賽富時 (CRM) 2006 Q4 法說會逐字稿

Good day everyone and welcome to the salesforce.com fourth quarter 2006 financial 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. David Hevlick, Vice President of Investor Relations for salesforce.com.

Please go ahead, sir.

I would like to welcome everyone to salesforce.com's fourth quarter fiscal year 2006 financial results conference call.

Joining me as always today our CEO and Chairman, Marc Benioff, and CFO, Steve Cakebread.

Marc will begin today's discussion with a brief review of our fourth quarter performance and update you on some of our key achievements and initiatives.

Steve will follow with a detailed discussion of the numbers for the fourth quarter before discussing our outlook for fiscal year 2007.

Following our prepared remarks we will open things up to all of you for a question and answer.

Before we get started today, let me quickly take a few minutes for some formalities.

First, in order to provide a better understanding of our business we will reference certain non-GAAP measures during today's call.

A reconciliation of GAAP and non-GAAP results is available in the earnings press release issued earlier today, and filed on Form 8-K with the SEC.

The press release contains a complete review of our financial performance for Q4.

Additional financial information beyond what is provided in the press release may be found on our website.

Second, today's call is being webcast and a replay will be available shortly following the conclusion of the call through March 3.

To access the press release, the financial detail, or the webcast replay, please consult our Investor Relations website at www.salesforce.com/investor.

Before I turn it over to Marc, pleaser be reminded that the primary purpose of today's call is to provide you with information regarding our fourth quarter fiscal year 2006 performance.

However, some of our discussion or responses to your questions will contain forward-looking statements.

These statements may include projected financial results, subscriber, financial and operating metrics, business strategy, the timing of future services, product or platform releases and their capabilities, demand for on demand services generally or our products services or the AppExchange's specifically, anticipated growth, market opportunities, expected implementation or our services by certain customers, data center, hardware or software initiatives, future system and service availability, the decline of the enterprise application market or other business related topics.

These statements are subject to risks, uncertainties and assumptions.

Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, actual Company results could differ 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 SEC, including our Form 10-Q for the period ended October 31, 2005 and our Form 10-K for the fiscal year ended January 31, 2005, both of which are available on our IR website.

Finally, please be reminded that any unreleased services or features referenced in today's discussion or other public statements are not currently available and may not be delivered on time or at all.

Customers who purchase our services should make the purchase decisions based upon features that are currently available.

With that said, let me turn the call over to Marc.

This was an amazing quarter for salesforce.com, our best quarter ever.

Let me begin the review of our accomplishments with our financial results.

Revenue for our fiscal fourth quarter was $94.1 million, up 10% from last quarter, and up a remarkable 67% from the same period last year.

This was an outstanding performance and reflected strength across all aspects of our business.

To put this revenue accomplishment in context, we achieved almost as much revenue this quarter as we achieved in all of our fiscal year 2004.

GAAP net income for the quarter was roughly $6 million, up 66% from the fourth quarter of last year.

Fully diluted earnings per share finished at $0.05 for the quarter, $0.01 above the high end of the outlook we provided you at the beginning of the quarter.

And cash from operations during the quarter was a spectacular $39 million, the highest result in our history by far.

Driving our financial performance was another terrific customer and subscriber quarter.

We added 1,800 customers to end the quarter with approximately 20,500 customers worldwide.

Worldwide customer count grew a record 48,000 to end the fourth quarter at 399,000 subscribers.

Of these 399,000 worldwide subscribers, we now have over 52,000 European subscribers.

Now from a competitive perspective.

Twenty-eight months after Siebel entered the on demand business with a much publicized partnership with IBM, we are still adding subscribers at nearly ten times the rate of the 5,000 that they added in their most recently reported quarter.

And our European business is larger by 3,000 than their entire worldwide base.

That is amazing.

This is really a testimony to the innovator's dilemma that plagues our competitors when they follow us into this new technology and business model call on demand.

Our biggest win this quarter came as Sprint, which we expect will soon have over 5,000 users on salesforce.com.

They already have over 4,500 active subscribers today.

Sprint joins Merrill Lynch, Cisco, ADP, Symantec, Aon and Corporate Express as customers with over 4,000 users.

At quarter's and we had 26 customers with 1,000 or more subscribers, among them CIT, which roughly doubled its subscriber account this quarter to 2,700.

It is hard to believe, but it was just three years ago that we were talking about our first 1,000 seat customer with SunGard, and now we have 26.

Bio-Rad Laboratories has joins our customer ranks with nearly 1,000 subscribers.

And AmeriCredit has selected salesforce.com for roughly 750 subscribers.

In addition, our services partnership with Accenture led to a sizable implementation during the quarter at energy giant Chevron.

We also had customer success internationally.

In Europe our wins included implementations at Prudential, and Alcatel.

And in Asia, Matsushita, more commonly known as Panasonic and SoftBank became salesforce.com customers during the quarter.

We have also seen acceleration in a variety of important industries.

High-tech, financial services and media have become strong opportunities for us.

For example, in the media industry a wide variety of publications now rely on us to manage their customer data.

Our media customers include AOL, CNet, Dow Jones Newswires, The Wall Street Journal, Business Week, Sports Illustrated, The Washington Post, Newsweek, The New York Times, The Los Angeles Times, Info World, Computerworld, and The Chicago Tribune.

And that is only a sampling of our media customers.

And we're certainly not standing still.

On January 15 we released the Winter '06 version of our application.

