賽富時 (CRM) 2008 Q2 法說會逐字稿

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  • Operator

  • Good afternoon.

  • At this time, I would like to welcome everyone to the salesforce.com second-quarter 2008 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 conference over to Mr.

  • David Havlek, Vice President of Investor Relations.

  • Please go ahead, sir.

  • David Havlek - VP, IR

  • Thank you, and welcome, everyone, to salesforce.com's second-quarter fiscal-year 2008 financial results conference call.

  • Joining me today to discuss our outstanding second-quarter performance are Chairman and CEO Marc Benioff and CFO Steve Cakebread.

  • Before we begin, let me emphasize that all of our financial commentary today will be in GAAP terms, unless otherwise noted.

  • Also, please be reminded that we do not recognized subscribers in our reported figures until we provision for them, so not all of the subscribers within specific opportunities discussed today are included in our first-half results.

  • Full disclosure of our Q2 financial performance can be found in our second-quarter results press conference 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 can also be found in our website.

  • Today's call is being webcast, and a replay will be available shortly following the conclusion of the call through August 24th.

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

  • Please be informed that the primary purpose of today's call is to provide you with information regarding our second-quarter fiscal 2008 performance.

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

  • These statements are subject to risks, uncertainties and assumptions.

  • Should any of these risks and uncertainties materialize, or should our assumptions prove to be incorrect, actual Company results could differ materially from these forward-looking statements.

  • All these risks, uncertainties and assumptions, as well as other information on potential factors that could affect our financial results, are included in our reported filings with the SEC, including our most recent reports on Form 10-K and 10-Q, particularly under the heading Risk Factors.

  • These reports are also 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 decisions based upon features that are currently available.

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

  • Marc Benioff - Chairman, CEO

  • Thank you, David.

  • We're pleased to tell you about another remarkable quarter for salesforce.com.

  • Our business is firing on all cylinders, with record milestones for revenue, profit, customers and subscribers spread across a healthy mix of core and new products, including a blockbuster deal for our new Platform Edition.

  • Revenue for the second quarter was $176.6 million, up 9% sequentially and 49% over the same quarter last year.

  • Our second-quarter revenue was more than we achieved during our entire fiscal 2005, and our first-half revenue of $339 million was more than we posted for our entire fiscal 2006.

  • We exited the second quarter with an annual revenue run rate that is now in excess of $700 million, and our goal of $1 billion run rate is now well within our sights.

  • GAAP earnings per share was $0.03, well above the guidance we gave you last quarter.

  • Our operating cash flow was $35 million, our second-best quarter ever, and we exited the quarter with roughly $0.5 billion in cash and equivalents on the balance sheet.

  • Even more exciting, we achieved a new milestone in customer additions by adding 3,000 net new customers during the quarter, to bring our total customer count to roughly 35,300.

  • That's an increase of 10,500 customers in the past 12 months.

  • I'm also thrilled to report that our subscriber base increased by more than 60% from the year-ago quarter to more than 800,000 subscribers around the globe.

  • After taking roughly seven years to achieve our first 400,000 subscribers, we have more than doubled that total in the past six quarters.

  • Not only are we adding record customer numbers in all areas of our business, but our customers are getting larger, too.

  • A year ago, our largest customer had roughly 7,500 subscribers.

  • Today, our installed base includes two customers with more than 30,000 subscribers, four customers with 20,000 or more subscribers and five customers over 10,000 and a remarkable 68 customers with more than 1,000 subscribers.

  • That last number represents an increase of more than 40% over the number of customers with 1,000 or more subscribers that we reported just six months ago.

  • Nothing says more about enterprise adoption than this explosive growth.

  • These results clearly demonstrate growing momentum in our technology and business model for customers of all sizes.

  • In fact, Gartner recently positioned salesforce.com above SAP, Microsoft and Oracle in the Leaders' Quadrant of the SFA Magic Quadrant for 2007.

  • Gartner's report went on to predict that within three years, the majority of salesforce deployments will be delivered as a service.

  • That's amazing marketing potential.

  • Significantly, our largest deal in the second quarter was not for CRM.

  • Internationally, one of our largest financial services customers has selected the Salesforce Platform to build and run a custom application that they have developed in their organization.

  • With our Platform Edition, they have expanded their deployment to more than 35,000 users, making them the largest implementation in our history.

  • There is no other platform that offers the customization, integration, scalability and reliability of ours.

  • In its first full quarter since its launch in March, Salesforce Platform Edition was a certifiable hit.

  • In addition to the large customer I just mentioned, the Platform Edition customer list now includes Saber, Celerant Consulting, Panasonic, Allianz, Bank of Oklahoma, Robert Half and Procter & Gamble.

  • In the second quarter, we also saw large enterprise deals for our more traditional CRM service.

  • In the United States, it's at large accounts like IMS Health and Wells Fargo.

  • Internationally, we also saw continued growth with new wins at Fortis, Arriva, Asia Netcom and Air Liquide.

  • Increasingly, our enterprise customers are realizing the benefits of extending their salesforce deployments to their networks of partners, and that drove another record quarter for our PRM Edition.

  • After growing their salesforce deployment to more than 15,000 salespeople around the globe, Cisco has selected salesforce.com to manage approximately 15,000 PRM subscribers at roughly 3,000 resellers around the globe.

  • This brings their total deployment to more than 30,000 subscribers.

  • Equally exciting, we also booked a 15,000 partner opportunity with Sprint Nextel, bringing their total subscriber deployment to more than 20,000 subscribers.

  • We also saw exciting new PRM wins at SAP -- sorry, probably did.

  • We also saw exciting new PRM wins at S&P, I should say -- that's Standard & Poor's -- Sun, EMC and Sony.

