賽富時 (CRM) 0 Q0 法說會逐字稿

Good afternoon.

At this time, I would like to welcome everyone to the fourth-quarter fiscal-year 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 will now turn the call over to David Havlek, Vice President of Investor Relations.

Mr. Havlek, you may begin your conference.

Thanks, and welcome, everyone, to salesforce.com's fourth-quarter fiscal-year 2007 financial results conference call.

Joining me as always today are Chairman and CEO, Marc Benioff, and Chief Financial Officer, Steve Cakebread.

Before we begin, I would like to emphasize that all of our financial commentary today will be in GAAP terms.

Please consider this as you evaluate our results, particularly against First Call estimates, which exclude certain recurring items, such as stock-based compensation and purchased intangibles, and when making year-on-year comparisons to prior-year results, which may not include these expense items.

A full disclosure of our Q4 financial performance can be found in our fourth-quarter 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 March 8th.

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 with information regarding our fourth-quarter fiscal-year 2007 performance.

However, some of our discussion 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 the Apex platform or language, the AppExchange directory or other products specifically; market opportunities; expected implementation of 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 and 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 quarterly period ended October 31, 2006.

The 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 these decisions based on features that are currently available.

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

Thanks, David.

Our fiscal 2007 ended with a bang, and it's a sound that is being heard around the world as a starting gun for a new on-demand industry focused on customer success, as well as a new era for salesforce.com and our breakthrough on-demand platform strategy.

At the fiscal-year finish line, we're turning in some remarkable numbers.

We added more than 250,000 subscribers in fiscal 2007, approximately 1,000 every business day.

It took us five years to get to our first 250,000 subscribers, and yet we did that many in this year alone.

That's breathtaking momentum.

That momentum has kept pace across all customer segments, particularly in large deployments.

We now have 47 customers with more than 1,000 subscribers.

That's up 81% from a year ago.

There are 150 customers with more than 500 subscribers, up 88% from last year.

Our hardware and software infrastructure set new benchmarks for security, reliability, availability and transparency.

We delivered approximately 4.3 billion transactions in the quarter, up 116% from last year, and they were delivered faster than ever, approximately 0.25 seconds, an improvement of 32%.

That kind of scalability is every CIO's dream, and we're delivering that dream every day.

It's there for the world to see every day on http://trust.salesforce.com.

Customers are more engaged than ever.

The number of users per day is up 67%, and customers are integrating their systems with ours more deeply than ever before.

Calls to our application programming interface or API now account for 55% of our total transactions.

Just 13 months ago, the AppExchange went live, and customers were installing their very first apps on our platform with just a click.

Today, the AppExchange is a vibrant marketplace, with 520 apps from 250 ISVs.

This is an increase from approximately 150 applications a year ago.

Now, more than 8,000 customers have installed 20,000 apps, and they have taken more than 200,000 test drives.

For our partners and customers, the AppExchange has gone from a standing start to a standing ovation.

Our technology has been doing anything but standing still.

Our innovation accelerated dramatically in 2007, with announcements of new products like Sandbox, Unlimited Edition, Apex Mobile, Summer '06, Salesforce PRM, Salesforce for Google AdWords, AppStore, Winter '07, and perhaps the most significant ovation for us in the industry, our new Apex programming language, which is now in beta.

For the traditional software industry, which ekes out a new release every six years or so, this would be remarkable list of accomplishments for a decade.

But for us, it's business as usual in an exciting new industry that we're defining and leading.

When we first started talking about our vision many years ago, there was plenty of skepticism.

But now, all the major research firms are seeing the same thing.

On-demand is the future, and customers are eager for it.

For example, Gartner predicts that 25% of all new business software will be delivered as a service by 2011, and a recent McKinsey survey of enterprise company CIOs showed 61% were planning to implement software as a service.

Experimentation is over.

The age of widespread adoption has begun in the enterprise, and there is no other company that has the track record of success and the world's first on-demand operating system to take advantage of it.

Let's look at some of the strong numbers in the fourth quarter.

Fourth-quarter revenue of $144.2 million was up 58% from the year-ago quarter.

Our annual revenue run rate is fast approaching $600 million, another milestone as we pushed toward our goal and dream of $1 billion in annual revenue.

For the full fiscal year, revenue of $497.1 million rose by more than 60% from fiscal 2006, making salesforce.com the fastest-growing software company of our size.

GAAP EPS was breakeven for the quarter, at the high end of the guidance we gave you last quarter.

For the full year, our breakeven EPS performance was excellent, when you consider it included stock-based compensation and significant investments in our sales capacity, infrastructure and technology.

Cash from operations totaled more than $38 million for the quarter.

We ended the year with approximately $413 million of cash and marketable securities on the balance sheet.

We added approximately 90,000 subscribers in the fourth quarter, a record.

We also added a record 2,700 new customers in the period, and our business showed consistent strength in small, medium and large businesses.

Just a few weeks after we told you about Cisco Systems expanding to 15,000 subscribers, we announced that Dell is also signing on for 15,000 seats.

