賽富時 (CRM) 2008 Q3 法說會逐字稿

Good afternoon.

My name is Cara and I will be your conference operated today.

At this time, I would like to welcome everyone to the Salesforce.com third quarter '08 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.

Thanks, Cara, and welcome everyone to Salesforce.com's third quarter fiscal year 2008 financial results conference call.

Joining me today as always to discuss our outstanding performance are Chairman and Chief Executive Officer Marc Benioff and Chief Financial Officer Steve Cakebread.

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

A full disclosure of our third quarter financial performance can be found in our Q3 results press release issued earlier today, and also on our Form 8-K issued with the SEC.

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

Today's call is being web cast and a replay will be available shortly following the conclusion of the call through November 23.

To access the press release, the financial detail or the Web cast replay, please consult our investor relations web site at salesforce.com/investor.

Finally, let me remind you that the primary purpose of today's call is to provide you with information regarding our third quarter fiscal year 2008 performance.

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

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.

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

These reports, again, are available on our investor relations web site.

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

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

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

Thanks, David.

In a fiscal year full of exciting firsts, our third quarter was a high point.

I'm delighted to report record revenue, record operating cash flow and a sharp increase in GAAP profits.

Even more remarkable is that in the third quarter, we also delivered an electrifying Dreamforce that inspired a record 7300 attendees.

Salesforce.com has become the world's first multi-application, multi-category software service company with a vision that has never been clearer.

Before I begin with the quarter results, let me first make an important announcement about a customer we have signed last week.

I'm absolutely thrilled today to announce that Citigroup has chosen Salesforce.com to deliver their financial adviser desktop to 30,000 financial advisers around the globe.

We believe this is the largest and most important CRM agreement of 2007, and our largest deal ever.

After a lengthy evaluation process to assess functionality, availability, security and integration capabilities, Citibank has selected Salesforce.com over every other CRM solution, including Oracle, Microsoft and SAP.

This is an incredible endorsement for the competitiveness of our Company, service and for customer success in the financial services marketplace.

We look forward to building our relationship with Citigroup in the years to come.

Citigroup will become our fifth customer with approximately 25,000 or more subscribers joining a list that already includes Merrill Lynch, Japan Post, Dell and Cisco.

As with other large agreements that we have signed, we will recognize the subscribers in revenue after delivering key milestones which we anticipate occurring this quarter.

The Citigroup deal follows a third quarter full of noteworthy wins and developments.

So let's get to the details.

Revenue for the quarter was approximately $193 million, an increase of 48% from the year-ago quarter and up 9% from Q2.

That is more revenue in nine months this year than we did in our entire fiscal year 2007.

At this rate, we expect to be the first on-demand company to push through the $800 million run rate in the fourth quarter.

Looking ahead to fiscal '09, we're on track to become the first-ever on-demand Company to exceed $1 billion in annual revenue.

Our on-demand industry leadership has never been more evident.

Our outstanding revenue performance contributed to third quarter fully diluted GAAP EPS of $0.05 per share.

This result included a $0.01 investment gain that Steve will discuss in a moment.

Net profit rose by $6.2 million from last year and 2.87 from Q2 to finish at $6.5 million.

This was an amazing performance when you consider it included roughly $14 million in stock-based compensation.

Even more remarkable was our record cash generation.

Q3 operating cash flow was $52 million, an increase of 70% from last year and up 50% from Q2.

Our year-to-date operating cash flow of $123 million is more than 11 times our reported GAAP net profit for the same period.

Our cash generation really shows the leverage in our model.

As a result, we now have more than $571 million of cash and equivalents on the balance sheet, an increase of $200 million from the year-ago quarter.

This tremendous financial success was fueled by another tremendous quarter of customer success.

And increasingly, customer success is being driven by the growing popularity of our Force.com platform as a service which is also behind our largest deployment in the world, the Japan Post.

During the third quarter, Japan Post continued to expand their massive custom application deployment built on our Force.com platform.

Today, less than six months since beginning their rollout, their deployment stands at more than 60,000 users.

This is a remarkable achievement for Japan Post and an exciting new subscriber milestone for the on-demand industry.

As an early adopter of our Force.com platform as a service, Japan Post is proving that robust enterprise class applications can be built and deployed globally at a scale more rapidly than ever before on our platform.

Our multi-application, multi-category strategy is working.

Nowhere was this more apparent that in our ever-expanding relationship with Dell.

Dell also expanded its deployment during the quarter and now has become our second-largest employment with more than 40,000 subscribers.

Starting with a simple CRM deployment, Dell is now utilizing Salesforce.com to help manage their partner relationships through our Partner edition.