This version incorporates more than 200 new features, including a new user interface, greater customizability and an improved off-line mobile capability.

We also launched our Sandbox Edition which enables testing and development in a separate environment by customers, including actual production data.

Already a number of our customers have added Sandbox Edition to their deployment, including DoubleClick, Chevron, and Charter Business Networks.

Winter '06 brought with it the official launch of AppExchange, our own eBay of enterprise applications that you can find at www.AppExchange.com.

Since going live six weeks ago, the response has been nothing short of amazing.

We now have 163 applications and components in AppExchange, including Voice over IP communications from Skype and on demand PDF generator from Adobe, and on demand reporting with Crystal Reports from our customer Business Objects who has 2,000 users on salesforce.com.

We are also seeing a variety of exciting applications in project management, product management, and real estate markets.

In Japan we now have 25 applications in the Japanese version of AppExchange to bring our worldwide total to 188.

The AppExchange has inspired a wave of creativity in our partner and developer community, which now totals more than 200 ISVs and roughly 15,000 independent developers.

And this innovation has found an eager market with more than 97,000 test drives, and more than 4,400 application installations to date.

We're also seeing a variety of venture capitalists from Silicon Valley making a major investment in companies who are now delivering AppExchange applications, a trend that we see expanding.

Earlier this month a large East Coast financial institution became a salesforce.com customer.

What was exciting about this new customer, Morgan Stanley, was not that they have signed up for 400 subscribers, but it was that they have decided to deploy on demand recruiting and HR application from the AppExchange.

This exciting movement really demonstrates to us, and gives us added confidence that customers small and large will find tremendous value for their enterprises on the AppExchange, the only platform for deploying scalable secure, on demand applications.

In addition, [Conacan] Consultancy Services, India's largest systems integrator, has formed a partnership with us for AppExchange development, and is planning to post their own applications there as well.

We believe the AppExchange platform will become the center of what we call the business web, a wide variety of web services seamlessly integrated into unique customer solutions.

The era of huge, monolithic, proprietary, single tenant systems is over.

And the reaction of customers convinces us now more than ever that businesses are tired of the complexity, costs and time requirements of the traditional software model in trying to maintain these single tenant approaches.

Customization, flexibility, and seamless integration, these are the attributes of the AppExchange and the hallmarks of computing in the age of the business web.

I encourage you to take a look for yourself at AppExchange at www.AppExchange.com and try out some of these exciting new applications.

Now on the usage, usage of the Salesforce platform has never been greater.

During the fourth quarter we saw unprecedented usage of our application with nearly 2 billion transactions, which includes the combination of web pages and APIs calls.

That is roughly 2.5 times the transaction volume we saw just one year ago.

Subscribers are using our application more than ever, not just to manage their CRM data, as in the example that I gave with AppExchange, but increasingly as a fully integrated web services application development and delivery platform for a wide variety of on demand applications.

API call transactions are exploding as users are integrating at a faster rate than ever our application into their existing environments.

And the introduction of the AppExchange is accelerating that trend in both the desktop as well as throughout the enterprise.

Now I would like to spend a few minutes on a topic that is very important to us and also to our customers, system availability and reliability.

For the past seven years salesforce.com and our customers have come to expect the very best from our system, and we have responded by delivering unmatched reliability and availability year after year, month after month, day after day.

Customers have relied on us to run their CRM infrastructure every day, every hour, every minute.

We have been a pioneer, not just in our products offering and how we deliver our service, but in how we use and manage technology in our data centers.

It is why we have spent over $50 million last year on a new Mirrorforce architecture that we have been applying since early November.

As you know, to deploy Mirrorforce we essentially changed our entire hardware, architecture, software, and data centers.

And then late in the quarter we unveiled our most ambitious software released ever, which included Winter '06 and AppExchange.

Essentially for all intents and purposes we replaced all our technology.

This vast amount of change cause us to have several challenging days during the quarter, and especially during the month of January.

This has been very uncharacteristic of our system, which has had seven years of excellent reliability and performance.

And with all the challenges and changes to our environment, we anticipated some issues, but this was more than we expected.

To improve performance we have been working with our server, cluster and disk drive manufacturers and our fault tolerance software vendors, with teams led by their respective CEOs.

This elevated level of focus and commitment from our hardware and software partners has resulted in better product reliability and also a reduction in the recovery times following a down system, both important contributors to better service availability.

Our focus on tuning and optimizing our environment is allowing us to achieve record levels of speed for both web pages and API calls.

In fact, just yesterday we delivered more than 36 million transactions at an average speed per transaction of 297 milliseconds.

No to explain why this is so significant, this is a most transactions we have ever delivered in a single day.

And our systems speed was the highest for this level of throughput in any day in our Company history.

So essentially we're delivering more pages faster than ever before.

In many ways our position is similar to what major Internet companies like eBay and Amazon, both of which are customers of salesforce.com, went through during their hyper growth phases.

We have compared notes and shared best practices on what is necessary to deliver best in class reliability and availability and communications.

Finally, we're setting a new standard for transparency in our industry.

Customers and prospects and analysts alike can access the trust.salesforce.com site for up-to-the-minute real-time reports on service performance, transaction volume, and transaction speed for each of our data center -- each of our database servers.

This is unprecedented in our industry.

And like so many of the best innovations, we got the idea by talking to our customers.

We think this level of transparency is important to our customers and good for our entire industry.

And we encourage all of our competitors to report their performance by server and by day in transaction volume and in transaction speed.

