賽富時 (CRM) 2007 Q3 法說會逐字稿

Good afternoon. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the salesforce.com third-quarter fiscal year 2007 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Mr. David Havlek, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Michelle, and welcome, everyone, to salesforce.com's third-quarter fiscal year 2007 financial results conference call. Joining me today are Chairman and CEO Marc Benioff, and CFO, Steve Cakebread.

Before we begin, please be advised that all of our financial commentary today will be in GAAP terms. Please consider this important change as you evaluate our results, particularly against First Call estimates, which exclude certain recurring items. Steve will provide more detail on this in his discussion.

A full disclosure of our Q3 financial performance can be found in our Q3 results press release issued earlier today, and also in our Form 8-K filed with the SEC. Additional financial information beyond what is provided in the press release may be found on our website.

Today's call is being webcast and a replay will be available shortly following the conclusion of the call through December 1. To access the press release, the financial detail or the webcast replay, please consult our Investor Relations website at www.salesforce.com/investor.

Finally, let me remind you that the primary purpose of today's call is to provide you information regarding our third-quarter fiscal year 2007 performance. However, some of our discussions or responses to your questions will contain forward-looking statements.

These statements may include projected financial milestones; anticipated growth, goals and 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; the Apex platform or the AppExchange directory specifically; market opportunities; expected implementation of our services by certain customers; datacenter, 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 those 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 quarter ended July 31, 2006. The 10-Q is available on our Investor Relations 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 decision based on features that are currently available.

So with that, let me turn the call over to Marc.

Well, thank you, David, and good afternoon, everyone. Our third quarter was our most spectacular quarter ever. As we predicted, we became the first on-demand company to exceed the $0.5 billion annual revenue run rate. At this new level, salesforce.com has become one of the 40 largest software companies in the world today.

And this accomplishment has been one of our primary goals for this fiscal year. And it sets up our next dream -- to become the first $1 billion on-demand company.

Salesforce.com's revenue for the third quarter was $130 million, well above our outlook and up 57% versus the same period last year. There aren't too many other $0.5 billion software companies growing at greater than 50%. In fact, there aren't any. We have the fastest-growing software company of our size, driven, as always, by unparalleled customer success achieved through our innovative on-demand model.

Our GAAP net profit was $339,000, our best performance of the year. On a per share basis, our breakeven GAAP EPS was at the high end of the outlook we provided you at the beginning of the quarter. The performance included approximately $11 million of stock-based compensation and amortization of purchased intangibles, which reduced EPS by approximately $0.06.

Operating cash flow was $31 million, an increase of 25% from the year-ago quarter and the second-best cash flow performance in our history. And our balance of cash and cash equivalents now stands at roughly $371 million.

Total net paying subscribers rose by 61,000 in the third quarter, the biggest quarterly increase in our history. Total net paying subscribers increased by 163,000 through the first three quarters of this year, for a total of 556,000 subscribers.

We've closed a lot of business in the third quarter, unabated by competition. Our marquee deal this quarter represents a major accomplishment on many fronts. Cisco Systems has signed on for an additional 7500 subscribers of salesforce.com, becoming our largest customer at a total of a remarkable 15,000 subscribers.

This has been one of our great customer success stories. Our flagship Salesforce automation application now powers Cisco's formidable worldwide sales team. It is a clear proof that the world's largest and most technically demanding companies can easily manage and share their information using the on-demand model.

We also started a partner relationship management program with Cisco this quarter, and we expect further subscriber expansion with their partners over the next year. We also closed significant expansion transactions with Dun & Bradstreet, who now have 2100 subscribers of our Unlimited Edition, and TD Ameritrade, who expanded with our service and support offering to now have over 1000 subscribers. In Europe, Cohen Elevators expanded their deployment for more than 1000 subscribers.

We also won significant new transactions in new and existing accounts, including Toyota, Siemens, Prudential, Sharp, Standard & Poor's, Hartford Life, Borland, [Surgrowth Panamex], [AfterTek], Rentokil, PAREXEL, Aveta Health, Aozora Bank in Japan, Mizuho in Japan, ChoicePoint, Thomson Financial and the third-largest software company in the world, Symantec. In fact, Symantec now has over 4500 subscribers.

We closed our largest transaction ever in our Asia-Pacific region, which does not include Japan, with a telecommunications provider in New Zealand of 1000 users. We now have more than 27,100 customers around the world. That represents an increase of a record 2300 customers over the last quarter. And compared to a year ago, we have added roughly 8300 customers. Remarkable when you consider it -- it took us five years to add our first 8000 customers.

Just as we are seeing continued success across all our customers segments, the same is true within our alliances. We are very excited to announce that we have entered into a partnership with IBM Corporation. We are very optimistic about this newly signed partnership that will focus both on the SMB and enterprise segments, with a goal of delivering on-demand solutions that expand beyond CRM capabilities by utilizing our new Apex platform. Together with IBM, we will leverage each other's strengths to take the best solutions to market and expand our tradition of customer success.