In addition to Dell, we added Plantronics, MSC Software, Saba Software, rockets and arrow electronics., MSC Software, Saba Software, [Rocketin] and Arrow Electronics.

Some of our existing high-technology customers got even bigger this quarter, with subscriber additions at Symantec, Brocade, Business Objects, Electronic Arts and Citrix Systems.

We also continue to enjoy great success in the financial services market with customers all over the world.

We added a large group of new financial services customers, including Barclays Wealth, Allianz Australia, Hartford Life, [One American], Sumitomo and RBC.

Major add-ons included ABN Amro, which added more than 1,000 users to become one of our top 50 largest customers.

We also saw subscriber expansion at large financial institutions that included Deutsche, Societe Generale, Citizens, TD AMERITRADE, Thomson Financial, Nikko Asset Management, E*TRADE and Wells Fargo.

But our success isn't limited to a few industry verticals.

We are seeing broad adoption of our service by customers from all industries.

Ashland Distribution added 900 customers, to bring their total deployment to roughly 2,700, and Baker Hughes grew to roughly 1,500 subscribers during the quarter.

Our service and support business is also gaining momentum.

During the fourth quarter, Fortune 100 giants Procter & Gamble and Wal-Mart both selected salesforce.com to help them manage their call center customer interactions.

In all, we closed nearly 500 service and support deals in the fourth quarter, 150 of which were at new customers.

As I mentioned earlier, the fourth quarter ended with a bang, a big one.

Next Tuesday, in New York City, we will announce our largest deal ever, a major customer expanding to 25,000 subscribers, 19,000 which are net new subscribers, in the fourth quarter.

We'll give you details behind what I think is one of the most decisive and influential bets on software service ever.

More important, we will explain the winning strategy of technological excellence, open standards and best-in-class partners that make it a model for future success in a demanding industry.

Join our audience of top customers, media and analysts on the webcast at salesforce.com/investor or, if you're in New York City, please speak to our investor relations department for an invitation.

That major deal was the capstone to a remarkable fourth quarter.

We look forward to discussing it in detail with you next Tuesday.

I would like to take a moment to talk about the incredible platform and services that we have put together at salesforce.com and how they will redefine our company and, I believe, shape the software service industry.

We will be talking a lot more about this in the months to come, and even next Tuesday in New York, but here's the big picture of what we call salesforce.com 2.0 and our circle of success.

Ask any customer or industry analyst, and you will hear that are on-demand killer apps have redefined what an enterprise application is and what end users expect from enterprise applications overall.

Our enthusiastic community is motivated to use the IdeaExchange at ideas.salesforce.com to communicate where the opportunities still are in on-demand and pointing a global audience of developers and ISVs to exactly what to build on-demand.

Our new Apex technology platform means that these developers can now build almost any application on-demand, easily, and deploy those applications immediately on the $100 million platform that we have built over the last eight years.

Finally, our AppExchange marketplace will provide a directory to our worldwide customers of thousands of on-demand apps, and new AppStore checkout services allow those applications to be purchased and deployed on-demand with a speed and efficiency that is unprecedented in enterprise software.

Simply put, we believe there is no better way to conceive, develop, market, sell, try, buy and deploy enterprise applications.

It's a circle of success.

Customers can break through their huge application backlogs with a platform that they not just trust but love.

A worldwide talent pool can't meet this need.

All that stands between a developer and success now is a brainstorm and a browser.

That is friction-free development on-demand for a flat world.

As you know, we like to have a little fun here at the expense of the established giants like Microsoft and SAP and Oracle.

But in a new century of opportunity on-demand, why would any developer in their right mind choose platforms that define the last one?

Why build your business on an operating system that has stopped innovating?

Why would a customer choose rigidity and complexity over flexibility and simplicity?

The answer is that more customers, developers and ISVs are choosing software as a service, and they are asking Salesforce to show them the way with our platform.

When we first started salesforce.com, we had to do a lot of heavy lifting -- basically, complex software programming work and hardware engineering that laid the foundation for years to come -- and much of it had to be done before we could build the core CRM application that inspired us in the first place.

No developer has to do that again.

No hardware, no software, no back office, no data center.

It's all about innovation, not infrastructure.

So when people ask me, "What's next for salesforce.com?"

I say, try another question.

Who is the next salesforce.com?

Because it is that next-generation on-demand developer and ISV who is developing, marketing and deploying on our platform, and that is what is next for salesforce.com.

That's the story I believe will define salesforce.com, our on-demand platform strategy and the on-demand industry in the years to come.

With that, I will turn it over to Steve for a detailed review of the financials.

Thanks, Marc, and welcome, everyone.

By any measure, our fiscal-year 2007 performance was tremendous.

Q4 was a fitting way to end such an incredible year -- record revenues of $144 million, record customer and subscriber additions, breakeven GAAP EPS and $38 million in operating cash.

Before I begin, please be advised that all of my commentary today will be on a purely GAAP basis.