  • However, we are also happy to take SAP if they need us.

  • Our customer service business also had an outstanding quarter, with impressive wins at Barclays Capital, Misys, Plantronics and CIT.

  • Salesforce Call Center, launched in January as part of our winter 2007 release, has been a hit, and customer momentum is clearly on the rise for this exciting new offering.

  • We are delivering even more innovation in customer service with the recent launch of Salesforce Customer Portal.

  • We started the second quarter with the strongest portfolio of multi-tenant, on-demand applications in the world.

  • Then we rewrote the rules of this industry in June, when we announce a strategic partnership with Google and our first joint product, Salesforce Group Edition, featuring Google AdWords.

  • We are not shy marketers, by any means, but the intense interest in this announcement surprised even us.

  • We are delighted to report that this innovative new application has produced one of the fastest ramps of any new product in our history.

  • In addition, all 35,000 of our customers are now live on Summer '07, the 23rd generation of our award-winning release.

  • For the first time, customers can run their code on our servers with Apex code, which is now live for Unlimited Edition customers.

  • Our Platform as a Service once again redefines on-demand computing by allowing customers to run and customize their own code, database, workflow and user interface and run it on any environment, whether it's the PC, Mac or even mobile computers.

  • This allows customers to focus on innovation, not infrastructure.

  • The competition continue to struggle with how to build, seller and deploy multi-tenant shared solutions and their underlying business model.

  • The appeal to customers is undeniable, but for entrenched legacy vendors like SAP, Oracle and Microsoft, to truly adopt this model is unthinkable.

  • SAP's largest European customer, Siemens, selected Salesforce for customer relationship management in the second quarter.

  • Of course, we already have SAP's largest global customer, DuPont.

  • That's amazing.

  • We also won IMS Health, Mercedes-Benz and Corning against SAP.

  • These new accounts join a long list of legacy SAP accounts that are now using salesforce.com, including Motorola, Symbol Technologies, Air Products, Ashland, Shell Energy, Chevron and many others.

  • We continue to see similar success against Oracle.

  • As I mentioned, one of our largest overseas financial service customers grew to more than 35,000 subscribers in the second quarter.

  • We will announce the name of this exciting win against Oracle next month.

  • In the US, we doubled our subscriber deployment at Cisco, a legacy Siebel account, by adding our PRM offering.

  • Finally, we won an exciting opportunity at American Express in another head-to-head battle with Oracle.

  • Microsoft also returned to its summer pastime, announcing its intention to one day deliver a centralized multi-tenant on-demand service.

  • But after a flurry of announcements and PR hype, there are no customers on this mythical service and no URL where you can try out the service for free.

  • That's why Microsoft customers -- like Dialogic, Bracco Imaging, Standard Duplicating Machines, International Turnkey Systems -- all selected salesforce.com over Microsoft CRM this quarter.

  • Microsoft's strategy of an inferior product at an inferior price promises to do for on-demand what Zune has done for music players.

  • One thing that no competitor can match these days is the Salesforce Platform, which gained dramatic momentum in the second quarter.

  • We logged our first 100-million-transaction day in the quarter, and for the period, our transactions totaled approximately 6.8 billion, a new record.

  • While we delivered 119% more transactions this quarter, we delivered them at an average time of less than 0.25 seconds each, a 22% year-over-year improvement in speed.

  • More remarkably, we delivered all this performance at greater than 99.9% availability.

  • Of course, it's all available for you to see every day at trust.salesforce.com.

  • None of our competitors -- not Microsoft, not Oracle, not SAP -- provides this level of transparency or even the kind of website that we've made popular at trust.salesforce.com.

  • As we have seen in recent quarters, calls to our API accounted for more than half of our transactions, indicating deeper and deeper integration with our service.

  • That integration capability took a big leap forward this quarter, with our introduction of Salesforce SOA.

  • This is a powerful set of technologies for enterprises as they continue to move to on-demand.

  • We had our first-ever developer conference back in May, and now, our developer community numbers more than 48,000.

  • On the AppExchange, 348 ISVs have contributed to the 642 applications now available.

  • Customers have now completed more than 251,000 test drives and 32,000 installs of on-demand applications from the AppExchange.

  • Our platform is where partners go to build their own businesses into the next salesforce.com.

  • One thing that they have been asking for is even more help in marketing their AppExchange applications, so we have made a couple of key announcements in that area.

  • We launched the IdeaExchange for partners in the second quarter, giving the partner community a place to comment on and prioritize our marketing programs.

  • Partners have also asked for closer alignment with our core marketing team, so now the AppExchange marketing unit reports directly to our Chief Marketing Officer, George Hu.

  • Partner feedback on these changes has been excellent, and the venture capital community has signaled its belief in this model by raising its investment with AppExchange business models to more than $300 million.

  • All of us here at Salesforce are working on delivering the on-demand event of the year, Dreamforce.

  • Dreamforce kicks off on September 17th here in San Francisco at the Moscone Center.

  • We are expecting more than 7,000 attendees to hear from keynoters like Cisco Chairman and CEO John Chambers, and I'm pleased to announce that legendary filmmaker George Lucas will be the featured keynoter on day two.

  • He will be talking about his vision of philanthropy, a passion that he shares with salesforce.com.

  • We will also have a special analyst track on Monday the 17th, so you won't want to miss this incredible event.

  • Please register now at dreamforce.com, or by contacting David Havlek and our IR team.

  • Of course, those of you with an appetite for news are used to us serving up industry changing surprises like AppExchange and Apex at Dreamforce.

  • We promise that you won't be disappointed.

  • The second quarter closes an incredible first half for salesforce.com, and Dreamforce is the kickoff for what we believe will be an even more exciting second half.