Dell's ideastorm.com customer web site is also built entirely on our news Salesforce ideas service.

And less than a year since being deploy, the ideastorm.com Web site has already recorded more than 7500 ideas and more than 500,000 promotions from the Dell customer community.

And Dell's Win XPC initiative was the direct result of customer feedback on this site.

I courage you to visit ideastorm.com to see how Dell is collaborating with their customers.

We also added subscribers to existing deployments at a number of very large companies, including [Aon], Ashland, [Ruckatin], IMS Health, Delta Air Lines, QUALCOMM and McKesson.

These growth stories are important because they prove that our multi-application, multi-category strategy is working throughout our customer base.

In addition to all of the great expansion business from our installed base, we also added a large number of new customers to our ranks.

AIG has selected Salesforce Unlimited Edition for roughly 2000 users to help them manage their broker client relationships.

Citizens Telecom also became a new customer by signing for roughly 1200 subscribers of Salesforce Call Center during the quarter to become our largest call center deployment ever.

They join a growing list of more than 1100 companies using Salesforce.com technology to manage their service call centers, including P&G, DuPont, Barclays, S&P, GMAC, Plantronics and Sumitomo.

In all, we added roughly 2800 net new customers to exit the third quarter with approximately 38,100 net paying customers.

This represents an increase of more than 11,000 customers over the past 12 months, remarkable when you consider it took us more than six years to win our first 11,000 customers.

I am also pleased to say that the investments we have been making in our international business are really paying off.

In Q3 nowhere was this more apparent than in Asia.

In addition to Japan Post, we won sizable opportunities at [Mizuho], [Sampo], Babcock and Brown, MacQuarrie Bank Ltd., ABN Amro and Johnson & Johnson.

Our growth in Europe also accelerated in the third quarter with wins at Siemens, BMW-Rolls Royce, Budget Group, Lloyd's Register, Software AG and AirComm.

We see an increased opportunity internationally for our services and I'm very excited today to announce that we plan to build our first international data center in Asia in the first half of next year.

Together with our two U.S.

production data centers, this new international data center will be a key component in our global delivery infrastructure and we hope an engine to further accelerate our international growth.

This multi data center architecture has become a tremendous differentiation to us in competitive situations.

While many of our largest competitors still only have one data center, we will soon have three.

The global shift to software service and platform as a service needs a truly global infrastructure.

The energy behind that global shift was in the air this fall at Dreamforce in San Francisco where a record 7300 attendees representing 2000 companies and 179 partners saw amazing new technologies and heard world-class keynotes from John Chambers and George Lucas.

Of course the big news at Dreamforce was the introduction of our Force.com platform as a service and the unveiling of our Visualforce user interface as a service.

With Force.com, developers can now design any application for any user and then deploy that application on any device anywhere in the world.

Force.com includes our global infrastructure as a service, database as a service, logic as a service through our multi-tenant apex code allowing our customers to run their code on our servers.

Workflow as a service, integration as a service and now with Visualforce a framework for building any user interface as a service for any device.

And best of all, everything runs natively in our trusted data center architecture so developers can focus on innovation, not infrastructure.

Already developers like European ERP leader Coda and Latin American leader DataSul have selected the Force.com platform to build and run their next-generation applications, again all fully native on our platform.

This is an exciting development for Force.com and a game changer for the future of on-demand.

And we are already seeing tremendous momentum for these platform as a service technologies from the developer community.

We have shown Visualforce delivering on-demand applications natively to Explorer, Firefox and Safari browsers as well as applications to a diverse set of devices, including the iPhone, BlackBerry and [Okio], among others.

And last month in Japan, we demonstrated native Visualforce applications running on a wide variety of Japanese mobile phones from diverse carriers.

It's no wonder why customers have already built over the 50,000 custom applications with Force.com and why it has become our fastest-growing service.

We also announced two new application services to expand our core software service offering from four to six.

Our award-winning SFA service and support marketing and PRM services will soon be joined by Salesforce ideas and Salesforce contact.

With Salesforce ideas, companies will be able to harness the wisdom of their customers and communities by giving them a place to submit, discuss and promote ideas.

It's the same technology that powers Salesforce.com's own live community idea exchange and Dell's ideastorm.com.

Salesforce content will bring the power of on-demand to the challenges of managing unstructured data within the enterprise.

This new service is challenging traditional document management applications from the rapidly fading client/server era.

Utilizing Web 2.0 technology, such as tagging, subscriptions and recommendations, Salesforce content will enable users to more effectively manage all of the documents and critical business information necessary for their success.

These new application offerings together with Visualforce are expected to be available before the end of fiscal Q4.