With that said, let me begin today with a quick review of our P&L.

Fourth-quarter revenue of $144.2 million was up 58% from the year-ago quarter and 11% from Q3.

For the full year 2007, we recorded revenues of $497.1 million, an increase of 60% from fiscal year 2006.

Managing this revenue growth was truly an outstanding achievement for the Company.

On a geographic basis, revenue in the Americas was roughly $111 million, an increase of 53% from the year-ago quarter and up 9% sequentially.

In Europe, revenue of roughly $23 million rose 77% year on year and 14% from the prior quarter.

At 84% year-on-year growth, Asia-Pacific continues to be our fastest-growing region.

Fourth-quarter revenue of roughly $11 million was up 21% from Q3.

International revenue now represents 23% of our revenue versus 20% a year ago, reflecting the investments that we have been making in the past year in our international capacity.

Subscription and support revenue of $132.1 million grew 60% year over year and 12% sequentially.

Our professional services business, which includes consulting and training, also continued its outstanding growth, closing the year with fourth-quarter revenue of $12.2 million, an increase of 41% from the same quarter last year and 5% sequentially.

ASPs, calculated as quarterly subscription revenue divided by ending total net paying subscribers, finished the fourth quarter at $68 a month per subscriber.

This result was down slightly from Q3's $71, but this was driven principally by the two large deals late in the quarter that Marc referenced earlier in his comments.

Excluding the effect of these two deals, ASP was essentially flat quarter to quarter.

As Marc mentioned, Q4 was an incredible customer and subscriber quarter.

Our 90,000 net new subscribers in Q4 are almost double the number we added during our outstanding Q4 in fiscal year 2006.

Importantly, our customer retention continues to be outstanding.

For the fourth quarter and for the full year, our attrition rate continues to be less than 1% of net paying subscribers per month.

GAAP gross margin for the fourth quarter was 77%, this slightly better than our full-year gross margin of 76%.

We have managed to maintain our gross margin on a year-over-year basis, even as we were absorbing roughly $1.5 million in incremental 123(R)-related stock-based compensation expenses in cost of goods sold.

Subscription and support gross margins were roughly constant from the year-ago quarter at 88%.

Professional services gross margins were down a bit from Q3, primarily because of holidays and the resulting reduction of training and consulting days during the quarter.

As a percentage of revenue, operating expenses finished the quarter at 78%, up 2 points from Q3 and up 7 points from last year.

We continue to add people and IT capacity in all our major expense areas.

The primary driver of the 7 point year-over-year increase was roughly $8.8 million in incremental 123(R) stock-based compensation expense.

For the full year, operating expenses finished at 77% of revenue, up 5 points from fiscal 2006 and, again, the result of 123(R) stock-based compensation.

Clearly, our operating expenses represent the key leverage points in our model, but it's important to understand that we're still very much in our growth mode.

If we lever our business too quickly in the near term, we create risk in achieving our goal of become the dominant on-demand company over the long term.

Since most of our costs are driven by people, particularly in the expense categories, let me provide a quick update on headcount.

We added 263 people during the quarter to finish the year with 2,070 full-time equivalent heads.

This represents an increase of 766 people from the beginning of the year.

We more than doubled our headcount over the past 18 months, adding in every functional area to enable our continued growth and industry leadership.

With that said, let me finish up on the P&L by moving to taxes.

Our effective GAAP tax rate for the fourth quarter was 68%.

That's down from the 79% we recorded in Q3, and driven largely by the reinstatement of the federal R&D tax credit.

There is no meaningful year-on-year comparison because of the inclusion of 123(R) stock-based compensation in our fiscal year 2007 results.

But as I've said in the past, because of our growth and profitability in various foreign tax jurisdictions, this number is somewhat difficult to forecast.

Net income for the fourth quarter and for the full year was essentially breakeven.

Thus, our reported GAAP EPS for both periods was also breakeven.

Average fully-diluted shares outstanding were 121 million shares for the fourth quarter and 120 million shares for the full year.

We achieved these results even while we absorbed more than $39 million in stock-based compensation expense and roughly $2 million of expenses related to the amortization of purchased intangibles.

We also made important investments in extending our technology and growing our capacity.

For these reasons, I was very pleased with our fiscal-year 2007 performance.

Q4 was another excellent cash quarter for salesforce.com, with operating cash of approximately $38 million.

While this number is essentially flat from the year-ago quarter, please recall that FAS 123(R), the tax benefit associated with stock-based compensation, now appears in the financing cash, not in operating.

This quarter, that tax benefit was roughly $6 million.

For the full year, cash from operations totaled approximately $111 million.

This number does not include roughly $16 million in 123(R)-related tax benefit.

Together, this results in slightly more than $1 per share of cash generation for the year.

All this cash continues to fortify our balance sheet.

Total cash, cash equivalents and marketable securities finished the year at approximately $413 million, an increase of $41 million from Q3 and an increase of $116 million for the year.

Receivables jumped up a bit in Q4, finishing $46 million higher than in Q3.