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

  • Steve Cakebread - CFO

  • Thanks, Marc.

  • Good afternoon, everybody.

  • Q2 ended an exceptional first half for salesforce.com.

  • Our financial performance was outstanding, and we exit the first half with a much more efficient, focused organization than where we began the year.

  • Let me begin today with a brief financial review, and then I'll close with our outlook.

  • As Marc indicated, revenue for the quarter was $176.6 million, up 49% year over year and 9% from the prior quarter.

  • This outstanding performance was well above the outlook we provided you at the beginning of the quarter, for several reasons.

  • First, demand for our core CRM Software as a Service offerings, including SFA, marketing automation, PRM and call center management, has never been better.

  • Not only did we add a record 3,000 customers during the quarter, but existing customers like Cisco, Sprint Nextel the continue to grow their deployments to record sizes.

  • That's why our installed base of 35,300 customers is such an important asset, not just to salesforce.com but to our growing community of ISVs eager to tap into the SaaS economy that we're creating.

  • We launched our Platform Edition in March, and we're already beginning to see meaningful contribution from our Platform as a Service business via opportunities like the 35,000-seat opportunity that Marc mentioned in his comments.

  • In addition, the Platform Edition lets customers build applications internally or buy them from AppExchange, and then deploy those applications to non-CRM users within their organizations.

  • The early success of this product is very encouraging.

  • Together, our Software as a Service and Platform as a Service offerings resulted in subscription and support revenue of $160 million for the second quarter, an increase of 50% from Q2 of last year and up 8% from Q1.

  • We also saw excellent growth in professional services business, which finished Q2 with $16.6 million in revenue, an increase of 45% year over year and 13% sequentially.

  • Second, in addition to our strong overall business momentum, revenues this quarter benefited from FX a bit more than we had forecast at the beginning of the quarter.

  • Currency contributed approximately one-third of our higher-than-projected revenues.

  • In Europe, where the euro strengthened materially during the quarter, Q2 revenue rose 65% from last year and 14% from Q1 to $29.2 million.

  • In constant currency, our European business grew by 56% versus prior year, and Asia revenue of $14.1 million was up 77% from Q2 of last year and 14% from Q1.

  • Constant currency growth in Asia from the year-ago quarter was approximately 84%.

  • Moving on to gross margins, the Company gross margin continued to show the benefits of our increasing scale, finishing at 77% of revenue, up 2 points from the year-ago quarter and 1 point from Q1.

  • Delivery gross margin for our subscription business remained flat from Q1 at 86%, but were up 1 point from Q2 of last year.

  • This is truly remarkable performance, when you consider that we're processing 119% more transactions than we did a year ago.

  • The investments we made in our data centers early last year, together with our improving delivery efficiencies, are really starting to show in the numbers.

  • Despite a lot of competitive rhetoric, our consistent Q2 subscription gross margin performance continues to reflect a very stable pricing environment for our services.

  • ASPs remained well within our historical range of high 60's to low 70's, even as our lower-priced PRM and Platform Edition services become a larger part of our overall business mix.

  • Just as we did in Q4 of last year, we had a couple of very large transactions in the last week of the quarter that you should consider as you evaluate our average revenue per subscriber.

  • This quarter, those deals contributed roughly 45,000 subscribers to the total but little revenue, because of our daily revenue recognition.

  • Without these transactions, ending subscription revenue per subscriber was roughly flat from Q1.

  • Finally, I'm also encouraged by the improvements in our professional services gross margins.

  • Our investment in these strategically important businesses grew less quickly than revenue, and I expect continued margin improvements in our professional services business going forward.

  • Operating expenses finished Q2 at 75% of revenue, down more than 1 point from both Q1 and from a year-ago period.

  • While we continue to spend at roughly the same rates in sales and engineering to support our continued growth in innovation, we were more efficient in marketing and G&A spend, on both a sequential and year-over-year basis.

  • As a percent of revenue, G&A has fallen 170 basis points and marketing 160 basis points from a year-ago quarter.

  • We achieved these results by being more disciplined and our spending and by reducing the rate of hiring in certain subteams.

  • Let me talk about our headcount for just a minute.

  • Overall, we exited the quarter with 2,302 full-time equivalent employees and an increase of 59 from Q1.

  • We hired at a slightly slower rate than in prior quarters, because we're making some important organizational adjustments to enhance employee productivity and customer responsiveness.

  • In addition to the marketing consolidation Marc mentioned, we also reduced the number of sales specialists and redeployed them as account reps.

  • As a result of these changes, we exit Q2 with a much stronger sales and marketing organization.

  • With a more effective organization in place, we expect to increase the pace of our hiring again in Q3 to more historic levels.

  • Our GAAP operating margins finished the quarter at 2%, up from essentially breakeven in Q1 and up from a loss of 1% last year.

  • Excluding the effect of roughly $13 million of stock-based compensation expense and roughly $1.5 million of amortization of purchased intangibles, non-GAAP operating margins were 10%.

  • While investing in the massive growth opportunities remains our top priority, I continue to be pleased with the consistent operating improvements we have made in our business model.

  • Our GAAP tax rate of 50% this quarter was down significantly from last quarter's 73% and our projected rate of 70%.

  • As we have said in the past, improvements to our tax rate would come as the profitability in certain foreign tax jurisdictions improved.

  • Those improvements came a bit earlier than we projected at the beginning of the quarter, and that was the primary driver for the reduction in our GAAP tax rates this quarter.

  • Summing up the P&L, our GAAP EPS of $0.03 per share was our best-ever performance since we began expensing stock-based compensation in our results.