I am also pleased to announce we have signed a global alliance agreement with Deloitte and during the quarter enjoyed several joint wins together, including Intercontinental Hotel Group, amongst others around the world. Already in the early stages of this important partnership, we're seeing tremendous potential.

In addition, we expanded our partnership with Cisco Systems and have teamed up to create a business-class solution designed especially for small and medium-sized organizations. Cisco Unified CallManager Express Connector for salesforce.com will offer SMBs in branch offices a complete user-friendly solution for improving employee productivity and delivering superior customer service.

These partners and many others are coming to us not just for CRM, but for the power of AppExchange and Apex, our new on-demand programming language and platform. Apex will allow our customers and partners to build and run virtually any application on demand. And it dramatically expands the potential for the AppExchange and the benefits that our platform can deliver to our customers.

With the Apex language, we are essentially popping the top off our platform. Now everyone will have the same power to create applications as our own developers here in San Francisco. Armed with the tools of the Apex platform and programming language, IT organizations and ISVs will soon be able to tackle even their most complex business challenges.

It is the combination of Apex and the AppExchange where things really get interesting. Anything created with Apex can now be published and installed via the AppExchange. So developers anywhere in the world can build and distribute everything from custom buttons to components to complete applications. And customers will be able to browse, demo and install what works for them from the AppExchange.

It's hard to believe that the AppExchange went live just 11 months ago. Today, there are more than 430 applications on the AppExchange, up from 70, when we first showed it to you about a year ago at Dreamforce 2005. More than 23,000 developers and more than 230 ISVs are working on bringing their best ideas to the AppExchange, and customers are really starting to see the benefits.

To date, approximately 165,000 application test drives have resulted in more than 15,000 installations at roughly 7000 customers, making the AppExchange one of the most successful software service solutions in our industry. We expect that our new Apex offering will dramatically expand this already incredible adoption.

We are now offering a full portfolio of applications, platform capabilities and services to our customers. This includes our Team, Professional, Enterprise and Unlimited Editions of our applications. All of these editions continue to grow dramatically.

Our Unlimited Edition has been chosen by over 280 of our customers, including new implementations and upgrades with Cisco, Dun & Bradstreet, AfterTek and Borland. Our introductory pricing of Unlimited Edition at $195 per user per month will end on December 31. With the new year, the standard price of Unlimited Edition will be $250 per user per month. Unlimited Edition is our premier offering for our most engaged customers and the most powerful path to success on the business web.

Our Partner Edition, which includes five users for $1500 for one year, has emerged as our next killer application, offering our existing customers the ability to extend their salesforce.com investment to their partners. In fact, more than 100 customers have already selected our PRM service to manage their partner relationships.

The customer highlight of the third quarter was Dreamforce, our annual global gathering for customers and partners. We exceeded our most ambitious goals for this conference, with over 5000 members of our community sharing the unique experience of Dreamforce. That is nearly 70% more than the roughly 3000 who attended just a year ago.

I would like to thank our customers and partners for bringing their incredible ideas and energy to this unique event and thank General Colin Powell and special surprise guest, Michael Dell, for making this gathering so memorable.

As announced at Dreamforce, to further accelerate the innovative potential of Apex and the AppExchange, we will be launching our new AppExchange Incubators early next year. For $20,000 a year, a developer can rent a cube at our new San Mateo AppExchange headquarters and get access to valuable technical, marketing and sales expertise on the world's most compelling on-demand platform.

In addition, we already have DCs interested in setting up shop in our incubators so that they can be there on the ground floor as these innovative new companies launch their ventures on AppExchange.

And finally, as we announced at Dreamforce last month, later this quarter, we plan to deliver the newest version of our service, Winter '07. This new release will include a fantastic mix of features from autoreminders to embedded match-ups. And in our tradition of rapid innovation, these new capabilities will help our customers get more out of their implementations.

Our customers are using the system with a record throughput, performance and reliability. On October 31, for the first time, we delivered over 60 million transactions in a single a day in approximately 269 milliseconds per transaction. In the third quarter, we delivered more than 3.7 billion transactions, up 20% quarter over quarter.

Our customers are using our system more often and more deeply for all aspects of their business. We are now providing 1.6 million transactions per hour or almost 500 transactions per second to our customer base. We did it all at greater than 99.9% reliability.

Driving much of this increased transaction growth was our AppExchange API call volume, which, for the first time, represented more than half of our total transactions in the quarter. There is no better indication of our ability to integrate on-demand with other applications and Web services than this API volume. This level of deep, comprehensive use of our application programming interface is establishing a new standard for integration on the business Web.

And, speaking of standards, all of our performance data continues to be available in real time at http://trust.salesforce.com. We believe that transparency is a core value of all multi-tenant on-demand services for business.