We saw a similar increase last year from Q3 to Q4, so I expect this number to come back in line during Q1.

Deferred commissions also showed a typical year-end increase.

Other assets increased to $19 million from $12 million in Q3.

This increase was primarily the result of capitalized software and a small increase in our ownership interest in our Japanese joint venture.

On the liability side of the balance sheet, deferred revenue finished at $284 million, an increase of roughly 58% from last year, and up 29% from Q3.

Remember, this is just for the business that is booked and invoiced.

For business booked but not yet invoiced, we continue to carry a non-GAAP, off-balance-sheet deferred revenue amount that is slightly more than what you see on the balance sheet.

In total, our on and off-balance-sheet deferred revenue is now approaching $600 million.

This is a remarkable number, when you consider we just included a year where we recorded $497 million on our P&L.

Before I get onto our official outlook for next year, I would like to discuss an important reporting change for the year.

There's no question that subscriber growth is key to our overall growth strategy.

However, as we have said before, upgrades in non-subscription services like Sandbox, Apex Mobile, Google AdWords and, now, AppStore are also becoming a greater part of our overall revenue mix and growth opportunity.

Because upgrades and add-ons are revenue events but not subscriber events, looking at subscriber additions on a quarterly basis is not the best indicator of future performance.

At the same time, the magnitude of our deals has grown exponentially.

In Q2, our largest account was 7,500 subscribers.

In Q3, that number doubled to 15,000, and now in Q4, we have a 25,000-seat customer.

That's almost a 400% increase in our largest deal in just six months.

Because of the timing of large deals is still difficult to predict, this creates a potential for greater quarterly lumpiness in a metric that is becoming less predictive than in the past.

It's actually the same challenge we faced two years ago.

At that time, we eliminated our mid-quarter subscriber updates, going from eight updates a year to four, because they are not useful in understanding our true business performance.

Today, given our multiple revenue drivers and the fact that the magnitude of our large deals now creates added quarterly lumpiness in the subscriber metric, we similarly believe that quarterly subscriber performance is not the best way to evaluate our business.

As such, we will be changing our subscriber reporting frequency in fiscal year 2008 from quarterly to twice annually -- once at midyear, in our Q2 report, and once at year end in our Q4 report.

We believe that the long-term trends are much more useful in understanding our true business performance, and in the best interest of our shareholders.

With that said, let me conclude today with our fiscal year 2008 outlook.

For Q1, we are now projecting revenue in the range of $155 million to $157 million and GAAP EPS of approximately a $0.01 loss to a $0.01 gain.

This GAAP EPS projection is expected to include roughly $11 million to $13 million in stock-based compensation expense and roughly $500,000 of amortization of purchased intangibles.

This projection assumes an average fully-diluted share count for Q1 of 124 million shares and a projected Q1 GAAP tax rate of 70%.

After raising our revenue outlook for our full fiscal year 2008 in December, we continue to expect revenue in the range of $710 million to $720 million.

We further expect full-year 2008 GAAP EPS in the range of $0.07 to $0.09.

Again, this estimate includes an expected $60 million to $70 million in stock-based compensation expense and roughly $2 million in amortization of purchased intangibles.

For purposes of calculating the full-year estimates, we projected a fully-diluted average share count of 126 million shares and a GAAP tax rate for the full year of 60%.

To close, by almost every measure, fiscal year 2007 was an amazing year.

That concludes our prepared remarks for today's call.

We thank you for joining us, and we will open things up for your questions.

So operator, please?

(OPERATOR INSTRUCTIONS).

Thomas Ernst, Deutsche Bank.

First, thank you for reducing some of the sub number volatility;

I think that's welcomed by your shareholders.

But the question I wanted to ask you -- it looks like we accelerated hiring pretty significantly in Q4 off of the run rate that you had been going, been hiring during the year.

I think the outlook here, in terms of the cost guidance or the earnings guidance, suggests that perhaps this acceleration continues.

Why the optimism?

Obviously, you had been growing quickly already and expanding fast.

Are you expecting to continue to hire more aggressively?

What gives you the comfort to kind of raise the bar a little bit more on the investment?

This is a great time in the on-demand industry, and I know that you know that, because you cover us pretty closely.

We are very excited about the opportunity, we are also very excited about our competitive position, and we're also very excited about our new technology.

But to take advantage of all of that, we have to have the corporate infrastructure to be able to execute on what are probably the most aggressive goals in the industry.

I don't think any software company is growing faster this quarter than salesforce.com, certainly at our size.

So we want to continue that momentum.

We went to take advantage of the change.

We went to continue to accelerate our market-share gains.

To do all of that, we want to expand our infrastructure, which includes our employee base.

Just a quick follow-up.

Was there any specific catalyst that got you excited to ramp that?

Because it looks like it actually started probably in Q3.

What was it that made you decide, well, let's pick up the rate of investment?

We are very optimistic around our competitive position and the development of our pipeline, because of the trends that we see in all of our market segments around customers wanting to go to on-demand computing.