They reinforce our position as the world's first multi-application, multi-category on-demand company.

Dreamforce '07 also represented the second anniversary of the unveiling of AppExchange.

In just two short years, AppExchange has gone from concept to vibrant marketplace, connecting on-demand developers with our more than 38,000 customers.

Today, there are roughly 750 applications on the AppExchange.

To date, more than 280,000 user test drives have resulted in the installation of more than 38,000 applications at more than 13,000 customers.

This is an amazing success and we're just getting started.

Our enhanced platform development capabilities together with our growing customer community make the Force.com platform and AppExchange marketplace the most attractive way for ISVs to tap into the on-demand revelation.

Before I close, let me may make a couple of comments about our outstanding delivery in Q3.

Put simply, our delivery quality has never been better.

During the third quarter, our system availability exceeded 99.98%, a remarkable achievement when you consider that our transaction volume now frequently exceeds 125 million transactions per day.

In total, we delivered more than 8 billion transactions in the third quarter, more than twice what we delivered a year ago.

There is no greater measure of success than customers actively using our system.

These robust user statistics are remarkable when you consider that the packaged software sold by our client/server competitors is known for the shelf wear that it represents.

To close, Q3 was a tremendous quarter.

We have grown from an SFA provider to a CRM provider and now onto a multi-application, multi-category on-demand leader.

We're looking to a forward to a strong Q4 and to achieving our goal of becoming the first ever billion-dollar on-demand company next year.

And now with that, let me turn things over to Steve Cakebread.

Thanks, Marc.

Q3 was simply outstanding.

Revenue for the third quarter was $192.8 million, up 48% year-over-year and 9% sequentially.

While currency did provide an incremental $1 million over our forecast, it was primarily strong business demand that pushed overall revenue to nearly $4 million above the high end of our outlook.

For the full year, revenue rose 51% from the prior year to $531.8 million.

Our subscription and support business continues to be very strong, growing 49% from the year-ago quarter to $176.4 million.

As Marc mentioned, we are executing on our strategy of growing our installed base accounts along with a strong pipeline that once again brought us an excellent mix of new business.

Professional services revenue was $16.4 million for the third quarter, up 41% versus fiscal year '07 but down slightly 1% sequentially.

This sequential decline was not unexpected given the summer seasonality in the business and our strategy of increasing our business through a growing ecosystem and system integration partners.

Geographically revenue in the Americas was $141.7 million, up 40% year-over-year, up 6% sequentially.

In Europe, revenue grew 71% year-over-year and 16% sequentially to $33.9 million.

Revenue of $17.2 million in Asia rose 92% from the year-ago quarter and 22% from Q2.

The accelerated growth internationally is starting to show up in our geographic business mix.

For Q3, 73% of our revenue came from the Americas while 27% came from Europe and Asia-Pacific.

For the same quarter a year ago, America-based business accounted for 78% of our revenues while Europe and Asia accounted for just 22%.

The international opportunity remains largely untapped so we will continue to invest in sales capacity and the data center that Marc mentioned earlier in his comment over the coming year.

Turning next to our margin performance, gross margin for the third quarter finished at 77%, up slightly from Q2 and more than a 4 point from last year.

This improvement continues to be driven by stronger gross margins in our subscription and support business which rose 40 basis points from last year to finish the quarter at just more than 86%.

Despite a lot of rhetoric from our competition, there has been no notable change in the pricing environment and our delivery continues to get more efficient as our business scales.

Gross margins in professional services continued to be negative.

As our SI ecosystem matures, we can modify the capacity of our own professional services business.

And while that will slow revenue growth a bit in professional services, it should result in improved margins over time.

As to operating expenses, as a percentage of revenue, operating expenses finished the quarter at 74%, down 1 point from Q2 and down a full 2 points from the year-ago quarter.

The biggest driver of the decline is sales and marketing which fell to 50% of revenue from 51% in Q2 and in the year-ago quarter.

Even as we invest in new geographies where we get very little immediate return, we're still driving better and better sales efficiencies into our model as our business scales.

We're also being more efficient in our G&A spend, which declined 1 point from the year-ago quarter to 15% of revenue.

While we expect to continue investing in infrastructure necessary to support our growth, I expect G&A continue its slow march lower in the years ahead.

And finally, our R&D spend remained flat for the past year at 9%, well within our target range of 8 to 10.

Importantly, our excellent expense management was not the result of slower hiring, but rather the result of more efficient use of our resources.

In fact, after a slow hiring quarter in Q2, we resumed our more normal pace of hiring in Q3.

During the quarter, we added 159 full-time equivalent heads to bring our total headcount to 2461 full-time employees.