The future of our industry will be delivered on demand. Gartner now estimates that 25% of enterprise applications will be delivered on demand by 2011. That is just within five years. And Gartner predicts that more than 50% of all Salesforce automation will be delivered on demand by 2009, just three years from now.

These are amazing accelerations in the movement to on-demand computing, accelerations that salesforce.com is benefiting from as the largest supplier of on-demand business services. Many will benefit from this change, but they will be following the leadership path we have been setting for the past seven years. With our world-class suite of products, our Apex platform and language, the AppExchange, and our unwavering focus on our customer success, we're leading the way in this new, important marketplace. It is an obligation to continue leadership and innovation in on-demand computing.

With that, let me turn things over to Steve Cakebread, over Chief Financial Officer.

Thanks, Marc, and welcome, everyone. As Marc mentioned, it was a great quarter -- strong revenue of $130 million, outstanding cash flow of more than $30 million, breakeven GAAP EPS that included approximately $0.06 of stock option expense and purchased intangibles, and 61,000 net new subscribers.

Before I review the numbers, let me remind you that all the financial commentary today will be provided on a GAAP basis. This represents a change from how we presented our results in the first half, when we excluded stock-based compensation and purchased intangibles from our reported non-GAAP results. Going forward, we will no longer report non-GAAP results that exclude these items, nor will we provide outlook on a non-GAAP basis unless there is a material nonrecurring charge during the quarter.

So on to my review of Q3 performance -- our $130 million revenue performance was the best in Company history and represents an increase of 50% versus a year-ago quarter -- 57%, sorry, versus the year-ago quarter.

Geographically, the investments we have been making in our international organization are starting to show in our performance. Overall international business is now 22% of our revenue mix, up from 20% a year ago. International revenue continued their rapid growth, with the European revenues up 75% from the prior year and Asia revenues increasing 70% year over year. And our strong growth in the Americas continued as well this quarter, with 53% growth year over last year.

Subscription and support revenues finished the quarter at $118 million, up 59% year over year. Driving this increase was outstanding customer growth and continued adoption of our broad-based solutions lineup. Our professional services business posted another strong quarter, with roughly $12 million in revenue, representing a 40% growth from last year. As Marc noted, Q3 was the best subscriber addition quarter ever for the Company, with 61,000 net new subscribers. And we have added 163,000 subscribers in the last nine months. As you can tell, we are very excited about our subscriber growth across all of our services.

You'll notice that our reported cumulative total grew to 556,000 subscribers from the 501,000 subscribers we reported in the second quarter. So in reviewing our subscriber reporting system, an error was discover that caused us to adjust last fiscal year's net paying subscribers downward by a total of approximately 6000, for 1000 in Q2 '06, 3000 in Q3 '06 and 2000 in Q4 '06. This 556,000 aggregate subscribers we are reporting today is net of this adjustment.

It is important to note that the subscriber adjustment has no impact on our reported net subscriber additions for this fiscal year and our reported revenue in any period. I call your attention to our detailed 8-K filing today, where we have provided you the adjusted subscriber totals.

While net paying subscriber additions remain a very important part of our overall strategy, they are becoming less correlated with our revenue performance. With fixed revenue-generating service additions with a wide range of price points, a strategy of upgrading existing customers, and a broad array of add-on products like Apex Mobile, Sandbox and our new Salesforce for Google AdWords, subscriber growth is just one part of our future revenue story. It is also why the small adjustment in subscribers is not material to our future revenue expectations.

Let's go onto the rest of the P&L. Gross margin continued to be relatively unchanged compared to last year. It's important to note that our year-over-year gross margin performance reflects an incremental stock-based compensation charge of more than $1.1 million in this fiscal quarter. Operating expenses -- GAAP operating expenses finished the quarter at 76% of revenue.

And while our GAAP operating margin decline roughly 8 points from last year, the comparison is not meaningful because of the more than $8 million in incremental stock-based compensation expense due to the implementation of FAS 123R.

As well this quarter, our effective GAAP tax rate of 79% fell 5 points sequentially. There is no meaningful year-over-year compare here, because you might recall that Q3 of last year brought with it a very large one-time tax benefit of roughly $6.8 million. Given our growth and our profitability in various foreign tax jurisdictions, this number will continue to be somewhat difficult to forecast.

For GAAP net profit, it totaled $339,000 for the quarter, our best result for the year. It is important to note that comparing this quarter's net profit performance to last year's result is not especially meaningful because of the more than $9 million in incremental stock-based compensation brought on by FAS 123R reporting changes and the large one-time tax benefit in Q3 of last year.

So our GAAP breakeven EPS for the quarter was at the high end of our expectations, and included in this result was roughly $10.2 million in stock-based compensation expense and approximately $600,000 of purchased intangibles. Together, these items impacted our reported GAAP earnings by roughly $0.06 per share.

Average diluted shares outstanding during the quarter were 120 million shares.