  • Even with the roughly $15 million of stock-based compensation and purchased intangibles I just mentioned, we still earned nearly $4 million of net profit.

  • Continued strong demand for our services, together with some currency benefit, excellent expense management and an improving tax rate, all contributed to this outstanding bottom-line result.

  • These strong earnings translated into another solid quarter of cash generation.

  • Operating cash flow for the second quarter was $35 million, an increase of roughly 15% from Q2 of last year.

  • For the first half, operating cash flow was roughly $71 million, an increase of almost 70% from the same period last year.

  • It's worth noting that Q2 brought with it some material expense (inaudible) ahead of our annual user conference Dreamforce and a large annual insurance premium payment.

  • Even with these pressures, this was the fifth consecutive quarter with operating cash flow of more than $30 million.

  • As expected, capital spending came down significantly from Q1, to finish the second quarter at roughly $10 million.

  • The primary driver of capital spending was, once again, leasehold improvements and capitalized software.

  • There were not many significant changes on the balance sheet from Q1, but our financial strength continues to grow.

  • Total cash, cash equivalents, marketable securities finished the first quarter at approximately $497 million, an increase of approximately $49 million from Q1 and up a remarkable $163 million from Q2 of last year.

  • In addition, another quarter of strong bookings pushed deferred revenue on the balance sheet to $321 million, an increase of 59% from a year-ago quarter and up 9% sequentially.

  • Don't forget, we only put on the balance sheet business that has been invoiced to customers, so there remains a very significant off-balance-sheet position for business that's not yet been invoiced.

  • In sum, the balance sheet remains rock solid, and we're well-positioned going forward.

  • So that brings us to the outlook for Q3 and our full year fiscal 2008.

  • As we enter the third quarter, it's important to remember that our Platform and PRM Editions carry lower pricing than our traditional CRM offerings.

  • This will impact the revenue contribution of several large PRM and Platform opportunities, as we discussed today.

  • In that context, we expect revenue for the third quarter to be in the range of $187 million to $189 million.

  • Diluted GAAP earnings per share are expected to be between $0.01 and $0.02, and this includes the projected $14 million to $16 million of stock-based compensation and roughly $1.5 million of amortized purchased intangibles.

  • For purposes of diluted GAAP EPS calculations, we anticipate a fully-diluted share count of approximately 123 million shares and a tax rate of 58%.

  • For our full fiscal 2008, an excellent Q2 business momentum is expected to translate into revenues of $727 million to $732 million.

  • As I mentioned in my headcount remarks, we are expecting to return to more historical hiring levels in the second half, after a pretty light hiring quarter in Q2.

  • Given those necessary investments, we now expect EPS to be in the range of $0.08 to $0.10 for our full fiscal 2008.

  • The GAAP EPS guidance includes an estimated $55 million to $60 million of stock-based compensation and approximately $5 million of amortized purchased intangibles, and further assumes a fully-diluted average share count of approximately 123 million shares and tax rates of 58%.

  • I want to make one clarification.

  • The FX impact on revenue -- I meant to say that our overachievement by about $3 million of outlook was one-third higher because of our currency efforts, not that overall revenue benefited by one-third.

  • Sorry for that.

  • This concludes our prepared remarks for today's call, and I thank you for joining us today.

  • With that, let me turn it back to the operator for your questions.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Laura Lederman, William Blair.

  • Laura Lederman - Analyst

  • Yes, a very good quarter.

  • Thanks, you guys.

  • A few questions -- one, a lot of big deals in the quarter.

  • Can you talk about the big deal pipeline?

  • In other words, is this unusual or are there just still a lot of ones out there?

  • Obviously, you can't give us specific details, but if you'd just give us a little color, that would be great.

  • Also, attrition -- is that still under 1% a month?

  • Finally, can you give us a quick update on monetizing the AppExchange, in terms of new thoughts or ideas of how to do that, and how the partners are reacting?

  • Marc Benioff - Chairman, CEO

  • First of all, in regards to your question about big deals, of course, as you know, our business is is split evenly between small, medium and large customers.

  • In regards to large customers, we do experience what we call lumpiness, where we will see various spikes in large deals.

  • But it's impossible for us to be able to predict going forward when we get those spikes.

  • Of course, this quarter, we saw several large deals happen.

  • We didn't know that in the first quarter, and just as we didn't know it in the first quarter, we cannot accurately predict what's going to happen in the third and fourth quarter.

  • Of course, that's the beauty of our business model.

  • The ratable aspect of our agreements and the ratable aspect of our revenue gives us a nice, smooth revenue curve, regardless of when these big deals come in.

  • So we don't like to make those predictions, and I think I have made some pretty interesting comments towards the beginning of the script in regards to the number of large customers that we have today even versus a year ago.

  • In regards to your -- let's see, what was the second question?

  • Attrition -- we haven't really seen anything materially change on attrition at all.

  • We have really developed the processes internally to keep attrition significantly below 1%.

  • Finally, on AppExchange, we're very excited about the progress of AppExchange over the last several years.

  • Of course, the technology in the last release got really significantly enhanced with the addition of Apex, which allows customers and ISVs to run code on our servers.

  • You're going to see us make more exciting announcements coming up at Dreamforce, so I will encourage you to come to that event.

  • Operator

  • Thomas Ernst, Deutsche Bank.

  • Thomas Ernst - Analyst

  • A brief follow-up to Laura's question.

  • I think you have been able to -- as the product has been getting richer with time and I think been getting stickier as customers use it more intensely, your attrition rates have actually been declining with time.

  • Is that still the case here, despite the rhetoric we are hearing out of some of the competition?

  • Then, if you can address it, just seven weeks ago, when Oracle posted their results, clearly, by piecing the data together, you're winning an order of magnitude more business than they are, but they are winning some big customers.