We believe that this level of transparency is essential to taking the industry to the very next level of performance.

If you look at this level of performance for the month of February, for example, you will see that our reliability has returned in the month of February to approximately 99.7%.

But this transparency is something that you will be able to watch yourself, minute by minute, day by day at trust.salesforce.com.

And we are very proud of this innovation.

Now, of course, for many years we have talked about how we want to become the eBay of enterprise applications.

And when you think about that it means taking the best of eBay and taking the best of traditional enterprise computing like SAP or Oracle, and combining it into a new model, into a new company, in a new technology.

And so it should be no surprise that the ideas that we have for trust.salesforce.com came from the community reliability pages at eBay.

More and more we're looking to companies like eBay and Amazon as our models for trust, for communication, for reliability, for us to really deliver on our vision of transforming the enterprise software industry to become the eBay of enterprise applications.

We want to adopt their best practices so that we can deliver the highest reliability and best practices possible in this industry transformation.

From the very beginning, we set out to create a service that customers would not only buy, but also use and love.

The growth in our customer base and in the usage of our service is testament that we are succeeding.

And our fundamental vision of success, as revolutionary as it is simple, is causing huge changes in the industry.

And we intend to continue to lead those changes with concepts like AppExchange and the business web and trust.salesforce.com.

So we can't help but be amused by some of the weak impersonations of on demand that we are seen from our competitors.

Now just two days after Siebel disappeared from our industry, SAP offered an on demand product that was strikingly similar to Siebel's product from several years ago.

The sales pitch was the same too.

Buy weakened on demand products as a on ramp to an existing legacy enterprise application.

But as the many former Siebel execs that we have now hired will tell you, on ramps tend to make road kill out of your business model.

At salesforce.com we're watching closely the changes in our industry.

And while we wait for Microsoft to figure out what live applications are, so that they can save their dead software and technology model, we're delivering real success on demand to over 20,000 customers every day on a platform that is exploding with the creativity, innovation and energy that defines the business web.

With that, let me turn things over to Steve for a more detailed financial review of the quarter and some details on outlook.

Let me begin my comments with a quick financial recap of our outstanding fourth quarter, starting with the P&L.

Revenue for the fourth quarter was $91.1 million, an increase of 10% from Q3, and up 67% from last year.

Revenue for the full fiscal year was $309.9 million.

This figure represented a remarkable 76% growth from fiscal year '05.

And it is more than three times the revenue we recorded for fiscal year '04.

Geographically, fourth quarter revenue in Americas rose 69% from the year ago quarter to $72.4 million.

This as well represents 10% sequential growth.

In Europe revenue of $12.8 million was up 57% year-over-year and 13% sequentially.

In constant dollars growth in Europe was 73% from last year and 15% from the prior quarter.

In Asia-Pacific revenue grew 66% from last year to $5.9 million, an increase of 11% sequentially.

But as well in constant dollars, topline growth in Asia was up 82% from a year ago quarter and 14% from Q3.

Subscription and support revenues finished at $82.4 million.

This represents growth of 67% from last year, and 11% from Q3.

This performance was driven by continued outstanding subscriber growth that we have seen in recent quarters.

And as Marc had indicated earlier, our subscriber growth continued torrid pace in Q4.

We exited the quarter with 399,000 subscribers, up more than 170,000 from where we began the year.

And our customer base of 20,500 was up over 6,500 for the same period.

On average, these results represent roughly 25 new customers and almost 700 new subscribers every business day last year.

Truly remarkable.

Our strong subscriber performances this quarter was once again driven by a highly diversified portfolio of businesses, with strength across customers of all sizes and all industry verticals.

And consistently our mix of subscribers continues to be split roughly equally across small, medium and large businesses.

While our Q4 subscription revenue performance was excellent, we did benefit from some year-end effects.

Not only were our salespeople working hard to close deals before year end to assure an invitation to our annual club event, but customers were as well spending unused year-end budget dollars.

As we have said before, forecasting our subscriber additions on a quarterly basis is not an exact science.

And predicting the timing of major account additions or subscriber additions within existing accounts is impossible.

Smaller accounts have extremely short sales cycles and provide little visibility.

And for those reasons we continue to expect some lumpiness in our subscriber number going forward.

Let me conclude my topline discussion with professional services, where revenue ended the quarter at 8.6 million, up 66% from last year, and 4% from Q3.

On to the rest of the P&L.

Overall gross margins finished the quarter at 77%, up from 66% last quarter, but down from last year's 82%.

And while subscription margins remained flat quarter to quarter, year over year results reflected the incremental IT investments we have been discussing with you the past couple of quarters.

As Marc had noted earlier, we essentially deployed an entirely new hardware and software architecture during the last quarter.

Because customer satisfaction is so integral to our business model and our top priority, we will continue to make these investments to assure our customers the best possible experience going forward.

Within our professional services business continued headcount growth and the effects of the holiday season on customer billing days pressured margins.

Operating expenses were well-managed during the quarter, finishing up 71% of revenue, down a full 5 points from the same period last year.

Marketing sales and G&A all showed year-on-year declines as a percentage of revenue.

We did however ratchet up our R&D spend this quarter to support the hardware and software initiatives we have already discussed, and fund our new test and development data center.

Finally, our cash tax rate ended the quarter at about 18%, slightly below the 20% we expected.

But this was primarily the result of true ups to our estimated year-end tax provision.

The net result was a GAAP EPS of $0.05, slightly above the high end of the outlook we provided you at the beginning of the quarter.