Our cash generation continues to be outstanding. Cash flow from operations for the quarter was $30.6 million, the second-highest total in our history and up 25% from last year. After our second consecutive quarter of $30-plus million operating cash flow, we've now generated more than $112 million in operating cash over the past four quarters. And the balance sheet continues to be rock-solid as well. Total cash, cash equivalents and marketable securities finished the quarter at roughly $371 million, up 45% versus Q3 of last year.

Deferred revenue on the balance sheet grew to $219 million, a 73% increase from last year. This was the second quarter in a row with 70%-plus year-on-year growth in deferred revenue.

Let me conclude my remarks with our outlook for Q4 and an early indication for fiscal year '08. Given our strong Q3 performance and our continued strong business momentum, we now expect to exit the year with revenues of $493 million to $495 million. This translates into a Q4 revenue forecast of approximately $140 million to $142 million.

GAAP EPS is expected to be in the range of breakeven to a $0.02 loss. This estimate includes approximately $10 million to $12 million of stock-based compensation and approximately $600,000 of purchased intangibles. Together, these items will reduce reported GAAP EPS by approximately $0.06 to $0.07 per share. Average diluted shares outstanding are projected to be about 122 million shares.

On looking ahead to fiscal '08, we believe the transition in our industry from on-premise to on-demand is clearly accelerating. Given our industry-leading vision, best-in-class products, and customer and partner enthusiasm, we now expect revenue of approximately $700 million to $710 million for our full fiscal year '08.

We plan to provide you with our GAAP EPS expectations for fiscal year '08 on our Q4 results call scheduled for mid-February 2007. However, a couple things to keep in mind -- our fiscal year '08 GAAP EPS will continue to be reduced by stock-based compensation and the amortization of purchased intangibles. Our $60 million to $70 million in estimated stock-based compensation expense is projected to reduce reported GAAP EPS by roughly $0.32 to $0.37 per share next year.

Similarly, our $2 million in estimated amortization of purchased intangibles is expected to reduce reported GAAP EPS by approximately $0.01 per share.

To close, Q3 was an excellent quarter all around. That concludes our call today. Thank you all for joining us, and I'd like to open up things now for questions. Operator, please?

(OPERATOR INSTRUCTIONS). Laura Lederman, William Blair.

Great quarter. That [sub cost] is beautiful. A few questions -- can you talk a little bit about churn? Has it changed at all in terms of the subscriber churn?

This is Steve. Thanks for the question. We don't routinely talk about churn, and I don't think we will talk about it this quarter. Clearly, we have done that traditionally in our Q4 results, so just stay tuned.

And what about sales headcount in terms of what you're saying? A lot of the companies I cover have seen some increase in churn of sales heads simply because it is a stronger environment out there, and was wondering what you are seeing.

And separately, can you just give us a quick update on the competitive environment? Are you seeing SAP at all? What about Siebel's presence year over year, that sort of thing. Thank you, and then I'll just pass it on.

Well, in regards to sales leadership churn, I'm sure you know that we really have not changed any of our sales leadership in any of our --

I don't mean the leadership; I mean the actual feet on the street.

And in terms of the feet on the street or really the sales leadership, we're not seeing any dramatic changes one way or the other in terms of anything against the industry standard. In our sales leadership in all of our major regions, that has been a very persistent team, which is really the key to our excellent sales performance, as we have a very experienced worldwide team in selling these solutions.

In this quarter, we also added a couple of other very senior executives into our sales team, including a new Co-President in Europe, as well as bringing online two more Senior Vice Presidents in the United States. And we are very excited about where we are from a sales leadership perspective, as well as from a worldwide sales capacity and sales distribution perspective, as well as demonstrated success in both small, medium and even the largest companies in the world.

From a competitive standpoint, I guess the big change has been kind of the disappearing of Siebel from the marketplace. Our information is that Siebel on Demand has approximately less than the number of subscribers after four or five years of being in business now than we have in total for this quarter. That is that the 61,000 net paying subscribers exceeds what Siebel has been able to do.

Microsoft CRM 3.0 has been out there now for a while. This quarter was significant for us because we're starting to replace existing Microsoft CRM 3.0 implementations. I hope that we will be able to give you actual account names soon of these accounts who tried to implement all this huge octopus of software, but wasn't able to do that. And with SAP on demand, their two customers that they announced on launch in February -- our information is neither one has been even able to get it to run.

So we feel very good about our overall competitive situation in terms of proven customer success, as well as the diversity and scale of our customer base. Does that answer your question, Laura?

Thomas Ernst, Deutsche Bank.

Question for you -- I think if you look at the performance of the business, it is obviously extremely strong -- 20% sequential usage growth -- I haven't finished the math, but about 20% free cash margins. And the thing that strikes me is that this has been the year you have been rolling out the platform -- AppExchange, Apex, promoting partnerships with Accenture IBM, Deloitte.