  • So they cited specifically ADP, which is one of your bigger customers.

  • Is there anything happening there you can see from their side into the Siebel OnDemand product?

  • Then, more generically, when they win, why?

  • Is there anything that looks painful to you or anything that you have to adjust to?

  • Marc Benioff - Chairman, CEO

  • Okay, well, you've got a lot in there, Tom.

  • So if I missed some of it, let's circle back with you and make sure we get it all.

  • First of all, again, exactly as I said to Laura, we have had no attrition of any consequence.

  • Let me just point this out to you.

  • You follow our company very closely, right, as does Laura.

  • You know a lot of our customers and a lot of our users.

  • You've met them at our events around the world.

  • You've met them at Dreamforces.

  • Can you name any customer of any consequence that we have ever lost?

  • It's kind of amazing, actually.

  • We've really never lost a customer of scale or, really, materially in our history.

  • Of course, it's not going to be true forever; it can't be.

  • But it is now, and I don't know of anyone else who can say that.

  • Look at our big customers we got because of attrition from Oracle.

  • They lost Cisco, they lost Merrill Lynch, many others.

  • So it has really become a tremendous asset for us.

  • The reason why is our customer satisfaction is so high.

  • I think you probably know, we recently completed customer satisfaction surveys in our base here at Salesforce, and 95% of our customers say they are very satisfied.

  • I think it's something like 70-something percent, 72% or 77% -- what is the number?

  • I think it's 72% of all of our users say they have actually referred us to somebody else.

  • In regards to the question about ADP, you know, Oracle cited on their earnings call that they had acquired ADP as an on-demand CRM customer, which surprised us.

  • It also surprised the President of ADP when I called him to ask him about that.

  • It turns out that they bought a company in Atlanta, Georgia, called Sterling Tax or something like this that had 10 users or -- I don't know what the exact number is, but some little number.

  • They felt that that was material enough to put it on their earnings call.

  • I think that that's evidence of where Oracle is in on-demand CRM.

  • They have to somehow position that they won ADP when they have a little Sterling Tax division in Atlanta that ADP bought recently with 10 users.

  • I think that speaks to their success.

  • In fact, while they were working on closing that 10 users in Atlanta, Georgia, we were working on closing a 35,000-user transaction internationally that we're going to tell you about in more detail in September.

  • So we feel pretty good about our ability to compete against Oracle CRM and the Siebel business unit.

  • As evidence of that, of course, we expanded Cisco, and we had another head-to-head win with them at American Express and many other organizations around the world.

  • But we, of course, follow them, SAP and Microsoft very closely.

  • We just don't see the traction and the adoption or the customer base.

  • Maybe one day we well, but I think that if they got as much code as they had rhetoric, they could actually maybe be doing something out there.

  • I don't know -- was there something else that I missed, Thomas?

  • Thomas Ernst - Analyst

  • No, I think that helps a lot.

  • Thank you again.

  • Operator

  • Kash Rangan, Merrill Lynch.

  • Kash Rangan - Analyst

  • You guys continue to outperform expectations quarter after quarter.

  • Just a quick couple of questions for you, Marc.

  • I'll try and keep this brief.

  • Number one, with SAP, A1S, Microsoft Titan, et cetera, coming on the scene [as quickly with PR], what is happening to pricing in the market?

  • What is also happening to sales cycles?

  • [If you can come down], that will be great.

  • Also, as a follow-up, Marc, how do you assess the productivity of the salesforce overall, especially some of the newer people that are getting onboard?

  • Third and finally, maybe just something you want to address, Steve.

  • How are the renewal economics coming along, compared to your IPO of probably three years back?

  • You're still in the land-grab mode, and you continue to be (inaudible).

  • But I'm just curious -- how are the renewals coming along?

  • How are the economics of the second-year and third-year renewals impacting your bottom line?

  • Marc Benioff - Chairman, CEO

  • You know, it's interesting.

  • I'm sure you saw the Gartner Magic Quadrant with salesforce.com in the top right hand above Siebel.

  • Honestly, when I saw that, I was shocked; I couldn't believe it.

  • Only two years ago, we weren't even on the Magic Quadrant, and now we're in the top right hand above Siebel.

  • I think what that really says is a couple things -- number one, that on-demand is going mainstream.

  • This is the big time and the big leagues, and customers don't want to buy software anymore.

  • So you either offer on-demand or you're not a player.

  • The second thing I think it really speaks to is the way Gartner does that survey is you have to produce a lot of referenceable customers of size and scale, and we were able to do that very easily.

  • I think that that has really impacted our ability to move into the Leader Quadrant.

  • That means of your not in on-demand, and if you are not producing those kind of customers, you're not going to play.

  • So competitors have to respond, saying, "Oh, sure, we have on-demand, too.

  • We're just like salesforce.com.

  • Oh, we're a big German software company, but we're just like Salesforce.

  • We deliver it on a CD, but we're just like Salesforce." The reality is they are not.

  • As evidence of that, the customers.

  • So when I meet analysts, I like to play a little game with them, and I say, "Look, can you tell me the names of two or three or more salesforce.com customers off the top of your head?" Then I ask them, "Now, tell me, who's the top SAP CRM customer?

  • Who's the top Oracle CRM customer?

  • Who's the top Microsoft CRM customer, on-demand?"

  • Because you don't hear those names, and because you don't see those subscriber and user counts, they are missing out on just a tremendous market right now and tremendous momentum.

  • Look at the growth that we have been able to experience over the last few years to become a company that's doing more than $700 million.

  • That's what these other organizations want, but they are just not delivering that.

  • So we feel very good about where we are today in the market.