These hires came in all areas -- sales, marketing and G&A.

The net effect of our excellent delivery in expense management was a Q3 GAAP operating margin of 3.2%.

This was up more than 3-4 points from last year and up 130 basis points from Q2.

We did an excellent job this quarter of managing our revenue overperformance to the bottom line, resulting the inherent leverage in our business -- sorry -- illustrating the inherent leverage in our business.

Remember, we achieved these results while absorbing $14 million of 123-R stock-based compensation expense and roughly $1.5 million in amortization of purchased intangibles.

Excluding these expenses, non-GAAP operating margin increased to 11%.

In that context, I was very pleased with our results.

Our GAAP tax rate fell a bit this quarter to 46%.

Essentially we got a bit more profitable a bit more quickly than we expected in some of our foreign tax jurisdictions.

Predicting the time of these events has been challenging, so predicting our tax rate has and will continue to be a bit difficult.

Net profit rose to $6.5 million, up roughly $2.8 million from Q2 and up approximately $6.2 million from last year.

Fully-diluted GAAP EPS finished the quarter at $0.05.

This result was benefited by roughly a $0.01 gain associated with an investment we made in [Okiri].

Their acquisition by Fujitsu Consulting during the quarter resulted in the recognition of this gain.

Strong earnings translated into a record cash generation in Q3.

Operating cash of $52 million for the quarter was the highest in our history, up 70% from your a year ago and up 50% sequentially.

Our operating cash margin for Q3 was a remarkable 26% and is now 23% year to date.

Capital spending declined from Q2 to finish at roughly $9 million, so free cash was also very strong this quarter at $42 million, or roughly 22% of revenue.

For the full year, free cash flow margin is now more than 16%, a full 14 points higher than our operating margin.

This outstanding and growing cash generation performance underscores the inherent leverage potential in our business.

The balance sheet continued to strengthen in Q3.

Cash and cash equivalents finished the quarter at $571 million, an increase of $74 million from Q2 and an increase of $200 million from a year-ago quarter.

There were a few other minor changes to assets on the balance sheet.

Prepaid expenses fell roughly $2 million quarter to quarter, but this is seasonally typically driven by our Dreamforce event in Q3.

Goodwill increased by nearly $2 million from Q2 related entirely to the increased ownership in our Japanese joint venture we announced late last year.

On the liabilities side of the balance sheet, another quarter of strong bookings pushed deferred revenue to $341 million, an increase of 55% year-over-year and 6% sequentially.

Importantly, our off-balance sheet deferred revenue grew at more than twice that rate sequentially, and as a result, our off-balance sheet deferred revenue is now materially higher than what you see on the balance sheet.

Finally, sequential increases in accounts payable and taxes payable were simply a function of the timing of these expenses relative to our normal payment cycles.

So let me close with our outlook.

For our full fiscal 2008, our strong business momentum is expected to push revenue to a range of $737 million to $739 million.

This translates into a expected Q4 revenue of approximately $206 million to $208 million in revenues.

GAAP EPS for the full fiscal year '08 is now expected to be approximately $0.12 to $0.13 per share.

This estimate includes an expected 56 to $58 million of stock-based compensation, a projected by $5.5 million of amortization of purchased intangibles.

It further assumes a GAAP tax rate of 50% and an average fully diluted share count for the year of 123 million shares.

These results imply an expected Q4 GAAP EPS of approximately $0.03 to $0.04.

This fourth quarter estimate includes an estimated 16 to $18 million of stock-based compensation and $1.5 million of purchased intangibles.

It further assumes a tax rate of 46% for the quarter and an average fully diluted share count for the quarter of 125 million shares.

Finally, as we look ahead to our fiscal 2009, we remain very bullish about the momentum of our industry generally and demand for our services specifically.

We now believe we are positioned to achieve our goal of becoming the first ever on-demand company with $1 billion in annual revenue.

We are projecting revenues for fiscal '09 of approximately $1 billion to $1.020 billion.

Importantly for fiscal year '09, our number one priority will be continuing to grow.

That means continuing to invest in global sales capacity and infrastructure, particularly international where the opportunity remains mostly untapped.

Our costs will be impacted by the buildout of our first international data center described by Marc, and in that context, as our business scales, I expect continued modest growth in operating margins for next year.

We're still finalizing budgets for next year, so we will plan to provide you more specific fiscal year '09 earnings estimates when we announce our fourth-quarter results in February.

To close, I would like to thank you all for joining us today.

And with that, I will turn things back over to the operator so we can take your questions.

Operator?