In almost every geography and market segment that we're in, we're seeing that continued growth.

That's evidenced by the report that we just provided you on the state of the Company.

We want to continue that momentum.

We want to continue that growth.

We want to continue that acceleration.

To do that, we have to be able to continue to add more people, and that's what we're doing.

Marc is absolutely right.

We're investing into our growth.

But we have a company and have a history of growing our margins over time, and we're going to continue to do that through this year.

You have seen that in some of our guidance.

Certainly, we have changed our methodologies to include our stock option expense, and we're aware of that.

But that doesn't change our direction in our management team, in terms of proving operating margins and continuing to focus on improving cash flow from operations, too.

So we're trying to make those balances, as Marc said, that we have always invested in our growth.

But at the same time, you're going to start to see us continue our expansion of margins over time.

The other thing I would like to add is, just getting back to my formal comments, Gartner predicts that 25% of all new business software will be delivered as a service by 2011.

I'm sure you saw the dramatic share gain that McKinsey cited in enterprises CIOs who are now willing to implement software as a service.

I'm sure you will agree no company is currently better-positioned to take advantage of those shifts, and these additional employees are going to help us to do that.

Brent Thill, Citigroup.

Steve, you mentioned some of the new revenue categories.

Can you just give us a sense of maybe how you are going to start to report those categories?

Will that start in Q1, or are we going to have to wait until later in the year for --?

I'm sure we will give some indications of how the business is doing, but it's still pretty early and we're going to stick with the simplified reporting.

It's important to understand we have a lot of levers in this business, and they are through the platform, the AppStore, et cetera, that we have laid the groundwork.

But we have always had add-ons and upgrades, and that is not going to change.

We have got new products and service and support, and we are very supportive of that.

Marc talked about the expansion there.

So you will see that, but I think it needs to become a major part of our businesses.

Also, it's early days in some of this stuff.

A follow-up for Marc.

You mentioned last quarter that price increases -- you felt fairly confident that the installed base was able to take on higher price point offering.

I think you had limited experience with that price point in the quarter.

Can you just give us a sense of the reception on some of those price increases during the quarter?

Well, as you know, during the quarter, we increased Unlimited Edition from $195 per user per month to $250 per user per month.

That was received very well by our customers.

Unlimited Edition is one of our most successful new offerings, and we have seen a lot of customers, even though it has only been available for about six months, move to Unlimited Edition.

We are very optimistic about that, and we also see our company releasing additions with higher prices in the future.

You may see some of that next Tuesday.

Jason Maynard, Credit Suisse.

Just a follow-up on the incremental or additional spending for next year.

Can you just maybe give a little bit more color or flavor on what line items on the P&L we should see this?

Is this more cost of service?

Is this going to be salespeople, R&D?

Just maybe directionally help us understand how we should think about those line items.

We're investing symmetrically across all aspects of our business, to take advantage of the opportunity at hand.

We believe that now is the time for salesforce.com to ascend to the market position that it rightfully deserves as a leader in on-demand computing.

As the market expands in on-demand computing to these kind of incredible numbers that are being cited by these industry analysts, we want to have a company that has the capabilities to be able to take advantage of the full opportunity.

We're creating that company.

That's what we have been doing for the past eight years, and that's what we see ourselves doing going forward as now, I believe, we're at the tipping point for on-demand computing.

We want to be at the apex, so to speak.

Certainly, we have been making investments and talked about investments in international.

That is starting to show up in terms of our business mix.

We have certainly made investments in development through the platform, Apex, AppStore.

Our own infrastructure, as we get bigger, we need to make some investments in as well.

So, as Marc said, it's pretty much across the board.

But I think there's demonstrated results in those investments through the growth in international revenue streams, through the technology developed.

We have had some incredible events where we have released product and technology over the last four to six months.

I think you will continue to see that.

How should, maybe, longer-term investors think about the ramp in operating margins?

Is this going to be something where you have a big spending year and then we see some leverage the following year?

Or is it going to be a little bit more of a gradual ramp?

Just what does the slope look like maybe over a two or three-year timeframe?

Well, I think in terms of that, it's tough to predict.

We've got huge opportunities, as Marc has quoted the size that Gartner and IDC and others have had in the marketplace.

Like I said in the script and earlier responses to questions, you have seen us move our margins up year over year in a managed way.

We're going to continue to do that, but not at the expense of our investments.

It is true that, as we get larger, you're also going to see continued improvements in cash from operations.

A little bit better than $1 per share this year is pretty exciting.

We had over 20% of our revenues convert into cash.

So I think you'll see us continue to focus on growing that, but it's hard to give an estimate of what those numbers could look like in a couple years.

I would also just say that, unlike a lot of enterprise software companies today, salesforce.com is a top-line-oriented company.

We're focused on growth and revenue.

We are a market-share-oriented company in a new market.

We are really organized and architected around those principles.

