maybe just anecdotally you can talk about pricing and what is happening as you -- particularly on the enterprise deals where there might be volume discounts or things going on? Can you just provide any color around that? That would be helpful.
Steve Cakebread - CFO
Sure, a little bit. As we have always said our average selling price should sustain a high 60s to mid 70s and they have been slightly above those for a while. We have also talked about and I think this is a good example when you get into a large corporate deal is you are going to see different discounts based on volume and that is fairly traditional.
Marc spoke about and rattled off a large number of large deals this quarter so that is certainly going to have a little bit of influence. But I think if you look at the ASPs, they continue to stay at or above our expected ranges. That is a comp, that is the composite of our small and large business. That is the strength of this model, that portfolio effect. And nothing significant other than that. We just had a very good month into our quarter and the enterprise business.
Ross MacMillan - Analyst
Just one follow-up. I noticed that the sales and marketing expenses were flattish sequentially; and then I've also noticed that if I look at your guidance you are implying by the fourth quarter revenue growth it is going to be a little bit above 50%. Steve, you kind of talked about as you slowed down in the business 50% growth you expect to see the margins expand. So I'm just trying to tally these two numbers together and try to understand if I think about the rate of increase across sales and marketing and particularly sales distribution -- are we starting to get to that point where you are hitting that plateau and you think revenues will decelerate and you will be looking at margin expansion as we go into next year at a faster rate?
Steve Cakebread - CFO
No I don't think so. If you look at Q1 to Q2, it is true that they were flattish, but we have had some very rapid expansion in our sales and marketing organizations in both quarters and across the world. And again like I discussed in the headcount hire, we are going to take a little break to absorb all the people and get back to our normal hiring in Q4. This Company and what we expect with the new technologies that Parker's team is bringing out is on still a rapid expansion in growth. I wouldn't anticipate any other changes at this point in time. Q4 is a bit of a ways away. Let us get through Q3 first.
Operator
Cash Brandon (ph), Merrill Lynch.
Cash Brandon - Analyst
Couple of questions for you. First for you, Marc, is there any way to qualify the number of users you've got for the Customforce product and secondly also when I look at the number of new subs you are adding per new customer it has increased pretty dramatically. I think the most recent quarter is roughly 30 new subs for new customer that is up from 15 or so year back? What is driving that number? Is it that the deployments of new customers seem to be larger or is it that you are getting more repeat business? (MULTIPLE SPEAKERS)
Marc Benioff - Chairman and CEO
As for the sub number you are absolutely right. This quarter was extraordinarily high in terms of 29 or 30 subscribers per customer. I think that reflects the additions of both like Merrill Lynch and others where they come onstream with very large sub counts will enhance that. If you look at the full year, the 308,000 and the 16,900 customers you get to a more normal but still extraordinarily high subs per customer. We have said often that we run 15 to 20 subs per customer on a total average. That is where it was last quarter. I don't anticipate any changes. What you're seeing and what I described in the prepared remarks is that these big deals when they bring in large numbers like that will influence the metrics slightly but that we believe that over time they continue to normalize back to where we have seen them.
I wouldn't get -- get ahead of yourself there as a number of people have in terms of subs per customer. And your other question. Sorry.
Cash Brandon - Analyst
How do you quantify Customforce users within your installed base? I mean if you look into the introduction of the product where do you stand when it comes to number of users? Trying to get some sense of trajectory on that?
Steve Cakebread - CFO
It's hard for us to really break it out. As you know what our customers do when they get our product, the majority of our customers they get in there and they start to tweak it. This is one of the magical aspects of salesforce.com. They change the field, they can change tabs. They can change the tab names. If we forgot a tab, they can add a tab. If we forgot a major piece of functionality they can even create a new application now, Cash, which is our Multiforce technology. They can start to create their own force, if you will. So ADP has created ADPforce and Cisco has created Ciscoforce and on and on and on.