(OPERATOR INSTRUCTIONS)

Just quickly here while we're waiting for the calls to queue, I would like to remind everybody of a couple of upcoming events at which Salesforce.com executives will be presenting.

First on Thursday November 29, George Hu, our executive vice president of products and marketing, will be presenting at the Credit Suisse Technology conference in Phoenix, Arizona.

On Friday December 7, cofounder and EVP of technology Parker Harris will be presenting at the Lehman conference in San Francisco.

And we encourage all of you to go down and attend these events.

There's no better way to learn about Salesforce than to attend one of these events.

Finally, before we take our first call, as a courtesy to the many analysts who want to ask questions, I ask that you please limit your questions today to a single question.

If you would like ask a second question, I respectfully ask that you get back in the queue.

With that, Cara, let's go ahead and take our first question.

Laura Lederman, William Blair.

Great quarter you guys.

Can you talk a little bit about what you're seeing in the economy?

Obviously the volatility of the stock market shows that investors are concerned about a deterioration in the economy, and particularly in the financial services.

The international numbers were great, the U.S.

seemed to be more in line.

So can you talk about what you're seeing in the U.S.?

Well, we're not economists, Laura, as you know.

We continue -- we don't see changes fundamentally in our customers' businesses.

Don't forget, we're primarily a B to B supplier, but we don't see any material changes.

We continue to see our largest customers add users.

As you saw with Japan Post they expanded from 45,000 to 60,000 users.

We have a lot of customers expanding with us.

We're signing new transactions of consequence as I mentioned.

We have signed Citigroup, which is our largest deal ever for 30,000 users.

That is not the only transaction we signed in the financial services industry.

We're seeing a lot of purchasing there obviously as well.

So I think our numbers really speak for themselves across the board, that our business looks really good.

Let me ask another quick if I could for Steve.

When you talk about modest margin improvement, are you talking 200 basis points, 100 basis points?

Because I think the street is higher that that.

You know what, Laura, we're like I said working on our (inaudible) estimates and we'll get back to you in February about that.

There's a lot of opportunity here and we need to make sure we take advantage of it.

Heather Bellini, UBS.

I was wondering if you could share with us a little bit about the adoption of the platform technology in the ISV community, if there's any success stories that you could share with us and how far away you think we are from seeing significant adoption by that group?

Thank you.

We have had increasing and exciting interest by ISVs in our platform.

You saw at our conference really the emergence of a whole new category of application on our platform, which is the native application.

Up until recently and really up to the introduction of our Apex logic as a service capability, most of the applications on our platform are what we would call mash-ups, which was integrating our technology with other types of services like Google Maps or Skype or something like that.

But now we're seeing a whole new generation of application built by the ISV, which is the native app, and that is increasing.

We have more ISVs working with us today than ever before and we see these native apps emerging.

We also believe that we're going to see some very significant ERP-style applications emerge natively on our platform over the next year.

The combination of Visualforce with the capabilities of Apex really have enabled this at a level that we have not seen previously.

In addition to that of course, the platform is also rapidly accelerating inside our customer base.

We are, as I mentioned, we have now more than 50,000 custom applications written by our customers.

And as we close more and more deals and beat more of our competitors, one of the main reasons is the capabilities of our Force.com platform and the ability for us to not only customize our CRM systems to meet exact customer needs, but also to be able to deliver any application.

Jason Maynard, Credit Suisse.

I just had a couple or a question about expenses and margins.

On professional services, that business is obviously still running in the red and I'm just curious how you see your ProServ strategy playing out to maybe getting to breakeven and perhaps facilitating adoption by partners and even with customers.

And also just the investment in the Asian data center, I'm curious as to what you're seeing in the European market and why not a data center in Europe, especially considering some of the privacy laws that perhaps could inhibit large financial services deals to come your way.

Let me take the data center question and then I will pass the other question to Steve.

We plan to add a number of new data centers over the coming years and our ability to add this Asian data center as our third strategic data center is really a result of the tremendous growth that we see in Asia.

Of course we have one of our largest subscriber customers in Asia, Japan Post, but we are seeing a lot of exciting opportunities in Asia.

And at the end of the day, our decision of where the data center should go is really not our decision at all, it's really what our customers are telling us.

So for our large global customers as well as for our Asian customers, I think that they would love to see a data center in Asia and we believe that will accelerate our business there.

And in terms of your Europe, I am sure that at some point in the future we will see a data center emerge there, but we don't have the opportunity to tell you exactly when that is.

With regards to the margins in the professional services area, as you know, we've been reaching out and working well with a large number of different system integrators.

It has always been part of our strategy.

Our business evolves slowly though, but we are going to take advantage of the growing system administrator -- or system integrator partners that we have, and you will see those margins.