Before I move on to cash flows in the balance sheet, let me quickly talk about headcount.

We exited the quarter with 1,304 full-time employees, up 188 from Q3.

And we are adding people in all parts of the organization to support our growth, and also assure our customers the best possible on demand experience in the world.

Let me move on to cash flows in the balance sheet now.

Q4 was another excellent cash generation quarter, with total cash from operations at roughly $39 million.

This record quarter was up 60% from an outstanding Q3, and up 86% from the fourth quarter of last year.

This strong cash generation quarter was the primary driver of an ending cash, cash equivalents and marketable securities balance of roughly $296.8 million.

This amount is up almost $100 million from last year.

Deferred revenue on the balance sheet also continued its strong growth, ending the quarter at $169 million.

This is up 33% from Q3 and 76% from a year ago quarter.

Together with our subscriber growth, this figure is a good indicator of our near-term future revenue performance.

Keep in mind we record balance sheet deferred revenue only for business sets that invoice the customers.

And then we recognize that revenue on a daily basis as we earn it on our P&L.

Non-invoiced, but contracted future (technical difficulty)

This is the operator and we are no longer able to hear you.

Ladies and gentlemen, please stand by.

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Once again, ladies and gentlemen, please stand by.

We are attempting to reconnect our speakers.

(OPERATOR INSTRUCTIONS).

Gentlemen, your lines are open.

Please go ahead, sir.

Okay everyone sorry for the line outage here.

But let me just quickly just review the results, because we're not exactly sure where we dropped off totally.

And then we will move back to questions.

If you will just bear with us we will get through this fairly quickly.

As you know, the revenues for the fourth quarter were 91.9 million, and increased 10% from Q3, and that was up 67% from last year.

Revenue for the full fiscal quarter was 309 million.

And this figure represented a remarkable 76% growth from fiscal year '05, and it is more than three times the revenue we recorded in fiscal year '04.

Geographically fourth quarter revenues in the Americas rose 69% from a year ago quarter to 72.4 million.

And this represents a 10% sequential growth.

European revenues were 12.8 million, and were up 57% year-over-year and 13% sequentially.

And in constant dollars growth in Europe was 73% from last year and 15% from the prior quarter.

In Asia-Pacific revenues grew 66% from last year and $5.9 million to increase 11% from Q3.

But in constant dollars topline growth in Asia was up 82% from a year ago quarter and 14% from Q3.

Subscription and support revenue finished at $82.4 million.

And this represents growth of 67% from last year and 11% from Q3.

This performance was driven by continued outstanding subscriber growth that we have seen in recent quarters.

As Marc indicated earlier, our subscriber growth continued its torrid pace in Q4.

We exited the quarter with 399,000 subscribers, up more than 170,000 from where we began the year.

And our customer base of 20,500 was up over 6,500 for the same period.

On average, these results represent roughly 25 new customers and almost 700 new subscribers every business day last year.

Truly remarkable.

Our strong subscriber performance this quarter was once again driven by a highly diversified portfolio of business, with strength across customers of all sizes and all industry verticals.

Our mix of subscribers continues to be split roughly equally across small, medium and large businesses.

While our Q4 subscription revenue performance was excellent, we did benefit from some year-end effects.

Not only were salespeople working extra hard to close deals before year end and to assure an invitation to our annual club event, but customers were also spending unused year end budgets.

As we have said before, forecasting our subscriber additions on a quarterly basis is not an exact science.

Predicting the timing of a major account addition or subscriber additions within existing accounts is impossible since smaller accounts have extremely short sales cycles that provide little visibility.

For these reasons, we continue to expect some lumpiness in our subscriber number going forward.

Let me conclude my topline discussion with professional services, where revenue ended the quarter at $8.6 million, up 66% from last year and 4% from Q3.

Moving on to the rest of the P&L, gross margins finished the quarter at 77%.

And that is up 76% from last quarter, but down from last year's 82%.

While subscription margins remained flat quarter to quarter, year over year results reflected the incremental IT investments we have been discussing with you the past couple of quarters.

As Marc noted earlier, we essentially deployed an entirely new hardware/software architecture during this quarter.

Because customer satisfaction is integral to our business model and top priority we will continue to make these investments to assure our customers the best custom -- possible experience going forward.

Within our professional services business continued headcount growth and the effects of the holiday season on customer billing days continued to pressure margins.

Operating expenses were well-managed during the quarter, finishing up 71% of revenue, down a full 5 points from the same period last year.

Marketing, sales and G&A all showed year on year declines as a percentage of revenue.

We did however, ratchet up our R&D spending this quarter to support the hardware and software initiatives we have already discussed, and to fund our new test and development data centers.

And finally, our tax rate ended the quarter at 18%, slightly below the 20% we expected.

This was primarily the result of a true up to our estimated year-end tax provision.

The net result was GAAP EPS of $0.05,, slightly above the high-end of our outlook we provided you at the beginning of the quarter.

Before I move on to cash flow and balance sheet, let me talk about headcount.

We exited the quarter with 1,300 full-time employees, up 188 from Q3.

We're adding people on all parts of the organization to support our growth, and to assure our customers the best possible on demand experience in the world.

With regard to cash flow and balance sheet, Q4 was another excellent cash generation quarter with total cash from operations of roughly $39 million.

This record quarter was up 60% from our outstanding Q3 performance and 86% from fourth quarter last year.

This strong cash generation quarter was the primary driver for an ending cash, cash equivalents and marketable securities balance of roughly $296 million.