No one implementation by any one of our customers -- 16,900 customers -- is like any other and what's especially interesting, Cash, is that this kind of high level of customization then makes it very very unique and special for that customer. As we upgrade and update our system we are aware of those customizations. Our system is aware of those and unlike other traditional enterprise products, the customizations just reappear automatically without any change in the new release. So when we went to our summer release all of the tabs that they created in the fields and so forth appeared automatically and that is the magic behind salesforce.com.
Because that is a technology that is core to what every customer is doing it is kind of hard for us to say, "this many customers or this many users are using this kind of Customforce technology" but you will see at Dreamforce, I believe, an extensive use of Customforce as well as an unusually quick uptake of our Multiforce technology as well as an introduction of some new technology that we think will further catalyze and accelerate this trend. Something that we think was very important for our future; and I look forward to having you come and see that.
If you want more information on Customforce, again, I would go to our Products tab and click on that Custom Applications link or go to www.Customforce.com and see some demonstrations and videos of customers using Customforce.
Cash Brandon - Analyst
Finally, for you Steve. If you look at better than expected retention rates among your customers and as you are putting in money for CapEx this year, how should we look at margin leverage? Not trying to pin you down to a certain point in time but how should we think of margin leverage as you get these two things out of the way this year?
Steve Cakebread - CFO
We are still investing in growth. So we are going stay focused on that in growing our subscriber base globally and domestically. So I don't think anything has changed dramatically. We have certainly had great success with our customers and you can see that on our customer stat numbers as well as the continuing reduction down to the slightly less than 1% of attrition. It is still about growing subscribers with the great technology that we have globally and I wouldn't anticipate much change in the model.
Operator
Tom Ernst, Deutsche Bank.
Tom Ernst - Analyst
Back to the pricing. We certainly hear some anecdotes about the competition in the marketplace about particularly aggressive pricing from your competition. I'm wondering in some of the wins you've had -- if you can walk us through what kind of a price premium do you get? It seems apparently you are getting a significant one. Maybe with some specific examples on the enterprise side if you can, given you've had a number of big wins over the last couple of quarters?
Marc Benioff - Chairman and CEO
As you have seen, the competition hasn't done very well on the enterprise side. And the competition hasn't done very well at all. They used just about every possible tool and trick and technique that they could possibly come up with to try to figure out how to get some of those subscribers on their side and they are not beyond using price. They are not beyond using fear, uncertainty, doubt, on and on and on. It's pretty interesting to see how these competitors can tease an act of desperation for business.
But customers don't like that and that is why we added more subscribers in the last 90 days than our nearest competitor has in total. These customers, they are willing to pay a price premium, they are willing to pay a price premium for quality. For innovation, for technology. We talked quite a bit on this call about Customforce. About Custom tabs. It is interesting to note that that has been a critical aspect of winning a lot of our deals, having clear differentiation with the power of our platform. The ability to trade that custom tab and a whole custom environment has been really essential to so many customers; and now we are going to take that to a whole new level. And because we have this credible technology that our competitors don't have, we have found our ability to maintain a price premium and we work hard to demonstrate to prospects that they are not buying just some kind of cheap SFA solution like they would get from some company in San Mateo. They are getting a really high-quality, premium, leading-edge technology that has not been delivered by any company, ever, in the history of the industry.
And even major industry periodicals -- and I'm sure you saw InfoWorld's recent review of Siebel on-demand and how it compares to salesforce. I mean, we believe we are at a different level and this has created tremendous success for customers and we think that they are paying for that.
Steve Cakebread - CFO
And they see a lot of value on the releases that will come out. You'll say that at Dreamforce. There is a huge amount of additional technology they get on every release.
Tom Ernst - Analyst
One final, if you permit. On the churn side, thanks from bringing that number out, I think some of the market was thinking you are still at the 2% or 3% level. What has churn done our time? Why do customers churn and one thing we pick up anecdotally is I would imagine the churn is a lot lower for a customer that has been with you for a year or longer. Any comments there?