As we have said all along, negative is not where we want to run that business and over time we'll grow that.

I don't have specifics for the future for you Jason because we're working on our plans for next year, but I think you will see the business continue to evolve both to serve our customer needs as well as improve our margins.

Brent Thill, Citi.

Marc, you alluded to the large financial services win, I'm just curious.

I know you mentioned it will be recognized over time, but can you just give a sense of how that timing hits?

And also if you could just comment on some of the larger transactions who you are seeing the most when you're going up against some of these larger deals.

Thanks.

Brent, are you referring to the Citicorp deal and when that will be recognized?

Correct.

The Citicorp deal, like a lot of our large transactions, we withhold the actual revenue and subscriber recognition until we meet certain milestones and we will recognize the subscribers and the revenue after delivering those milestones and we anticipate that occurring this quarter.

And then as with all of our transactions, Brent, as you're familiar with our model, the revenue is ratable over time.

So over the life of -- the agreement of course is a multi-year agreement like a lot of our large agreements are, and the revenue is ratable over the life of that agreement and is incremental.

What was the second part of your question?

Marc, it was about financial services and the impact that we may or may not see in our business.

In terms of financial services industry, you can see with this transaction, even with Japan Post as well as so many other transactions that we are announcing here on the call, including Mizuho and Sampo and AIG and others, we have a very healthy business in that sector and we continue to see aggressive spending as evidenced by the transactions that we're announcing here today.

But of course, all of our segments continue to be very strong.

Kash Rangan, Merrill Lynch.

I'm just curious to see if there's any change in your subscriber base as to the mix of PRM, unlimited, enterprise, professional, if you want to look at it from a sequential basis or a year-over-year basis.

Trying to get a feel for that.

I know you don't share the specifics of it, but I'm just looking for the incremental changes in the mix of your subscribers.

Also, Steve, a follow-up for you.

I know you have been consistently saying that the off-balance sheet backlog is 2X the on-balance sheet deferred revenues.

I was not sure the way you characterized it if that (inaudible) to be the case.

And also, if you have any statistics on retention or attrition, any trend you can share with us on a sequential basis year-to-date, that would be useful.

Thanks a lot.

Marc, I will start with off-balance sheet.

We've never characterized off-balance sheet as 2X, Kash.

Just to be clear, we have always said it has been roughly the same as what you see on the on-balance sheet.

This quarter, we do have more off-balance sheet than you see on the balance sheet, but I'm not going to characterize it in terms of magnitude.

So Marc, with that question one.

(MULTIPLE SPEAKERS) attrition just around that.

We have been fairly consistent with prior quarters.

So there's now news there.

In terms of the subscriber mix, Kash, as you know, our subscribers now fall into a number of different buckets, including Force.com subscribers like you have with the Japan Post, traditional sales type subscribers like -- we have announced like for example the transaction with Citigroup.

Marketing transaction subscribers like what we announced with Aon.

Service and call center subscribers that we announced today, like Citizens Telecom, and partner editions subscribers like we announced with Dell.

And of course we have mobile and ideas and content.

So all of these things, we have a rapidly evolving mix of subscribers because our Company has evolved very substantially, certainly just in the last year.

And for that reason, Kash, we cannot really characterize what the mix is of our subscriber base because it's changing very, very, very rapidly.

And that's very exciting to us, it's what we want.

We want to be a multi-application, multi-category company.

And as we've mentioned on previous earnings calls I think for the last couple of years now, the actual number of subscribers is an increasingly and relevant measure of our business and we point you to our traditional GAAP measurements which we believe is the correct and proper way to evaluate our success.

I will follow up and say that we talk a lot about some very large corporations, but our business mix between small, medium and large still remains roughly a third, a third, a third.

And I think that's testament to the broad range of solutions that we have and our ability to provide solutions as businesses start small and grow.

That particular relationship has not changed.

Thomas Ernst, Deutsche Bank.

Actually, this is Greg Dunham on behalf of Tom.

My first question really revolves around the competitive landscape and how we're a year into a number of announcements by the larger players and I wanted to get your thoughts on what they announced this week, what they announced through the year and how that has changed business day in and day out on the ground.

Well, that is a very good question, and as you know we have seen a lot of competitive announcements with quotes around announcements over the last year, two years.

And of course we always get a lot of calls here whenever these announcements happen.

And for those of you who saw the Oracle show this week, I thought it was a tremendous show in size and in scale, but perhaps not in innovation.

And that is probably best reflected in the lack of focus on on-demand, software as a service, multi-tenancy.

Oracle seems extremely vested in the single-tenant traditional enterprise software model and the integration of their businesses and trying to get out their fusion applications.