This amount is up almost 100 million from last year.

Deferred revenue on the balance sheet also continued its strong growth, ending the quarter at $169 million, up 33% from Q3 and 76% from a year ago.

Together with our subscriber growth, this figure is a good indicator of our near-term future revenue performance.

As a reminder, we record balance sheet deferred revenue only for that business that has been invoiced to customers.

And then we recognize the revenue on a daily basis as we earn it on our P&L.

Non-invoiced but contracted future business is not recorded on the balance sheet.

This off balance sheet deferred revenue has been growing slightly faster than our on balance sheet deferred revenue.

And as result, our off balance sheet deferred revenue is currently a bit higher than what we show on the balance sheet.

All very encouraging for our future business.

So concluding remarks around outlook.

As you are all aware, we will begin expensing stock options next quarter per the requirements of FAS 123R.

Our reported non-GAAP earnings will exclude these stock-based compensation charges.

Ultimately we believe our non-GAAP earnings are the best measure of our performance.

We are measuring ourselves that way, and we hope that you'll measure us that way as well.

With that let me offer our outlook for Q1 and the full fiscal year '07.

As I mentioned earlier, Q1 won't bring with it the benefits of the year-end sales or budget cycle.

So as such we expect subscriber growth to be more in line with the trend lines we saw in Q1 through Q3 of this past year.

We now project first quarter revenue to be in the range of 99 million to $101 million.

Operating margins will continue to reflect the pressures of growing headcount and our unrelenting focus on building the most highly available on demand platform in the world.

As Marc indicated, we're accelerating our plans to add technology, people and infrastructure to assure that we can deliver the best customer experience.

Incrementally we expect this to add approximately 1 to 1.5 million per quarter in IT costs.

Assuming a non-GAAP tax rate of 45%, average share count of 122 million, and excluding the effects of stock-based compensation, we now expect Q1 non-GAAP EPS to be in the range of $0.02 to $0.04.

With regards to full year fiscal year '07, last quarter on our results call we projected that number to be between 460 and $465 million.

Given our outstanding subscriber performance and continued strong momentum, we now expect revenue for our full fiscal year '07 to be in the range of 470 to $475 million.

And as I mentioned, we're investing in incremental 1 to 1.5 million each quarter in IT.

But even with this incremental cost we expect non-GAAP EPS, which excludes the effects of stock-based compensation, to be in the range of $0.20 to $0.22.

This estimate again assumes a non-GAAP tax rate of 45% and an average share count of $124 million.

Finally, many of you have asked about our cash tax rate for next year.

While this number can move around from quarter to quarter, we expect cash taxes to be something slightly less than 10% of non-GAAP taxable income for the full year.

So to close, once again, Q4 was an excellent quarter financially.

During the quarter we continued to build the most highly available web services platform in the world by adding the right technology, the right infrastructure and the right people.

And at the same time we grew faster than any company -- comparably sized software company in the world.

And our financial results continue to improve.

We are executing for the long term, because that is what is best for our customers and for our shareholders.

I want to thank you again for joining us.

I appreciate your patience on the phone line issues.

And with that I will pass it back to the operator and we will start our questions.

(OPERATOR INSTRUCTIONS).

Jason Maynard with Credit Suisse.

I just wanted to follow-up on your comment around expecting sub growth for Q1 to be more in line with the Q1/Q3 trends of last year.

Is there any influence on some of these outages or service levels issues that you think might be invoicing that, or is that the sort of more realization of normal seasonality in your business now?

Our sub growth over this past year has gone from the high 30s in the Q4 almost two years ago into the 40s.

We're at the high 40s now.

Our customers expect good performance from us.

We continued to deliver that.

We don't anticipate any impact at all from this.

But we need to get out and sell those customers and show them the advantages of AppExchange.

Maybe, Marc, do you have some follow-up information or --?

Of course, this quarter as you know is our best quarter ever.

And it is also our best quarter ever for subscribers.

In fact, it is substantially above the previous three quarters.

As you know, the sequential subscriber growth for fiscal year '06, which has now been reported, in that first quarter we did 40,000 subscribers.

In the second quarter we did 41,000 subscribers.

And in the third quarter we did 43,000 subscribers.

And now as we reported in the fourth quarter, 48,000 subscribers.

This has been outstanding fiscal year '06.

In the fourth quarter of course you see that the subscriber number is substantially above our trend lines.

And that does not necessarily give us confidence that in the first quarter our subscriber growth is going to be at that level, so we're conservative in our estimates for the first quarter.

We believe strongly in the quality of our customer base and in the quality of our technology.

And as I mentioned in my comments, January certainly was not our best month ever.

It was far from it.

And that was very disappointing for the Company.

But also, as I said, February currently has 99.7% availability.

In the last 36,000 minutes of availability we have had only 100 minutes of reported downtime.

That was only on one of our servers.

We are very optimistic about getting back to high levels of availability and are delivering that now.

And we're also optimistic that we want -- that we will reach even higher levels of reliability in the long term.

Maybe one follow-up.

You're obviously raising total revenue guidance by I think 10 million on the low and the high end of the range.

The incremental 1 to 1.5 million in IT, can you guys just talk a little bit about where that is going to be deployed and how we should think about that hitting either the P&L or if we are going to see any additional CapEx maybe that comes out of this?

Yes, as you know when we implemented our new Mirrorforce data center technology in November, and the wide range of hardware and software investment that we made last year, we felt very comfortable with our architecture, both our software architecture, hardware architecture and network architecture.