  • Because we have a product that, of course, is premium technology, we get a premium price.

  • That has always been true, and it has never been true more today.

  • Our customers aren't just buying our CRM; they are buying our Platform Edition.

  • I'm sure you know about its capability with on-demand database, on-demand workflow, on-demand user interface and on-demand logic now.

  • That's a tremendous, tremendous asset we have.

  • We're the only ones with an on-demand platform.

  • Customers want that, because it lets them customize and integrate our capability.

  • So we feel very good about our competitiveness, our ability to price and ability to win and our ability to continually define the market and to grow this company.

  • That's what we're all about, and you're going to see us do more between now and Dreamforce as well.

  • We have a lot of things that we are very excited about, and I'm looking forward to that conference, when we get out there and show you the next level of our vision.

  • You also asked about the productivity of our sales teams, given all our new hires.

  • You are right, we have hired thousands of people in the last several years.

  • Of course, whenever you hire somebody new, it takes time to get them up to speed and to train them and to make them productive.

  • It also takes time to weed people out.

  • You hire people, you hire salespeople, sometimes even hire executives that, in the first three to six months, they don't work out and you have to move them out of the organization.

  • Your failure rate is higher when you have a high growth rate of employees and executives.

  • But overall, we feel very good about where the productivity of our sales force is and our ability to manage it on a global basis.

  • Of course, they did a great job, as you can see, in the second quarter.

  • Operator

  • Jason Maynard, Credit Suisse.

  • Jason Maynard - Analyst

  • I just had one question going back to the comments that you made earlier.

  • I was just curious about the rationale around the changes that you made into the marketing and the specialty sales organization.

  • I'm just curious to get your take on how you think your go-to-market plays out, now that you are selling multiple products.

  • Marc Benioff - Chairman, CEO

  • Well, I appreciate the question.

  • We don't like to go into detail on how our salesforce is in terms of its size or structure, because it's such a competitive asset to us and something that we have invested so much money into over such a period of time.

  • But let me give you a high level.

  • Our salespeople -- they have a tremendous opportunity today.

  • The sell a product that's the leader in Software as a Service, as you know, which includes our CRM offerings and partner relationship management offerings and many other aspects of our technology that we automate through Software as a Service, call center and so forth and so on.

  • They also offer Platform as a Service, the ability for our customers to build their own on-demand applications, to use these capabilities.

  • But the power for our salespeople is that it's basically one service.

  • How they position it and communicate it to the customer ultimately is up to them, so that the customer understands our leadership position, but also our ability to deliver to the customer exactly their user interface and their capability.

  • We talk about this all the time, but it's very subtle.

  • Of course, we run the customer relationship management for a big company like Cisco, the largest enterprise supplier in the world, a company larger than IBM or HP in terms of market capitalization and capabilities.

  • We run their CRM.

  • We run one of the largest banks in the world, called Merrill Lynch, I'm sure you know.

  • We also have other very large customers in other industries, like insurance with Aon.

  • But the thing that's interesting about CRM is that it's not like e-mail.

  • So e-mail for Merrill Lynch and e-mail for Cisco and e-mail for Aon is exactly the same.

  • But CRM, managing the customer information for Merrill Lynch and for Cisco and for Aon is totally different -- the way they look at it, the way they manage their customer relationships, the way they manage their pipelines, their service against their claims.

  • That's the power of our product; it's the Platform as a Service built into it.

  • So our salespeople have the ability to take that out of their bag and execute it.

  • We have to spend a lot of time educating them and training, because we're the only ones in the world who have anything that's like this integrated SaaS and what we call PaaS, or Platform as a Service, offering.

  • That has given us this tremendous advantage.

  • So they have the tools that they need to be able to close the deals, and you can see us executing on multiple products across the industry successfully.

  • Jason Maynard - Analyst

  • Well, let me maybe cut this from a different perspective, then.

  • How much leverage are you actually realizing from the traditional SI channel?

  • Specifically, are you seeing partners that built [consulting] businesses around on-premise software actually starting to grok selling on-demand, or is this still cut and paste from their old Siebel or SAP on-premise days?

  • Marc Benioff - Chairman, CEO

  • Well, we do have relationships with the top systems integrators in the world, and I'm not going to go through it in detail.

  • But many of the deals that we're talking about today in the call were actually closed with large systems integrators in hand.

  • In fact, I can't think of a single call that I referenced that did not have a systems integrator of consequence associated with it.

  • We have great relationships with them.

  • As you know, we have really focused in that area.

  • Also, in the small and medium customers, which are very important to us, we see a whole new generation of systems integrators emerge.

  • I'm sure you've seen the cover of VAR Business this month that has Bluewolf on the cover, who has become one of the most interesting new systems integrators in the United States, and they have built their business on Salesforce, as you will read in that story.

  • We see that with a lot of new systems integrators emerging.

  • So we have the large, established ones, but we have a lot of the mid-tier and a lot of the small and medium-sized businesses emerging also.

  • Partner leverage is an important part of our business at Salesforce.

  • It's true with systems integrators.

  • It's true with application developers.

  • It's even true with organizations that help us to sell our product.

  • So we feel very, very good about where we are, from the partner capabilities.

  • Operator

  • Brent Thill, Citigroup.

  • Brent Thill - Analyst

  • Marc, with some of the issues playing in the financial services markets, there is some fear that the weakness is going to branch into tech purchases.

  • Has there been any deterioration in the financial services vertical that you have witnessed so far?

  • Marc Benioff - Chairman, CEO

  • No.

  • Financial services, as you know, is one of our strongest verticals.

  • We continue to add new customers in that vertical.

  • We see existing customers growing in that vertical.