If, at some point, we decide to maximize our margin or maximize our efficiency, like you see some of these large players do, I think that would be a sign that our market is shrinking or maturing, or that there's a phase shift happening in our technology cycle.

But, au contraire, we really have found that this is the time for on-demand computing, and there is no other company who is delivering technology in this space to satisfy customer needs, whether they are small, medium and large.

But to do that, we have to have the company in sales and service, consulting and development, to take advantage of the opportunity.

That's the company that we have created, and that's the company that we will continue to create.

Brendan Barnicle, Pacific Crest Securities.

Marc, as you head out on all these new initiatives in there, definitely expanding the on-demand market, how do you make sure that you stay true to the core FFA/CRM focus of the Company's original applications?

Well, it's a great question.

At our company, we like to say that all of our wood is behind the same arrow.

You probably notice we haven't changed our company name; it's still salesforce.com.

We haven't changed our stock tickers, either; it's called CRM.

That's just the beginning of a clear indication to our customers that we are the defined leader in customer relationship management.

If you look at a couple of the transactions that we closed this quarter, whether it was the large transaction that we mentioned at 25,000 subscribers, or Dell at 15,000 subscribers, or the transaction that we mentioned in the previous quarter with Cisco at 15,000 subscribers or over the, I guess, approximately 50 companies that have over 1,000 subscribers with us, let me just mention, when was the last time you heard Oracle or SAP say that they closed a 25,000-user CRM deal?

When was the last time you heard Microsoft say they closed a 25,000 or 15,000-user CRM deal?

Or can you name a customer who has 1,000 users on any of our competitors' platforms in customer relationship management that has the customer satisfaction level?

I get back to some of the core tenets of our technology.

If you look at the Winter '07 release that we just revealed and delivered to all of our customers a couple of weeks ago, I think you'll find that customers have seen it has more core CRM capabilities, is more competitive and is leading perhaps more than any release we have ever had.

In fact, it just won a rave review from InfoWorld.

If you don't read InfoWorld, it's on InfoWorld.com.

You can search on the Winter '07 salesforce.com release.

If you're not aware of it, InfoWorld today is the most demanding technical center out there for tech reviews, and we have done some incredible new technological developments, whether it's our integrated mashups or our hovers, whether it's our mobile technology.

Customers, I believe, define us as the leader today in customer relationship management, and we're continuing to make that investment.

That said, what makes our CRM really differentiated and really better than our competitors is our platform.

Our platform functionality is fully integrated into our CRM technology, so customers can easily customize and create, as well as add over 520 applications from the AppExchange.

We believe there's no other product in the world that's like that, and that is what makes our CRM the best.

Just a quick follow-up question, Steve, on ASP assumptions going forward.

We saw that bit of a decline; you noted it was on the big deals.

But you guys are doing more big deals.

Is this sort of seasonality, where kind of in the fourth quarter we should expect the big deals to come, and maybe see that decline and see them return to kind of (indiscernible) back to that $70 level going forward?

Or do you think we see these big deals fairly consistently through the future quarters and kind of remain at these levels?

Well, a couple things.

As Marc said, the pipeline looks very good and we're optimistic about that going forward.

As well, Q4 is the time for big deals.

Timing, whether it's Q4 or Q1, when a deal comes in is really critical.

Those tend to come in at the end of the period, so you will get the subscriber count but not necessarily all the revenue.

I still like to say that our ASPs are trading in a narrow historical range.

As our base gets bigger, it gets harder to move those things around.

So I would like our range in the high 60's, low 70's.

It moves it along.

Certainly, we're introducing higher-priced products and great opportunities there.

But it is about the timing of this, and that's another reason not to get too focused on the subscriber number at the end of every period.

But I would say that it's going to trade in the range that we have been trading at historically.

Peter Goldmacher, Cowen.

Just following up on that last question, it's interesting to me that your subscriber growth was phenomenal but your revenue growth lacked the outperformance of the subscriber growth.

Steve, I'm a little bit confused on your comments.

Are you implying that the discounts that you give to the enterprise are roughly in line with what you're generating from the midmarket business?

If they are not, can you give us some sense of what the general 15,000 plus seat deal discounts trend towards?

Well, that's a good question.

As you know, we have businesses in small, medium and large.

They each generate different types of discounting structures.

Clearly, we're discounting for larger volumes.

A big impact on the ASP, quite frankly, is the timing of when these transactions occur on the revenue that we recognize, not so much the discounting structure.

It hasn't changed.

On a per-discussion basis, we don't talk about the discounts at that level.

So can you give us just a little bit of help understanding what the potential difference in discount is?

Is it a 20% difference, 30%, more?

What I can tell you is that, of course, if you buy more product, you get a higher discount, because our costs to acquire that customer are reduced, of course.

Larger customers have larger discounts.

Smaller customers have smaller discounts.

But we don't provide our discount range, for competitive reasons, and we won't be doing that.

Christopher Sailer, Goldman Sachs.

Just diving a little bit deeper on the cash flow, it seems like that's going to be a much more important metric for investors going forward, given that subs, as you point out, is more volatile, and we're only going to be getting that metric a couple times a year.