As we deployed that data center technology, we have had some issues in regards to installation which were in early November.

And then, of course, we had a service interruption in December that was a surprise to us, and kind of foreshadowed a very weak January for us in regards to reliability.

As we have gone deeper looking at those reliability issues in January, we want to make a stronger investment in the research and development necessary for future architectures, because we now have a vision for ourselves of even higher reliability than we even expected before.

What we realized something is very interesting.

We have been talking for a while about how while we want to be the eBay of enterprise applications.

But we, as a Company, realized that for that to happen we have to deliver not just the best feature and functionality, and of course according to every major software reviewer and editor's choice award and technology award -- we received all of those.

But we also want to get to a level of reliability that is not just great, but excels and exceeds even the best consumer services that are available today.

And that is really our long-term vision for our reliability.

And that has is really been influenced by how we look at our Company now in a new way after January.

And we have done some extensive meetings.

I have done the meetings myself, not only with our hardware and software vendors, but also with major Internet service companies.

And we believe that we can get to levels of reliability that have never been seen before in enterprise software.

But to do that we need to make this additional investment, and that is very much what we're doing.

Jason, the monies that we're going to spend will show up primarily in cost of sales for subscriptions.

You won't see, as in the past, a lot in CapEx per se, because keep in mind we lease a majority of our gear.

So anticipate that in the gross margin range.

But again, our gross margins have been in the high 70s, low 80s.

We don't anticipate any changes though.

Kash Rangan with Merrill Lynch.

Just a clarification on the new subscriber growth that you are expecting for Q1 and Q2.

I wasn't sure if you talked about the new subscriber growth to be in the range of 40, 41, 43,000 subs, which you reported in Q1, Q2, Q3 of this year.

Or were you talking about the kind of sequential growth we were getting in Q1, Q2, Q3 meaning the order of 1,000 or 2,000 new subs?

The question to you should we be expecting new subs to be in the 49,000, 50,000 kind of range, or should we be expecting new subs to be in the 40, 41,000 range?

Just a simple tactical question for you.

I would like to really address that very specifically.

As you know salesforce.com has shown very strong incremental subscriber growth over our seven-year history.

And this year, of course was no exception with outstanding subscriber growth resulting in this very incredible subscriber number at 48,000.

When you compare that to our publicly reported competitors, of course, only Siebel reports their subscriber number, none of our other on demand competitors will even report it.

They -- Siebel basically I think has said in the last three quarters they have been done 5,000 users a quarter.

And I think that they have a total now about 49,000 total subscribers versus our 399,000 total subscribers.

I believe that they added 5,000 last quarter compared to the quarter that we are adding here at 48,000.

Now when we look at subscribers going forward, and we saw this huge leap from 41 to -- 40 to 41 and 41 and 43, and then this huge leap, which is not sequential to 48, it makes us nervous as a management team what will the Q1 subscriber growth number be?

During the quarter we see of course in the press or in various analyst reports all kinds of crazy subscriber numbers.

And we don't know where those are coming from, because we know how much distribution capacity we have and how much that distribution capacity can deliver in terms of subscribers.

Subscriber growth is directly related to distribution capacity minus customer attrition.

And the net of that of course will be the gross -- the net subscriber number.

And that subscriber number has continually gone up.

But when we look at this first quarter, we want to be conservative in that estimate, and we don't want to -- we don't want to set expectations of something that we cannot achieve.

Laura Lederman with William Blair.

Just a few follow-up questions.

One, is in your assumptions going forward, when you think of your own business are you assuming a slight increase in the attrition rate, given what has happened with the outages?

I realize you're giving a net number, and I am just trying to get a feel for what you are kind of assuming, if you're willing to chat about that.

So far our attrition has basically remained constant over the last (multiple speakers) basically over the past -- for our entire history.

It really has never risen above -- it hasn't in recent history risen above 1% per month, as we have stated before.

And attrition has remained relatively constant.

And in your specific answer, the reliability issues that we suffered in January, we have not seen impact of the Company in any type of attrition specifically.

Brent Thill with Prudential.

Just on that point on the attrition.

Have you seen sales cycles lengthen in enterprise contracts related to some of the issues?

And then if you can also follow-up.

You made a number of changes to the infrastructure.

Are the bulk of these changes completed?

If not, can you give us a sense of when they will be completed?

There is two different questions there.

In regards to attrition, we have not seen any of our reliability issues affect attrition in January or in the current month.

And we also have not seen any lengthening of sales cycles either.

We are still the leader in this industry.

And our product quality, our brand, our distribution capacity all is dramatically above where all of our competitors are of course.

Our ability to execute is very strong and powerful.

And the only issues that we have had with attrition are that we have seen it basically be the same number.

We monitor it very, very closely obviously, because it is core to our business process and business model that we know what that is.

But we have not seen that number fluctuate.

And it has remained constant at below 1% per month.

So we feel very good about that.

First of all, let me make sure I answered that question. (inaudible) And then second, let me answer your question regarding architecture.

Architecture, of course, with salesforce.com is an evolving service in terms of scale, performance, capacity, and as you know see from the trust.salesforce.com page, is a constant evolution in growth, like even all of our Internet service here.

There is no fixed salesforce.com architecture.

We are continuing to make changes, improvements, additions.

We're working on our new software release.

We're working on the next generation of our hardware architecture.

And we are evaluating all those things.