  • We successfully predicted some of the volatility that you see today in financial services when we saw, approximately a year ago, some of our customers -- these are relatively small customers -- start to have issues with their sales organizations in some of these markets, because we have such a broad range.

  • But the reality is that we don't see it impacting us or any even of our subscriber counts in any kind of meaningful way, and I think that our subscriber growth, really, over the last quarter is evidence of that.

  • Brent Thill - Analyst

  • Regarding the organizational changes that Steve spoke about, would you consider those just minor tweaks?

  • Or are they changes that will take maybe a couple quarters to play out, to get back those sales specialists that were redeployed, to get them back up on full --?

  • Marc Benioff - Chairman, CEO

  • Well, I don't see -- personally, and this is my view and maybe everyone doesn't see it exactly as I do, from the outside.

  • But from the inside, we're constantly making changes to this company.

  • We're growing this company at a very high rate, and I am constantly tuning and tweaking all levels of the management structure.

  • Today, we are working on an organization to go from $1 billion and above.

  • We can already project out, as we said on our last call, where we're going to see a $1 billion [run rate] coming up.

  • So if we look from $1 billion and go up from there, we're looking at how do we structure the Company from a management level?

  • That is, at the [PCOM] level -- which is the level where I am, and our top officers -- what are we going to do that the level below that?

  • How are we going to do it?

  • And on and on and on, all the way to our individual contributor level.

  • We're constantly tuning and tweaking that.

  • Now, I think that what happens is, sometimes people will take one particular action that we take out of hundreds and then amplify that and say, well, this is significant because of such and such.

  • The reality is, in the scheme of things, no one action that we take is material to the business.

  • It's all of the little actions that we do constantly, month after month, really, that make the difference to be able to deliver the performance.

  • When you have a fast-growing organization, you cannot keep your organizational structure static.

  • You've got to keep it dynamic and evolving.

  • But just because we make changes doesn't mean that it's going to impact our results of a specific quarter or even in a specific year.

  • We're constantly looking out for the long term, and those changes are critical for us to constantly align and realign our business to our business plan, which in itself is emerging.

  • So we are about to start our worldwide management off-site, which we do twice a year with our top 200 officers.

  • Every year, halfway through the year, we rebuild the business plan, or what we call our V2MOM, our vision and values, methods, obstacles and measures, which is the core way we run our business.

  • In January we rewrite it, and in June we rewrite it.

  • Then we roll it out in August.

  • When we roll that out -- and we roll it out in February, at these two key off-sites that we have, and then we realign everyone to that.

  • We have been making changes in reflection to this new V2MOM, and we will make more changes.

  • But it's because we have to constantly adapt.

  • It's organizations that don't adapt that ultimately have issues.

  • It's not organizations that are adapting that have issues.

  • It's the organizations that don't adapt.

  • So I look to organizations like us that can adapt quickly and move.

  • Look at the numbers; they speak for themselves.

  • Operator

  • Charlie DiBona, Sanford Bernstein.

  • Charlie DiBona - Analyst

  • Historically, in the on-premise world, your competitors have had difficulty in the combined sales effort for technology and the applications.

  • The buyers are different.

  • For platform buyers, it tends to be much more IT-focused, developer-focused, whereas applications tend to have much more of an end-user, sort of line-of-business selling process.

  • It sounded like -- and maybe I misunderstood what you were saying -- is that you were basically going to have your salespeople carrying one bag with both products.

  • Maybe you can elaborate a little bit here about your intentions of maybe ultimately dividing the salesforce.

  • Or maybe give us some insight into what about your product, about Software as a Service, sort of changes that paradigm that has historically made it so hard to sell both products from one sales effort.

  • Marc Benioff - Chairman, CEO

  • I think that's what has made it so hard in the past, is because it's two different pieces of code.

  • I think what is different with us is it's the same architecture.

  • What makes our SaaS great is our past -- or I should not use the acronyms.

  • What makes the Software as a Service great is the Platform as a Service offering.

  • What makes the Platform as a Service offering great is the Software as a Service capabilities built into it and the dynamic nature of that.

  • There has never been a time in our history that we've spoken to more CIOs than right now.

  • We are in conversations with the top CIOs in the world.

  • It's amazing to me.

  • We're able to have more strategic discussions with CIOs of the world's largest companies, because of our Platform as a Service strategy and how it's integrated with our Software as a Service offering.

  • The sales rep has to be able to sell the Platform as a Service offering as well as our core applications offering.

  • The reason why is the platform is fundamentally the differentiator.

  • It's the power, and it's what we have that is so amazing.

  • Our customers have made hundreds of thousands of changes to our product using our platform.

  • They change tabs and fields.

  • They extend it.

  • They make it exactly for their business.

  • They bring in their business logic, their workflow.

  • They make it look like their business.

  • It's the platform that does that.

  • Now, our customers have learned how to make their own applications.

  • Wow, that is really amazing.

  • It has been a while, if you think about it, since we've seen really great tools for our customers.

  • They tell us this, too, the days of Visual Basic or the days of Access or even the days of the application servers, when they first came out, like BA -- you know, that was more than a decade ago.

  • We haven't seen a lot of new tools emerge.

  • We're showing customers how to build modern applications with modern tools.

  • Our salespeople have to understand how to do that, because it's a core aspect of our application capability.

  • We're very successful in doing that, as you have seen with evidence of our platform uptake as well as our ability to deliver successful new applications offerings.

  • So we feel very good about the capability of our salesforce, as I said.

  • I have been in front of a lot of these CIOs myself, all over the world, the very top CIOs, the research board CIOs and so forth.

  • We are very fortunate to be in the zone, in terms of able to talk to them about what they are looking for today.