So I guess the question is there.

It looked like the cash flow margins for the year came down a bit, and that might be in part because of some big deals at year end, and the fact that those didn't necessarily collect the cash.

So I guess, going forward, would you expect cash flow to grow at a rate similar to overall revenue, or is that also going to be pressured because of the investments that you guys are making?

Well, that's a good question.

As you know, we're still in growth mode.

So predicting cash flow has always been tough, and I've not given any guidance around that.

I think it is safe to say that clearly we're focused on that as a management team.

We think that converting our revenues in the 20 plus or greater range into cash is a good number, but we're still adding facilities, adding people throughout the world.

It's still going to be a lumpy number.

So I can't give you too much guidance, but history is a good indicator of where we have been and what we're doing.

So you wouldn't expect it to diverge much from where it has been in the last few years?

Not over time.

But keep in mind, where we find opportunities to grow, we're going to do that.

So there is some lumpiness there.

Kash Rangan.

A question for Steve.

When I take the midpoint of your GAAP EPS guidance and add back in the -- on back of stock-based comp, maybe I did the math wrong, but I come up with roughly 11% to 12% operating margin, and that versus what you reported fiscal 2007 of roughly 7.5% is a pretty substantial margin increase.

Am I doing the math wrong here?

We're just focus on the GAAP earnings, because there's tax rate issues and a lot of other tricky maneuvers that make doing that type of comparison difficult.

I'll leave that to you and your colleagues to sort that out.

We're very proud of the breakeven that we had with the 123(R) costs in there.

We feel comfortable with what we're doing next year in terms of margin expansion, but I will leave that math to you guys, because it is very difficult to do.

I understand that.

But directionally, it looks like, in the last couple of years, this would be the largest margin expansion year for you guys, in fiscal 2008, when I look at your guidance, based on what is implied through the EPS.

I would just say that we have done is pushed the reset button and we're looking at GAAP now.

I think you ought to look at our energies around improving our margins on a GAAP basis.

I would just add to that that we're delighted with our revenue growth, with our margin growth, with our customer growth, with our subscriber growth, with our system availability.

With, really, every core metric of our business, we couldn't be more pleased with where we are, and we're very satisfied and, in many ways, ahead of even where we thought we would be at this time.

So we think this is an incredible year.

Longer term, which operating line item are you going to get the best margin improvement from?

Should it be sales and marketing or gross margins?

Well, as I've said on previous calls, when you are staffing up a deferred revenue company, specifically with a large direct sales organization, which is now what we have, you are going to have to onboard a substantial amount of costs.

Because when you hire a new salesperson, the industry average is that person will be productive after about nine months, or after about three quarters.

What's interesting about that is for a traditional enterprise software company who takes the revenue in the period that it occurs or gets signed, like an Oracle or an SAP or a Microsoft, that nine-month cost and the risk associated with that new hire gets rationalized in that quarter that they start to get delivering the revenue.

But in the deferred model, of course, we have ratable contracts, so the revenue doesn't happen, or a very small part happens in that third quarter.

It happens over the life of the agreement.

So you have more onboarding costs for those salespeople, which can include acquisition costs, draws and other things.

So when you are building an on-demand company with a deferred model, where you are expecting a high growth rate like we have achieved in the last eight years, indeed, you will have to be ready to take a heavy cost in sales, which is what we have.

We're going to keep investing in R&D.

We have got some great technology.

We have still got our international expansion.

So all of those are in our future and for the foreseeable future.

Steve, you said we should be looking at the business through up-sell, cross-sell, et cetera.

So in lieu of the sub number, are you going to be sharing with us more metrics?

First off, I mean just going to a once-in-two-quarters sub number, I think, would increase the volatility relative to expectations, because you are talking two quarters' accumulation of people's expectations for the summer, but that's a completely different issue.

Since you have chosen to not give us that number, what (technical difficulty).

Operator, I think we will need to go to the next question.

Mark Verbeck, Cantor Fitzgerald.

Steve, in the past couple years, Q1 has actually been, on an absolute basis, a stronger grower than Q4, I think, probably as all the deals that you do in Q4 spill over.

Any change in that expectation this year?

Did the ultimate pricing special pull revenue forward, so we shouldn't expect the same kind of seasonality this year?

I don't think that there's anything unusual.

It's reflected in our guidance for what we're doing.

We feel very comfortable about our business, and we do run our business based on revenue.

We feel strongly about Q1 and what we're going to deliver beyond that.

Just on terms of how you guys think about how much cash the Company should carry, and where you might be making investments, as you continue to just generate phenomenal amounts of cash flow, how do you think about how much you need to keep on the balance sheet?

Well, we certainly look at what we're doing with our cash.

Yes, we are still growing the Company.

So I think you'll see us stay focused on improving cash from operations, continue to grow our cash balances to allow us to be flexible and take advantage of either internal growth opportunities or external growth opportunities.