The question is how much of your resources is it taking to make this transition to platform and reinforce partnerships versus the core business of generating the results today? If you don't want to quantify that, maybe give us for a sense of how much of it is a focus of the Company, how much effort is it taking of your people's time?

Well, it is integrated. And what I mean by that is that our platform makes our CRM service what it is today. It makes it better. It makes it customizable. It makes it integratable. It allows us to add new functions for our existing customers easily. It is part of what every sales and service professional has to be an expert in in the Company. We are not just a CRM service anymore. We are truly a CRM platform.

But since you have been covering our Company very closely, you have recognized that this CRM platform has become extremely advanced and has evolved to become probably the world's only on-demand platform -- the ability for our customers, ISVs, developers, and as you have pointed out, systems integrators, can easily build new applications using our platform.

And this is very exciting. We have seen a lot of success in this area. In fact, we saw a major expansion with one of our customers this quarter with Electronic Arts, who has rolled out a recruiting application based on our platform, globally. But the news was that Electronic Arts did not use us for CRM at all. And so those types of successes are appearing on a more frequent basis. And it is becoming part of our core competency to manage all of our customers' information on demand.

Jason Maynard, Credit Suisse.

Congratulations on the quarter. I have two questions for you. So first, can we maybe dive into a little bit of the details of this IBM relationship and perhaps talk about what it means in terms of any type of minimum commitments, in terms of joint marketing funds, or any color that you can share with us on the relationship?

Well, as you know, it has been very important for us to reach out to these traditional integrators and services providers with our solution. We know that they have been struggling deploying the traditional client server model to their customers, in some cases, even as internal users of this technology.

And they have found us -- maybe through an acquisition such as IBM's acquisition of FileNet, or through a customer relationship. And now we are seeing almost every major systems integrator, ranging from Accenture, where we have had tremendous success throughout our customer base, to Deloitte, as I mentioned, to even IBM, and the pipeline is beginning to manifest itself with a lot of exciting opportunities with these integrators in hand.

What is exciting to me about this is that maybe only a year ago, this didn't exist at all as part of our business. And as Siebel has disappeared from the marketplace, these systems integrators have come to us to become their technology provider for customer relationship management and specifically for the on-demand platform. And we look to continue to broaden our relationship with them and work with them to deliver the customer success that we're known for today.

So is there any financial component to the relationship that you can talk about?

Not that we can disclose at this time. And in the future, we will have a formal announcement with them, and we will provide further details then.

Kash Rangan, Merrill Lynch.

Nice quarter. I had a follow-up question on the IBM relationship as well. I am just curious if you have any thoughts on how you go to market? Is there a specific sales division within IBM, be it vertical, horizontal, that is going to be trained on selling the on-demand subscription from salesforce.com? Any color at all that you can give on how long it takes to train these people to sell CRM subscriptions?

And since I suspect that the operator might cut me off and not let me ask a second question, I will ask Steve this question -- Steve, any color at all on the CapEx? I have noticed that there was nice bump-up. Any color commentary on compared to the prior go-around, where we saw a nice step function in CapEx? Where are you directing your investments these days, and what should we expect as a result of productivity?

So to answer your question about the systems integrators, let me answer it first generically and then a little bit more specifically. What we have seen with these systems integrators is that it required us over the last two years to develop a new core competency inside our organization to train them, to educate them, to show them how to sell and market this new on-demand model. It was not second nature for them.

But we have learned how to do that. And of course, we have so many great examples, for example, with Accenture, where we have done major implementations, like Kaiser and Cisco and Chevron and so many others. And that is becoming true of a lot of these other systems integrators as well.

In fact, we discussed the major customer implementation with Deloitte and others that occurred this quarter. And even with IBM, they are perhaps coming up to speed faster than we expected. We are now working on a significant public sector opportunity with them.

And that is very exciting to us, the potential, because we still have a relatively small distribution organization here. And these systems integrators can really reach out in these organizations with relationship that we don't have yet. So they are becoming a tremendous virtual extension of us. And we are seeing the movement from what I would say almost a year ago was denial -- oh, on-demand can't scale, on-demand can't integrate, on-demand can't customize -- to the point where we are saying now, the only way to do it is on demand.

And as we get more consciousness and more excitement around that within these systems integrators, we see much greater success happening. So we are very excited about the emerging of these integrators. And it has taken a tremendous investment over the last few years to get to this critical point -- what I would consider to be a tipping point with the systems integrator community.

With respect to the CapEx increases, there is nothing new there. Yes, the number is up this quarter, but you have to keep in mind, there's typically three things we capitalize. Leasehold improvements -- we've been very aggressive in taking on new leases, and that has had a driver. Certainly, we capitalize from beta to generally release for software. And then also, we have some internal systems development for our internal systems that we're working on.

All three of those contributed to this quarter's increase. But it also continues to be lumpy because it is primarily driven by our external releases and our leases. So I wouldn't draw any dramatic conclusions there other than it is business as usual for us.