  • Operator

  • Michael Wong, ThinkEquity.

  • Michael Wong - Analyst

  • First, can you actually walk through the rest of the year and talk about the key catalysts for spending on Salesforce solutions?

  • Maybe you could comment on whether Dreamforce could have a material impact on bookings in either Q3 and Q4?

  • Then, just from a Dreamforce perspective, is there anything that you are doing differently this year at Dreamforce versus what you were doing last year?

  • How could that impact some of your strategies for the event?

  • Marc Benioff - Chairman, CEO

  • As you know, Dreamforce is a time when we bring our customers together.

  • I really encourage you to be there; it's a very exciting conference.

  • It will be at Moscone Center.

  • We've got some great musical entertainment lined up.

  • We've got some great speakers lined up.

  • But the number-one thing that we have lined up is our customers.

  • We've got 7,000 of them coming in.

  • We give you free, untethered access to them.

  • So you can ask them what they think about our product, our competitiveness.

  • We don't keep you on a leash and walk you around the conference like other vendors do.

  • We let you go freely and learn and be as much about it as you want.

  • You will hear other CEOs that we're tightly aligned with speak there as well, like John Chambers and Bruce Chizen of Adobe and many others.

  • We're going to be also highlighting a lot of new technology companies like Dave Duffield at Workday and even Josh James at Omniture will be there.

  • We really see this conference becoming the heart of the on-demand world, and that's how we see our own company.

  • You know, I've been working on some new products over the last year that I'm very excited about, and we'll be rolling those out at Dreamforce.

  • I'm really looking forward to getting the customer reaction to those.

  • So I hope you'll attend.

  • Thank you very much.

  • Operator

  • Heather Bellini, UBS.

  • Heather Bellini - Analyst

  • I was just wondering if you could share with us a little bit about the partner traction you've seen with the Platform Edition.

  • I know you announced a large deal this quarter, but where are we, in terms of the VAR community or the SI community picking this up and promoting this?

  • Marc Benioff - Chairman, CEO

  • Well, we're very excited about the progress that we've made with AppExchange.

  • We have a goal of 1,000 applications on the AppExchange, and we're heading closer to that goal every day.

  • We feel very good about the capabilities and the ISV success on the AppExchange.

  • We have given them some critical new technology recently, which is our Apex code.

  • We see the applications quality increasing exponentially because of that.

  • But I guess what excites me is the lead flow to these customers, the amount of leads that we're able to deliver to AppExchange partners.

  • Today, we see more diversity on the AppExchange and on a global basis than ever before.

  • We see customers downloading and using those applications more than ever before.

  • I think I mentioned on the call about 348 ISVs already have about 642 apps on there.

  • But I think when you come to Dreamforce and you talk to customers, you will find that there probably won't be a customer around who hasn't downloaded or isn't using an AppExchange application already.

  • That's what's exciting me, and that's also what's drawing the ISVs in.

  • You'll also see, as evidence of these comments, a tradeshow at Dreamforce larger than any that we have ever done before, more ISVs coming to us saying that they want to standardize on our platform and integrate with it than at any time in our history.

  • We only see much more of this, and we see this as an important part of our business going forward.

  • Operator

  • Brendan Barnicle, Pacific Crest Securities.

  • Brendan Barnicle - Analyst

  • I just had two quick modeling questions for Steve.

  • If we're just using the base assumption of subscription revenue being the number of subs by ASPs, is it right to assume that based on this product mix, we would see a little bit of a decline in the ASP, based around the guidance?

  • Steve Cakebread - CFO

  • The ASPs have been running pretty much in our range.

  • You just have to keep in mind there's a lot of timing, and we are going to have some mix shifts with the platform and CRM.

  • But we have been very good in terms of margins on all of those products are high.

  • So think about timing a little bit when you're doing that modeling.

  • Brendan Barnicle - Analyst

  • But just purely on mix shift, we might see some differences in the overall ASP?

  • Steve Cakebread - CFO

  • Yes, but you have to keep in mind here, the fun thing about having two different avenues to get to customers -- so a platform may be an entree to a customer, but it's going to bring in potentially more CRM business.

  • The CRM business is an entree to a customer that will give platform.

  • I think you're still going to see the ASPs hang in there pretty much where they have been all along, because of that.

  • Operator

  • We have reached the allotted time for questions today.

  • I'll now turn the call back over to David Havlek.

  • David Havlek - VP, IR

  • Quickly here, I'd like first to apologize to some of you.

  • We have lots of questions in the queue, and unfortunately we didn't have time to get to everybody.

  • For those of you that have follow-up questions, I encourage you to contact me directly here at Investor Relations.

  • Also, just a couple of reminders about some exciting upcoming events for salesforce.com.

  • On September 5th, Marc will be appearing at the Citigroup technology conference.

  • He'll be giving an afternoon keynote.

  • So we're very much looking forward to that, and we encourage you all to come out and attend that.

  • On the 17th of September, as you've heard lots about today, our Dreamforce conference will be kicking off.

  • I want to personally invite everybody, get my registration numbers very, very high, to make everybody happy there.

  • It should be a great day for analysts on the 17th -- keynotes from Marc, John Chambers.

  • Steve will also, in the afternoon, as part of the analyst track, be giving a quick financial overview.

  • Then we'll have lots of time in the afternoon to take all of your questions with the entire executive team.

  • I encourage you to stay on the 18th as well, and toward the Expo Hall, there will be more than 250 partners out there showing off their wares and what they have built on AppExchange.

  • Also, if you would like to sit in and audit some of the customer events, I encourage you to do that as well.

  • So that concludes our call today.

  • Thank you very much for joining us, and we'll look forward to seeing you all at Dreamforce.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.