But it's a little bit premature to sit and say we're going to do something unique, unusual or different with our cash right now.

Congratulations on the quarter.

Dan Cummins, Banc of America.

I wanted to cover the traction you're finding in Europe.

Can you give us a sense of -- not naming the customer, but size of force, who is -- what would be the size of the largest customer in Europe right now?

What will that be in six months and perhaps a year out?

Also, with respect to pricing, the fact that these deals seem to have been signed in January and yet you're keeping the revenue guidance, I think, unchanged relative to what you had in December -- are we at a significantly higher degree of conservatism on the guidance?

Can you give us a sense of what SKU all these large deals are coming in at?

Are these indeed Unlimited Edition seats, or are they Enterprise, or are they Professional?

Well, first of all, if it's all right with you, I'm not going to tell you what our large deals will be in the coming quarters, because I don't think that will be good for our competitive position or our shareholders.

But what I can tell you, of course, is all geographies are growing.

I'm sure that that's clear through Steve's remarks as well.

We've seen some great wins in Europe and also in Asia and, of course, Japan.

We see the on-demand industry emerging in all geographies, and we are working hard to play in all geographies as well.

As you know, our product already operates, I think, in more than 12 languages.

In terms of future direction of our growth and how we see our revenue, we have provided our guidance just as we always have.

When we are ready to make a change to that guidance, we will do that through the formal and structured way.

Brad Whitt, RBC Capital Markets.

If I did my math correctly, it looks like cash flow from operations grew about 16% year over year and your free cash flow grew about 23% year over year, which obviously is lagging the revenue growth, which you mentioned you continue to want to make investments there.

I'm just wondering, should we use this history as an indicator for free cash flow going forward in the next couple of years?

Like I said, you have to look at a little bit of history, but also know that we're going to take opportunities to make investments.

That's why we have not been giving guidance or providing insight there.

I will tell you that we're focused on improving cash flow from operations, as we are our margins, as we are making our investments.

So I'll leave that to you to decide where you think we will go there.

But cash and cash flow from operations is an important metric that we manage to.

Then a quick follow-up.

On the last conference call, someone asked about churn, and you said that you normally only address that one time a year, and maybe to stay tuned.

I'm wondering if you can you give us an update on customer churn for this last previous fiscal year.

As I said in my prepared remarks, right now, we have seen our churn at less than 1% of our total customer base on a monthly basis.

So the implication there is it has been relatively flat and, we think, very good in terms of turnover.

We have small businesses that go out of business, et cetera.

So we continue to focus on customer success, and that metric has been very stable over the last year or so.

Yun Kim, Pacific Growth Equities.

What kind of change to you see in your sales organization going forward, as you see continued traction in the enterprise market, with a higher number of larger deals and also you continue to focus on AppExchange and Apex?

Do you see your sales organization becoming more vertically focused for both SMB and the Enterprise accounts?

Just give us some sense on how you are thinking about the way you are planning to grow your sales organization for both Enterprise and SMB.

Also, do you have any plans to pursue any indirect sales model like building on value-added resellers for the SMB market?

Our channel is our direct sales force, and that has worked incredibly well for us.

We're competing against organizations who have large, established direct sales organizations like Oracle and SAP.

To compete against them in their mainstream accounts, we have to have similar armies and soldiers.

I'm sure that it's clear that two of Oracle's very largest high-tech accounts, Cisco and Dell, just decided to go with Salesforce for their large enterprise application deployment.

That competition takes place in person, in their offices, at the highest levels of their company, and we have to be able to be prepared to present and represent ourselves in a peer manner.

That is our distribution model, and of course, we won those customers away from Oracle.

So when we look at other channels, the on that we're most excited about is AppStore, which is, of course, the announcement that we made in December.

We see AppStore as the development of a new channel of revenue for us.

It's based on our AppExchange technology.

We plan to offer a revenue-sharing model for partners starting this fiscal year that we're very excited about, and we have gotten a great response from our partners.

Also, we will have an electronic version of AppStore available before the end of this fiscal year that we also think could become an interesting channel for us, as we will be selling our partners' applications and taking a significant revenue share from that.

That's really the development of the channel that we see today.

We don't see that traditional reseller.

We see a new type of reseller relationship, as I just described.

Of course, we also have great relationships with companies like Accenture and IBM and Deloitte who are systems integrators, and we really cracked the code on value in these relationships.

We have worked and signed some major transactions with all of those partners, and that has become also an important relationship channel for us.

But still, that's because our direct sales organization is able to partner with them in a peer manner.

This concludes today's conference.

I will turn the call back over to Mr. Havlek for closing remarks.

Thank you, everyone, today for joining us.

I would like to remind everyone to listen in next Tuesday to the webcast, an exciting New York event that Marc mentioned in today's call.

Finally, if you have any follow-up questions on our fiscal fourth quarter, please contact the investor relations team at investor@salesforce.com.

Thank you very much and have a great day.

This concludes the fourth-quarter fiscal-year 2007 financial results conference call.

You may now disconnect.