Daniel Cummins, Banc of America.

I had a couple of questions about the acquisitions, if you could just get us up to date on the two acquisitions. And I had a question about -- you mentioned the Partner Edition, Marc, but Mobile has been out there a little bit longer. If you could just give us a sense of how that is doing.

I would be delighted to. First of all, in regards to the two acquisitions, as you know, our first acquisition was with Sendia Corporation out of Santa Monica, California. We repurposed their technology and developed our AppExchange Mobile, allowing for any application built with our AppExchange technology or even our core CRM offering to run on any mobile device.

This has been very well received by our customers. In fact, I even have it running on my own BlackBerry here. But perhaps the most important part of that is that we have bundled it into our Unlimited Edition. And it became one of the driving factors that so many of our customers are teed up to upgrade to Unlimited Edition.

By bundling AppExchange Mobile and Sandbox and our premium support into Unlimited Edition, we really provided the critical threshold to get our customers to move from our dominant edition on the larger accounts, which was Enterprise Edition, to Unlimited Edition. The higher ASP of Unlimited Edition and its price increase, which is going to happen at the end of this calendar year, we believe is critical for our overall ASP growth in our largest customers.

So from that perspective and from the perspective of having an outstanding technology that further differentiates us in the mobile space with both the core CRM offering and the AppExchange technology, the Sendia acquisition was a home run.

The second acquisition, of course, was Kieden, who had developed a critical technology that integrated salesforce.com with Google. And this product, which we then repurposed and redelivered as Salesforce for Google AdWords, has really been another tremendous success. In fact, it's had over 700 AppExchange installs already and over 250 of our customers have activated this product.

It lets them create ads in Google directly from salesforce.com, place those ads, and then monitor the success of those ads using our dashboard technology, but most interesting, allows them to move leads generated from Google automatically into salesforce.com. In fact, they have bought over 185,000 keywords on Google, managing a collective $20 million annual ad budget with this product -- pretty interesting for such a new offering and something that we are learning a lot about.

Our customers tell us it helps them to reduce click fraud and get a much higher level of efficiency with their advertising campaigns, both things that we are very excited about and we believe will lead to greater levels of customers success.

Rick Sherlund, Goldman Sachs.

A couple of quick questions. First, any thoughts on the net new subscribers for this next quarter with Cisco, 7500 -- a bubble, so would you caution us about extrapolating too much going into Q4? And then also, just any comments on the stock comp charge for next year? It seems like it is up quite a bit from this year. What is happening there? And any comments on tax rate or cash flow guidance going forward?

Well, let me answer the first part of your question, and then I will lead it over to Steve. And of course, as you know, we don't give guidance or forecasts on our subscriber number just because it is so hard to do so. Of course, we've been excited to see the subscriber growth increase over the last several quarters, especially with the introduction of so many of our new editions and the uptake from our customers. And of course, we're going into our fourth quarter right now. So of course, we're very optimistic about the potential.

But what that specifically will mean and how the number -- what the specific number will shake out, I can't tell you. Of course, we're very happy with the 57,000 subscribers last quarter. This quarter, we're very happy with the 61,000 subscribers. To know exactly what that will be for the following quarter, we are not very good at predicting the future, because it's a lot about what happens during that period. But we have a lot of exciting opportunities. So we are optimistic.

And Rick, with regard to the stock comp, the stock comp expense is driven by the number of shares or option grants that you give. And of course, we continue to hire fairly aggressively, so we are going to continue to grant options. I will remind you, however, that our stock option program only allows us to dilute our shares by about 4% next year.

The other driver is stock price. And so there's always estimates and expectations around that. So we are going to continue to hire aggressively, and that is going to cause us to have increasing stock option expenses.

Heather Bellini, UBS.

This is [Abhi] for Heather. Two questions, actually. Marc, can you talk a little bit about the adoption of the OEM Edition and what type of feedback you're getting for that edition?

And then I have a question for you, Steve, regarding this adjustment to subscriber numbers. Can you elaborate a little bit on what caused that? Is there a change in definition of subscribers? Was there an error in the system which has been fixed and the numbers should all be clean from now on?

Well, in regards to the OEM Edition, we are very focused on increasing the adoption and success of that. Of course, that is about customers who are building applications entirely on our platform. And we believe with Apex, that is going to accelerate next year.

In fact, we are getting ready to open our new AppExchange Incubator in San Mateo that will allow us to work closely with these developers to build a variety of new applications that we believe will run on this new OEM Edition. So we are very excited about the potential for the OEM Edition and how it will play out. And we hope to be able to announce some major new ISV successes with the OEM Edition over the coming year.

And with regard to the subscribers, as you know, it's a pretty small adjustment. We have been working on a new internal application to report subscribers with all our new editions and add-ons. When we implemented it, we discovered there was a small anomaly, and we talked about that today. We have corrected that. You can get the details in our 8-K, and this anomaly did not have any impact on our financials.