And based on what we went through in January, we doubled down and reviewed again and went through every aspect of our architecture -- I personally have been involved in that -- to make sure we can deliver the highest level of reliability possible.

Rick Sherlund with Goldman Sachs.

If I could get first some clarification on Kash's question about the subscribers.

I'm not sure I understood what your response was.

Are you saying that we should be down a bit sequentially from 48,000?

But I don't think you're saying we should be back to 40,000 of last year.

Is that correct?

We don't expect the Q4 subscriber number to be sustainable in Q1.

I can't remember exactly what you said.

I can go back to the transcript but --.

What we said was we expected subscribers to be in the trend lines of Q1 to Q3 of last year.

Because Q4, with the selling cycles that we're in and year-end tend to have a fairly high number that we think going forward we just want to be conservative with.

What does that mean within the trend line of Q1?

If you take a look at --.

It was a big jump between Q3 and Q4, right?

Right.

If you look at the trend line it was -- we did not expect 48,000 honestly.

That was not where we thought we were going to end up.

When we look at something like 40, 41, 43, then what we expect is like 44 or maybe 45.

Because what we're doing is we of course hire more people every quarter.

And some of those people that we're hiring are salespeople.

As we get more distribution capacity aggregated over time, we could then direct that distribution capacity and expect more subscribers.

And if you look at our history that is what has happened.

We've had tremendous subscriber growth over the last seven years.

When we see this jump from 43 to 48 then we say, okay, wow, what are we expecting for the next quarter?

And of course what is everyone else expecting for the next quarter?

And that's why we wanted to bring it up on the call that we see it more in line with our first three quarters not our fourth quarter, because we believe that the fourth quarter was heavily influenced by end of year phenomenon.

I got it.

So not in line with the first quarter of last year but the trend line.

So that would imply 46 or something like that.

As you know, it is not easy to predict when subscribers want to turn on here.

We're just trying to reinforce the fact yet again that subscribers are tough to call.

As Marc said, it is a function of distribution and how we grow the business.

And sometimes when you get these crazy numbers out there they are just not capable.

Also, I would add to that, what we feel good about is able to predict our revenue growth, and the kind of transparency of our model, and the ability to look in the long term.

And honestly, when we invented this model, this business and technology model that we're in now, we thought that we would not the under the quarter to quarterly scrutiny on any specific metric, because we had created this model that offers a lot of transparency and visibility going forward.

But of course, now, we're kind of -- we never actually got out of that.

And we're in -- well, what subscriber number are you going to do this quarter.

And of course, if the subscriber is plus or minus 2,000 it is just not material when you have 400,000 subscribers.

So we're hunting two really exciting quarters -- I'm sorry -- we are hunting two really exciting numbers this quarter.

We're hunting subscriber numbers in the 400,000, which for us is really exciting that we're heading towards 500,000 subscribers.

That is what we're hunting.

The second thing that we're hunting is our first $100 million revenue quarter.

We're really excited about that.

Those are the things that we're looking at.

We're looking at these general trends, and we're looking at general revenue trends.

Some things are, of course, always a little bit hard to control.

And one of those numbers is what is the quarter to quarter subscriber number.

And it has been great, fantastic over the last several years.

But whenever we see a blip like this, and this is not the first call that we have done this, we also did this in the first call -- the first quarter of last year -- we get conservative and say, wow, maybe our distribution capacity really is at a new level or maybe there's another phenomenon like an end of year phenomenon.

Does that answer your question?

And keep in mind, we're driving for the revenue guidance and EPS guidance.

That is how we manage the business.

Philip Rueppel with Wachovia Securities.

A couple of questions.

Maybe I missed it, Steve, but did you comment on what you estimate option expense to be for 2000 -- your fiscal 2007?

Second of all, maybe a more general question about the competitive environment now that some of your competitors have new owners or new on demand products out there.

Could you talk a little bit about the pricing environment, has that changed at all in the near term?

Let me talk about the option expense, and I will let Marc talk about pricing for a minute.

As you know, we have a fairly complicated model because we have to use Black-Shoales.

We will do our calculations for Q1.

Currently, we are estimating stock option expense or compensation costs through stock options to be roughly in the $45 million range for the full year.

And so that will give you some idea of what we're looking at here.

We're going to stay focused on non-GAAP EPS because we think that is good comparables for our '06, since we're not obviously going back and putting numbers in from '06, and how we ran the Company going forward.

On competitive pricing pressures, Marc?

Certainly the competitive dynamic has changed a lot in the last 12 months, and each competitor is a slightly different situation.

First, of course our primary competitor in the last seven years has been Siebel Systems, which no longer exists as a company.

And as you know, they had a product called Siebel on Demand, which we don't see as much in the marketplace anymore.

We expected Oracle to relaunch that product when they acquired Siebel, but what we have heard is that they are rewriting that product.

But we don't know -- we're not inside Oracle, so we don't know the specifics.

But we don't see the intensity in marketing and distribution around that offering.

We also have a competitor with Oracle, as you know.

And their CRM offering really has not been very competitive in the last five years.

And you have seen us win major transactions against them like Aon and CIT and others.

And we don't really -- have not really seen them as a dominant force in the market.

SAP's CRM product, certainly in the area where we compete in salesforce automation and in certain areas of customer service and support and in the mid market, really has not been much of a player.

And in large SAP customers, like DuPont, we have seen increased excitement about our offering.

And we don't see SAP at this point as serious about the CRM market.

Specific to that, I still try to find users who are using SAP's CRM.