So when it comes right down into a competitive situation in a large transaction likes Citigroup where we beat Oracle, of course both of our management teams show up and then we show both sets of our technology.

Well as you know because you attended our Dreamforce conference, our technology is highly differentiated from anything else in the marketplace, whether it's our Force.com service which is unique or any of our applications.

When you look at a demonstration and the capabilities of Salesforce as well as our proven success in these different marketplaces, our trust web site, we are a whole different kettle of fish.

We believe that we are the product that customers want today and are looking for.

A lot of our competitors we think just aren't showing up surprisingly.

Companies like SAP as you know have made big announcements regarding SAP, CRM, on-demand.

It's almost two years since they made that announcement.

We have not seen them really show up in the marketplace.

As a consequence, we have not seen the customer wins.

And finally, when it comes to the overall competitive situation, I'm sure you know that Gartner recently awarded Salesforce.com as the industry leader in our category, which we think is further evidence of how we are doing competitively.

Mark Murphy, Broadpoint.

I'm interested in what you feel the key determinants were in winning the Citigroup transaction.

Was it something around scalability requirements?

Was it a multi-tenant architecture or something new like Visualforce?

And also was Citigroup open-minded in terms of considering on-premise solutions, or did they go into this knowing that they needed and wanted on-demand?

Of course, Citigroup is one of the very largest banks in the world and has one of the very largest and most impressive IT budgets and staffs, as well as IT departments and they have the ability to buy anything, as I'm sure you know and have.

And we are extremely fortunate in that their evaluation of Salesforce.com and all of our code of all of our capability as well as our tremendous customer success with companies like Merrill Lynch, with Deutsche Bank, with Mizuho and our many others in the financial services industry.

When you stack it up and compare it to other providers, we came out superior.

And it was much more than just Visualforce, which of course is a very important part of our strategy, or the Force.com platform, or any specific technology.

It's really our ability to bring success to that customer.

And that's I believe at the end of the day why they signed the agreement with us versus any other provider.

It was not price, it was not I wouldn't say any particular technical feature.

It was really all about our ability to make them a success, just as we have so many other customers around the world today.

Brendan Barnicle, Pacific Crest Securities.

I was wondering if we could look at this revenue issue a different way.

Rather than subscribers as we move away from that, is there a way to start thinking about revenue in terms of how it breaks down into different broad product categories around sales or marketing or service or mobile, and start to think about it that way, as the same way that maybe some of the (inaudible) [SAP] breaks out the different areas of its products (inaudible) different application areas and selling product.

I think that is a good question, and when we look at customers, we go in and look at implementation at accounts like Dell or now Citi or Merrill or so many of our large customers today.

We see them using so many different parts of our service as well as our platform.

But as you know, we don't actually make individual kind of like software units our SKUs or CDs.

It's one fully integrated service with the capabilities for the customers to kind of pull what they need out of that service as they need it.

There are sales components and marketing components and service components and when we look at any one particular customer implementation, it's very difficult for us to look at them and say this customer is all about sales or this customer is all about marketing.

And I would encourage for you to go and look at some more customer implementations and validate that.

It's not like the traditional company that's shipping that box and can say that box is going here, therefore that revenue must be going to this category.

It's much more of a hybrid and an integrated approach.

I think that's true.

The small business too, I've been working with a couple of potential customers where they took us on as CRM for just 25 seats and are now aggressively looking at content and ideas and Visualforce.

So Brendan, I think that is across the board.

As people learn how to use On-Demand and get more comfortable, they're going to expand the types of uses that they have, and that's why it's so difficult to categorize it into a particular SKU.

They're just using our solution in general.

Nathan Schneiderman, Roth Capital Partners.

Congratulations on the nice quarter.

Marc, in the past you have shared with us some information about cumulative investment by venture capitalists and companies developing AppExchange solutions.

I was wondering if you have an update there on how much investment dollars have been spent by the VCs.

And then also, could you speak to any meaningful OEM or platform deals that you booked during Q3?

Sure.

I would be delighted to.

If you take a look at AppExchange, of course you will see the top 10 installs as well as the latest listings.

And then if you track those back to the actual companies emerging, I think what you will see is just an innovation explosion that is happening in Silicon Valley in on-demand.

And as we talk to venture capitalists around the world, what we see is an increasing amount of their portfolios going towards On-Demand.

And in fact, you've also seen two of them come forward recently and create an AppExchange fund, which we thought was really impressive.

That continues to result in much more innovation on the AppExchange with these ISV applications, and that has been -- it has really -- I would say it has exceeded our expectations.