Phil Rueppel, Wachovia Securities.

First of all, a question on the AppExchange. You said you now have 15,000 installs. I was curious as to the applications that customers are using. Is that a pretty distributed -- widely distributed -- i.e., does it kind of have a long tail? Or are there just a handful of applications that are proving really popular? And if that is the case, what are those applications?

And then second would be just a clarification -- did the 7500 new Cisco seats go live during the quarter, and therefore were included in the 61,000 new subscriber count?

Let me answer your second question first, which is yes, the 7500 incremental for Cisco that made it our largest customer with 15,000 total activated subscribers occurred in the third quarter, which is why we're reporting it today that Cisco Systems is now our largest global customer with 15,000 subscribers.

And in regards to your other question about AppExchange, the most popular application, I would really bring you to our AppExchange home page at appexchange.com. You will see in the top right-hand corner the most popular applications. And that, of course, is only part of the story. Our customers have built, I believe, over 60,000 custom objects, which are custom applications themselves, which are wide-ranging and make up very much what you suggested -- the long tail.

In our opinion, AppExchange is really exciting for two reasons. First, yes, you can find a great application in the AppExchange for email marketing, or project management, or even recruiting, like I mentioned with Electronic Arts. But also, you can find other objects and components, as well as all kinds of tools for building your own custom application inside your own implementation of Salesforce to deliver whatever you want.

And we're seeing tremendous creativity and impact by our customers in building these custom AppExchange objects. So we are very excited about the long tail that this has created. And also, that means that the potential for the ISV across the globe is going to be just extraordinary.

Brendan Barnicle, Pacific Crest Securities.

This is Matthew Coss in for Brendan Barnicle. Now that AppExchange and Apex had been well established and successful, are you thinking about going into other vertical applications like human resources or financials? And also, how has pricing been in the marketplace?

Well, that is a great question. And we are planning to go into verticals. And the first one, in fact, is now live on the AppExchange. It hasn't really been noticed very well, but it's actually in your industry -- it is financials services. And I would encourage you to take a look at this.

I'm sure you know, salesforce.com is really successful in the financials services vertical. We have large implementations with the largest banks in the world today, and they have asked us to do more. So in the AppExchange, we have now launched a financials services vertical. And in that financial services vertical, you will find a variety of applications that have been built by us, as well as by third parties.

And we are even working on a new workstation for the financial services marketplace, that we call a private wealth workstation, that we plan to be demonstrating more over the coming year, which will find a place right here in our financial services vertical inside the AppExchange, which I encourage you to look at.

As we continue to understand what our customers want us to do more of, you'll see more of these verticals emerge and you will see them emerge through the AppExchange.

Nathan Schneiderman, Roth Capital Partners.

A couple questions for you. In the past, you have made some comments about off-balance-sheet backlog, suggesting that that was about the same size or even a little bit greater than what is on the balance sheet. I was wondering about the trends there -- is that still the case or has that increased?

And then also, in terms of year of bookings mix, I'm wondering if that is shifting a little more towards larger deals, and if so, if you are becoming a little more back-end-loaded in terms of your bookings?

On the off-balance-sheet, again, that is one of those things we talk about on occasion, but not this quarter.

Peter Goldmacher, Cowen.

Just wanted to confirm something you said, Marc. Did you say you have 280 customers using Unlimited Edition?

Yes, that is, I believe, what I said. And that, of course, is at the end of the last quarter. So it probably has increased a little bit since then.

So that's about 1% penetration into your customer base. What can we extrapolate from that about your success at the high end of the enterprise? I would have thought that Unlimited Edition would have sold very well into the high end.

Yes, it is selling very well into the high end. So that is an excellent observation. As you know, Unlimited Edition has only been available for a few months. And it takes a while for our customers to get an offering like that into their purchasing cycle. And, of course, a lot of them are already on contracts for another edition of the product. So in many cases, they wait for those contracts to renew before they upgrade.

We are very impressed with the number of customers already on Unlimited Edition. As I mentioned, as part of the increase with Cisco Systems from 7500 to 15,000, I believe approximately all 15,000 were Unlimited Edition. And we also saw that with Dun & Bradstreet and many of the other transactions we did this quarter -- new upgrades this quarter or new deals this quarter were really done on Unlimited Edition. Even AfterTek in Europe or even here, Borland in Silicon Valley were Unlimited Edition wins. And we expect Unlimited Edition to continue to be a real barn-burner for us in terms of increasing our ASP with these customers, which is a core to our strategy.

You'll note also that Unlimited Edition's price will increase from $195 per month per user on December 31 to $250 per user per month at the next calendar year.

Brent Thill, Citigroup.

Marc, you mentioned the price increase of Unlimited. It seems to be a healthy 28% increase. Does this embed new features or is this just, given your comments in terms of the adoption rates running above plan, you feel like you can raise that price point at that level?