Steve Cakebread - CFO
I can't talk about length of time in churn. We've certainly seen it come down over the history of the Company and slightly less than 1%, we keep working on it. We want to keep our customers happy and successful there. It's -- that has been in place for a while. It is something like I said we've got people working on, you will see them at Dreamforce. You can talk to them about "Are they satisfied with the solution?" But it is something over time in the last couple of years it has gotten better. Certainly we are focused on making our customers more successful with our solution.
Tom Ernst - Analyst
Who tends to churn? Is there a difference in the churn levels is the customer has been on the product longer?
Marc Benioff - Chairman and CEO
It really depends on -- one of the great things about our model of course is that customers can enter our solution risk-free. That is how we really got a lot of customers' interest. But what we found is that when these customers experience the success of their product that they haven't experienced with other offerings, they get just tremendous value as we've mentioned. And so when we talk about this kind of subscriber attrition at less than 1%, we think this is very very good. We have driven this down over our 6 1/2 year period as we've learned, what makes customers successful, what makes customers compromise, get their users adopting. You may know we have a whole website for best practices called www.crmsuccess.com and, Tom, if you haven't been to that and if you want to know our secret for this incredibly low churn number or attrition number, and why we get such high success, take a look at crmsuccess.com. Customers talk about right on there, how they're doing it, why it's working for them. They're sharing presentations with each other. They're communicating with each other and we are encouraging these customers to achieve these high levels of adoption through tools like this and others that we created.
Operator
Heather Bellini, UBS.
Unidentified Speaker
This is Apai (ph) for Heather. Quick question, Steve, just for clarification, did you say expected subs for this quarter might be low to mid-30s?
Steve Cakebread - CFO
Yes. We said that we had an extraordinary quarter in Q2 with a lot of large deals. And that we thought we'd get back to what we thought were more normal numbers in the mid-30s, low to mid-30s this quarter.
Unidentified Speaker
If we looked at what happened in Q1 there was a tail of large signings in Q4. And you had a lot of large signings in Q3 so shouldn't we expect something similar or is there any other reason for the sequential decline in the quarter?
Steve Cakebread - CFO
We have had extraordinary run the last four quarters with a lot of different deals and as Marc said, we have been surprised quarter after quarter with our business success. We think that our more normal lines are in the 30,000s right now and that is the revenue guidance we've got for the third quarter and it maps up with the subscriber numbers.
Marc Benioff - Chairman and CEO
In our call last quarter, we talked about our normalized run rate with subscribers and the trajectory of our line, and we would encourage you to take a look at not just our last two quarters but the proceeding four quarters before that. And to really understand and look at that trendline off of time, as I mentioned the first quarter was dramatically off of the trendline. So much so we were hugely surprised. And this quarter is also dramatically off of the trendline, driven off that trendline by these huge enterprise deals that we're getting done. So we are conservative on the third quarter because we are looking as statisticians and as reasonable businesspeople, as our trend over the last 24 months. And so we are taking a more conservative view on the third quarter.
Also you probably noticed that last year, sequentially, our third quarter was below our second quarter in subscribers.
Steve Cakebread - CFO
And also we are taking into account like Marc said, this last quarter we had a rather large number of large deals. And as I mentioned in the prepared remarks that is going to add some amount of volatility and unpredictability to the subscriber number, not necessarily the revenue number. We've all been through this, our subscribers come on at different times and so we just want to make sure that people are paying attention to our business model, vis a vis, these large accounts that come in at different times during the quarter and different times during the year.
Unidentified Speaker
Of these large deals that you mentioned you mentioned about 15,000 subs I am assuming not all of them have been (indiscernible) and included in the number. Is that right? Can you give any light on what wasn't done there?
Marc Benioff - Chairman and CEO
Yes that's correct. Not every subscriber that we've mentioned is in our number and we don't disclose when specific customers come online.
Operator
Brent Thill with Prudential.
Brent Thill - Analyst
Can you give us a sense of what shift you are seeing for you and renewal customers opting for the higher price point enterprise version versus the professional? And as a follow-on it seems that there is still some opportunity for flexibility for even higher level premium pricing on top of that. Could you just give us a sense of how you -- what you're hearing from clients in terms of their ability to look at the potential higher band of pricing?