I did not expect that.

We're coming up on and I believe we will soon have 1000 applications in the AppExchange and there is such a wide diversity.

And also when you go to different countries, for example I just got back from Japan.

We have a whole Japanese AppExchange with all applications just for the Japanese marketplace.

In terms of how that translates then into our customers and platform agreements for our customers, you know at Dreamforce, I talked about quite a few of those that we have put together recently, including the Walt Disney Company, Electronic Arts, the [Bronx Lab School].

But, again, I point to not just the big wins and how these customers see Force.com as a critical part of their implementation strategy like with Citigroup today, but our largest subscriber implementation is Japan Post, which is not part of the any of our core apps.

It's a custom application built with Force.com.

I think that that is really evident of what we're going to continue to see more of in the future, which is customers not just customizing their CRM with the platform, but building their own custom applications that are discrete and unique from our traditional CRM offerings.

Ajay Kasargod, Piper Jaffray.

Just a couple -- number one for Steve.

On the operating margins, the preliminary guidance, can you maybe tell us what are the variables that you're deliberating here in near-term?

And just one quick follow-up on Citi.

I just want to confirm, that is running multi-tenant, correct?

I will turn it over to you guys.

Again, we're working through those now.

It's a little early to characterize any of that, but certainly that will bring you back for our February conference call.

And Marc?

We only have one copy of basically Salesforce.com for everybody.

It's a multi-tenant architecture.

Unlike the traditional single-tenant architecture of the client/server vendors who basically set up their own server and their own piece of software for each customer, we are a multi-tenant shared architecture similar to what you would find on Amazon.com or e-Bay or Google.

We take that multi-tenant architecture concept and all of our customers are part of that, and that includes Citigroup.

Daniel Cummins, Banc of America securities.

Can you of date the periodic churn rate for the customer base?

And then I just had a question on the Citigroup wins.

As I said before, the churn rates really haven't changed over the last couple of quarters, so there's no real need to update that.

And then Marc, you want to talk about more on Citi?

Can I ask the question on Citi?

I assume a 30,000-seat win for the FA product is terrific, but could there not be also significant follow-on opportunity for the broader business there?

I assume they still have a large Siebel implementation that everybody works there is not so happy with.

Well, that's kind of the status quo in most Siebel implementations, I think, and it continues to be a green field for us in many accounts that have Siebel.

But we're very happy with starting with an initial 30,000 users at Citigroup.

And if and when that expands, we will be the first to let you know that.

[Steve Koenig], KeyBanc Capital Markets.

The question, the category I guess I would ask about, it looks to be definitely good progress in terms of broadening the CRM and other apps.

If there is a point of even the slightest bit of controversy, it's around maybe the spending on the platform and progress on the Platform strategy.

You're certainly are able to point to some good wins on Platform.

Would you consider at any point in the future giving transparency into how much -- what percent you are spending on Platform or even revenues from Platform Edition which I do believe is a separate edition?

Today, we just don't really see, first of all, how we would do it.

I would be happy to set up a demonstration of our technology for you anytime.

As I mentioned, our platform technology and our applications technology or any discrete application is not an individual SKU or a piece of software, it's one fully integrated service.

It's the ability for the customers to then pull from that service as well as from other services around the Internet and through our AppExchange to then build the application that they use internally.

And that is what is exciting about our product.

If you can meet with some of our customers, review their implementations, how they have used it and you can come out with a better way to describe our revenue in GAAP terms better than what we're doing now, of course we're open to it.

But we think that the GAAP measurements that we provide you today and revenue and expense in cash flow and in other areas is the correct and proper way to report our results to you.

Mark Verbeck, Cantor Fitzgerald.

Can you give me an update on your efforts around security of your system and preventing attacks on your customers?

What was the reaction from your customers on your efforts to improve their security?

And do you have plans to improve your security with things like financial institutions are doing with either security images or known machine type authentication?

Thank you for that question.

Of course, security is something that we do every day at Salesforce, and you are right in that we have seen an increase in the number of attacks recently on our customers, specifically phishing attacks.

We have taken both offensive and defensive measures to protect our customers.

These attacks, by the way to characterize them, have resulted in attacks on less than 1% of our customers and we have not seen any change in our business because of these attacks.

But we have learned quite a bit from our customers, including with some of the technologies that you're mentioning on how to protect our customers fully from phishing, and you will see some of that new technology in place as early as next week.

Thank you very much for that question.

There are no further questions.

Thank you very much for joining us and we will look forward to catching up with everybody next quarter.

If you have any follow-ups, please contact investor relations.

Thank you and have a good day.

This concludes today's conference call.

You may now disconnect.