We feel very optimistic about increasing that price for two reasons. First, we wanted to create an introductory price that gave us the reference base inside our own customers that our salespeople could use to sell at this higher price, which we have now done with these 280 closed deals.

We also found feedback from a lot of our customers who said when we gave them the original $195 introductory price that they would have been willing to spend a lot more. And when we ran through our focus groups the $250 price, they didn't blink.

So we are very optimistic about the potential of the price increase. It is also of course timed towards the end of our fiscal year end by triggering it at the end of December. So we think our salespeople will be able to go back to a lot of our customers and talk to them about upgrading to Unlimited Edition as soon as possible.

Rob Schwartz, Jefferies & Co.

One question for Steve and one question for Marc. Marc, I was wondering, given this price change, where do you think the ASPs will be trending for you? And will they be driven as much by upgrades or more by linearity on any one quarter -- linearity of sales in the quarter?

And then for Steve, it seems that the margin on professional service really took a dip this quarter. And I am wondering what is behind that. Is that a trend we should think about modeling going forward?

Let me address your ASP question first. As you know, ASPs really have not changed that much because our mix of subscribers is so varied. And how this new price for Unlimited Edition will affect our ASP going forward -- it's kind of hard to tell, honestly, because we just don't have the model until we see some actual numbers.

It has been surprising that the ASP has been so solid. Some people might have said it might be going up with Unlimited Edition; other people might say it was going down because the mix is including some lower-priced editions. The reality is it just kind of stayed about the same.

And so we are not very good at predicting what it will do. We are going to watch it closely. But of course, for our largest customers and our most committed customers, we are going to work hard to move them up our edition ladder.

And what that means is that we have a lot of customers who come in on Team Edition, or a pilot on Professional Edition, and we try to move them up to Enterprise Edition. And as they do more work on customizations and integration and using more of those features, then we go back to them and move them up to Unlimited Edition.

And that has been true of a lot of our customers. We have this wonderful edition ladder. And it gives our salespeople the ability to work with these customers over time to move them up that ladder. And that is something that we want to do. It is a core part of our strategy, and it has worked well. And if you talk to our customers, you'll find they are receiving excellent value from our Unlimited Edition offering.

And with regards to the services margins, the services business has been growing fairly rapidly, as we described in the script, as well as the margins are impacted by what we call EITF 21, which is amortization of some of those services over time. So if we have a broader mix of services business that gets EITF'ed, you will have some impact on margin. But it is a combination of continuing to grow our resources in advance of our billings and the amortization of those expenses.

And then one last question because (technical difficulty) got cut off quickly -- in terms of mix in our business, we are still in a small, medium and large mix of a third, a third, a third. You have heard us talk a lot about big deals this quarter. We are very excited about those large customers, but our business mix stays in that relative mix model. It has not changed over time at all.

Mark Verbeck, Cantor Fitzgerald.

Congratulations on the results. A question on the upgrade to Unlimited Edition -- if people don't wait for their contract to renew, are they typically signing a new annual agreement at that point? And if someone has signed up for this promotional rate, how long are they entitled to that rate before their pricing would reset to the new pricing?

Well, it's a good question. And every customer is a different situation. And that is one of the reasons that we have a global salesforce. As we go from country to country and industry to industry, as well as the difference between small and medium and large or even Fortune 100 accounts, what we have found is because of the diversity of our market, we have to have a salesforce that is able to reach out to that customer wherever they are.

And then what that means is that that pricing and that agreement with that customer needs to be put together exactly for them. And you would be surprised how important that is in our overall success. And it has been a critical part of the Company that we have built and one of our core competencies in executing globally.

So as our customers put together initial agreement, we put together the right price and performance for them, then as we see them succeed and grow, add users and get ready to move editions, we do exactly that -- we them renew their agreement, we help them change editions, and we will do everything necessary to make them successful. At salesforce.com, nothing is more important than our customers' success.

I will now turn the call back over to David Havlek for a few closing comments.

Thanks, Michelle. Before we close up today, I would like to remind you of a couple of upcoming appearances by salesforce.com executives at some upcoming financial conferences.

First, Marc will be appearing as keynote at the Credit Suisse tech conference in Phoenix, Arizona, on November 29 -- should be a great event, so we will look forward to seeing you all there.

Second, George Hu, our newly appointed Chief Marketing Officer, will be appearing at the Lehman tech conference in December, on December 7, here in San Francisco. If you have never met George, I encourage you to come on out. I think you'll find it a most useful event.

Finally, if you have any follow-up questions to today's call or any of our quarterly performance, please contact Investor Relations at investor@salesforce.com.

That concludes today's call. Thank you very much for joining us, and have a good day.

Thank you, ladies and gentlemen. This includes today's salesforce.com third-quarter fiscal year 2007 financial results conference call. You may now disconnect.