Marc Benioff - Chairman and CEO
I will tell you, it is something that we talk about a lot here at salesforce.com as well. We have a customer ladder that we look to you customers up over time. Of course a lot of customers start with our free trial as you know. Many of them move on to our Team Edition which is our five users for about $995 for a year or about $17 a month.
Then, many of those customers upgrade onto our Professional Edition which starts to give them some new technology like our Customforce technology or Multiforce technology and so forth. Then, many of those customers move onto our Enterprise Edition to get some of that richer more capable functionality and that product, as you know, lists at about $125 a month.
We believe that as customers expand with Multiforce and look to make us more of an enterprise standard for managing and sharing information on-demand, there are also upper levels in our pricing matrix and we are in discussions with customers on what those levels are. Because we are kind of in a new world here with Multiforce and with Customforce. We are only in it, actually, as you know for a couple of months. It is -- a lot of that information and research is still ongoing. But we will look for, we believe there is, and we are looking at higher pricing bands as well for greater enterprise expansions for some of these customers.
Brent Thill - Analyst
Steve, in the 41,000 subscribers this quarter can you just give us a sense of what the highest number of subscribers was from one customer in that count? I think you gave the number out last quarter if you could give that out again?
Steve Cakebread - CFO
Merrill Lynch was the highest at 5,000.
Operator
Peter Goldsmacher (ph), S. G. Cowen.
Peter Goldsmacher - Analyst
Earlier in the call you mentioned that there was some sort of tail from customers signing large deals and then actually adding the subscribers later. I was hoping you could give a little more detail on not the revenue recognition but how you all look at these subscribers? How you decide when to recognize new subscribers in one month versus the next month and some of the dynamics that happened with your customers that have them bringing certain subscribers on at certain points in time?
Marc Benioff - Chairman and CEO
I would love to address that for you and let me just give you a various high level of review of how business is done at salesforce.com and when a subscriber comes on and when we recognize the revenue associated with that.
At any period during the year of course, a customer can sign an agreement with salesforce.com to bring on subscribers and sometimes when a customer starts with salesforce.com they'll start with a small pilot or a trial. It might be 10 or 20 users and/or maybe 50 users or in a large company maybe 100 users. As those pilots succeed and as they see that this model and, specifically, this product is much better than anything else that they've used, then they tend to come to us and they look at enterprisewide agreements.
When they sign for those enterprisewide agreements, there is usually one of two paths that they can take. They can either acquire all the subscribers at once and just start paying for them on delivery so they will sign the contract and within a week or two they will take delivery of those subscribers and start rolling them out in the Company or they may choose a more phased approach over a period of time. And as we go into that more phased approach, that is what you see when we talk about that tale of subscriber edition or add-ons as that happens over the history of an agreement, or as a customer is just much more successful than they were -- then they maybe initially expected to be.
Let me give you an example with ADP. As I mentioned, ADP now has 5,500 subscribers with us. When they started with us about 18 months ago with their first 1500 subscribers which was their major accounts group, they weren't sure how big of a commitment they wanted to make to salesforce.com. ADT -- who is one of the largest contiguous sales forces in the United States as you know, they sell on-demand payroll systems. They had bought every CRM solution known to -man.
Every one of our competitors -- small, medium, and large -- and they were very very cautious in dealing with us. But that major accounts group was very successful and that group and it grew and grew and grew and it grew to different divisions and now here we are with 5,500 subscribers with ADD. It is the tale of success.
Now we are talking to ADP about a Multiforce and all of our other new capabilities and looking for other areas of expansion as well with ADP. Where that will go, we don't know yet. But we are, of course, we are optimistic and we hope that we can give them success in other areas of their business as we have with Sales Force Automation.
So that is very much the tale of success and it can take many different flavors and we recognize the revenue as the subscriber comes on line and as the Company is contractually committed to pay for that subscriber. Steve, do you want to add to that?