I talk to people all the time trying to find who is that salesperson using SAP CRM.

But even SAP, as far as I can tell, doesn't use SAP CRM.

They have a new product called SAP CRM on Demand, which looks even worse than their traditional SAP CRM offering which is -- it is actually kind of hard to believe -- and that was just something that we just looked at and said, that maybe it will create more opportunity for us in their accounts.

We have -- if you look at Microsoft, they have launched a new CRM 30 product, but they have a lot of product quality issues as we look at in blogs and this kind of thing.

We're still waiting for reviews to come out in that product.

And of course, Microsoft is always a factor in the software industry.

But so far in the CRM industry we have seen them mostly to be not very competitive.

Finally, we have smaller on demand competitors, companies like NetSuite and RightNow and others.

But because they don't report their traction by customers and subscriber numbers and reliability like we do, it is hard to track.

But we don't see them that much in the market.

But we would like to see more transparency in our industry overall.

Because we are a publicly traded company and because we are covered by financial analysts and because the press does cover us very well, we have a lot of transparency to our business, and we're trying to provide more transparency and more communication over time.

So in terms of the competitive situation that is kind of -- that is our high-level assessment.

Thomas Ernst with Deutsche Bank.

This is Greg Dunham on behalf of Tom.

I want to get back to AppExchange and the platform strategy.

You guys provided some deals in terms of downloads and new applications that are being developed.

But I wanted to get what you have learned here in the past month in terms of how to monetize that business and kind of next steps you're taking there?

We're very excited about AppExchange and our AppExchange strategy.

And if you had an opportunity to watch our launch in January, we had a lot of customer talking about what they're doing with AppExchange, as well as partners.

Not just small partners like new companies starting around our platform, but also large companies as well, like Adobe and Skype and Business Objects.

But I guess the most surprising thing for us so far with AppExchange was when we got a call from Morgan Stanley, and they wanted to buy 400 seats of offering.

It wasn't for our salesforce technology it was for recruiting, which was an application in the AppExchange.

And honestly, at the time, when the order came in for me I didn't even know we had a recruiting application.

It turns out we have a pretty good one.

It is very customizable.

It is very integratable.

It is very scalable.

It is very reliable.

And they liked it so much that they gave us a very significant contract for it.

That really shows how we think customers, both small and medium and in case of Morgan Stanley large customers, will add additional seats based on AppExchange.

They're going to find new application and new levels of value in the AppExchange.

And they're going to work hard to deploy those seats inside their company.

And we feel that that will bring us more subscribers over time.

Peter Goldmacher with SG Cowen.

Over the last year or so you have had your investment in services grow faster than your actual revenue from the services business.

Can you talk a little bit about how you're thinking about the services business internally?

And also how you think about it with other go to market partners, including those smaller in size than the Accentures of the world?

We are making an investment in our services business.

And perhaps that was more evident in than about 90 days ago we hired John Freeland as our new President of Worldwide Operations.

John of course with 26 years at Accenture, and the sixth most tenured executive at Accenture.

Somebody that we had worked with very closely because he managed the 5,000 CRM consultants at Accenture and was an expert in CRM as well as services.

We brought John in because we wanted even more of a focus, not just providing the services ourselves, but also in relationships.

Now you have seen us build relationships with other services companies like Accenture and Product Consultancy and actually many, many others worldwide.

We have seen expansion of our service's ecosystem.

A lot of our customers are very excited to work with these new service vendors.

We also see a lot of service companies coming to us to understand how they can participate in AppExchange, not only building applications for the AppExchange like Tata, but also in helping our customers build their own custom applications, helping them manage and share information on demand.

A services partner is a great fit for a lot of these customers who may not have the IT experiences available to them internally or through another external party.

We see an increased focus on services, both delivered to ourselves, as well as through our ecosystem going forward.

Due to time constraints we have time for one more question.

It comes from Brendan Barnicle with Pacific Crest.

Going back to AppExchange, can you give us a sense of what sort of contribution we may get from AppExchange in the '07 numbers?

And what other metrics should we be looking at to measure AppExchange's progress?

The metric I think that is most exciting for us in AppExchange progress is the number of applications.

When we launched the AppExchange I think we launched it with 60 or 70 applications.

Now you see I think 168 applications in the United States.

And in Japan I think we have another 20 something applications.

That is getting close to 200 applications overall.

The reason the number of applications is important in AppExchange is because it is really a metric associated with a value.

Today you see project management applications, product management applications, recruiting applications, Voice over IP, reporting, real estate management, crisis management, emergency data management for disasters.

On and on and on.

And as we see those applications begin to emerge, and we see those applications also translated into different languages and different currencies, we see the value of AppExchange increase dramatically over time.

And we believe that that value increasing will therefore give our customers the ability to deploy those applications internally, or in the case of a customer that I cited today, bring us new opportunities as well.

That concludes our question and answer session.

I would like to turn the conference back to Mr. Hevlick for concluding remarks.

Thank you very much, and thank you all for joining us today.

I want to apologize for some logistical issues that we faced today.

And I appreciate your patience as we worked through those.

I also want to encourage you all to visit the www.trust.salesforce.com site to take a look at how we are performing.

I also encourage you to visit AppExchange.com to take a look at some of the exciting new apps out there.

And as always, please contact Investor Relations directly if we can do anything to provide follow-up information.

With that, have a good day, and thank you very much.

This concludes today's conference call.

We thank you for your participation, and you may disconnect your phone lines at this time.