Steve Cakebread - CFO
They come on line because we were start recognizing the revenue when we invoice them and we defer the contract volume and start recognizing them monthly. So Marc is accurate there.
Operator
Robert Schwartz, Jefferies & Co.
Robert Schwartz - Analyst
Steve, I wanted to understand how Mirrorforce might flow through the income statement and on the cash flows. I know you've said that you have taken delivery of the software and the bulk of hardware already. Maybe you could talk about the following. How we should expect cash burn over the next couple quarters in '06 related to that increasing cash expenditure? What should happen to the CapEx line and if any of this expense should drift into G&A? I saw a little increase as part of -- I don't know if we should expect accelerated increase next quarter.
Marc Benioff - Chairman and CEO
As I said before we lease almost everything and that is true for a lot of the data center infrastructure that we're rolling out so your biggest single impact you'll see is cost of sales. There is very little that shows up in CapEx typically and that's not changed here in this investment strategy.
So as we talked about we saw a major uptick in Q2. In that area cost of sales the subscriptions (indiscernible), we anticipate like I said 2 to 3 million more added in Q3 in that arena and then we will normalize that out toward the foreseeable future and get back to our normal hiring in Q4.
So, not much on CapEx. It is all leased equipment or predominantly leased equipment and it shows up in cost of sales directly as an expense.
Operator
Brad Whitt, RBC Capital Markets.
Brad Whitt - Analyst
Steve, just a question here for clarification. When you sign up a new customer and you book services, along with the subscription, is that services revenue spread over the length of the contract and recognized? Under which line items is it recognized on the income statement?
Steve Cakebread - CFO
There are a couple of things that we do with our customers when we book a contract. We have support agreements and if they were to take on our support programs, this will get spread on the subscription line item. If they choose education and training classes, those will show up in the professional services and others, and typically occur when they take the training or education.
Lastly on professional services, it depends on the type of contract or the agreement that we're working through. There is some of it that does get spread over the life of the contract and is very tough to categorize, because our smaller businesspeople have one set of programs and our larger corporations, obviously, have a different set of programs. That is why. But it does have an impact on us and why we keep talking about our merging issues task force 0021 or 00021 because it does get amortized, primarily in the larger accounts, you will amortization with the contract. So it's very tough to answer that question specifically, unfortunately.
Operator
Dave Koning, Robert W. Baird.
Dave Koning - Analyst
Congratulations on a great quarter. I was wondering over the last couple of years, cash flow relative to earnings in the second half of the year has been stronger than the first half of the year. I'm wondering if we can reasonably expect that again this year, particularly in the fourth quarter? And maybe if you can describe the dynamics that caused this?
Steve Cakebread - CFO
When you look at cash flow from operations right now it's variable. Obviously we brought it by step (indiscernible) year-over-year as our business has grown. It is clearly a focus of this Company and the management team to continue to improve cash flow from operations. But it's also subject to timing of changes of accounts payable, deferred revenues and accounts receivable. And so I can't say much more than that. Look at the trends. But you know we are a growing company. The business is growing and all of those, unfortunately, influence that cash flow from operations number. So it is pretty tough to call right now.
Dave Koning - Analyst
Just one follow-up. The guidance on diluted shares went from 123 for this year. You took that down to 120. I'm just wondering what might have been behind that change?
Steve Cakebread - CFO
As part of that calculation it's somewhat shares issued in programs, it's somewhat about estimated stock prices. So there's a couple of variables. We're just looking at our numbers and giving you a slight adjustment to that. I think you will find that number changes in that (ph) meaningful.
Operator
At this time Mr. Cakebread, we have no further questions. I would like to turn the conference back over to you for any additional or closing remarks.
Steve Cakebread - CFO
We want to thank everyone for joining us on today's call. We appreciate your time and the excellent questions. A replay will the available until Wednesday, August 31st, and can be accessed by dialing 719-457-0820 or AAA-203-1112 with the pass code of 1884741. There will also be a replay of the webcast available on our investor relations site at www.salesforce.com/investor and, again, thanks everyone.
Operator
That does conclude today's presentation.