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Operator
Good afternoon.
At this time, I would like to welcome everyone to the salesforce.com fourth 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
Thanks and welcome, everyone, to today's call.
Earlier today salesforce.com released results for its fiscal fourth quarter.
A full disclosure of these results can be found in our fourth quarter results press release as well as in our Form 8-K filed with the SEC.
Additional financial information beyond what is provided in the press release may also be found on our web site.
Joining me today to discuss our outstanding fourth quarter performance are Chairman and Chief Executive Officer Marc Benioff and Chief Financial Officer Steve Cakebread.
In addition I've also very happy today to welcome our CFO designate Graham Smith to today's call.
Graham will close our commentary today with our outlook for fiscal '09 and then we will open things up to your questions.
Before we begin, a couple of brief housekeeping items.
First, all of our financial commentary today will be in GAAP terms, unless otherwise noted.
Next let me remind you that the primary purpose of today's call is to provide you with information regarding our fourth 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 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 risk factors that could affect our financial results are included in our reports filed with the SEC, including our most recent report on Form 10-K and Form 10-Q, particularly under the heading, Risk Factors.
I also remind you that today's call is being webcast and a replay will be available shortly following the conclusion of the call through March 7.
To access the press release, the financial detail, the webcast replay or any of our SEC disclosures, I encourage you to visit our Investor Relations web site at www.salesforce.com/investor.
Lastly 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 decisions based upon features that are currently available.
With that let me turn the call over to Mark to tell you about our excellent fourth quarter.
Marc Benioff - Chairman and CEO
Thanks, David.
Our outstanding fourth quarter performance was the perfect way to cap off a monumental year for salesforce.com.
Businesses of all sizes in virtually every industry all over the globe are adopting Software as a Service over failed legacy client/server alternatives like never before.
By becoming the world's first multi-application, multi-category Software as a Service company in fiscal year '08, we extended our industry leadership and achieved some remarkable milestones during the year.
Specifically, in all, we added more than 11,000 new customers during the year, more than we had after five years in business.
In December, we celebrated our 1 millionth net paying subscriber and we exit the year with nearly 1.1 million subscribers.
That is roughly 450,000 more subscribers than we began the year or roughly 1800 every business day.
Even more exciting, we raised the bar for cloud computing and became the first multi-category On Demand company by introducing the world's first Platform as a Service -- force.com.
Building, deploying, and running custom On Demand applications has never been easier than it is today with force.com.
Our deployments also reached record new scale in fiscal 2008.
At more than 60,000 subscribers, our largest deployment today is more than twice the size of our largest deployment just a year ago.
And because customers are using the force.com platform for deep customization and integration, system usage reached unprecedented new heights during the year.
In total we delivered more than 29 billion transactions at more than 99.9% availability for the year.
And daily transaction volumes now exceed 130 million.
We also delivered on our commitment to innovation in our applications last year.
After Gartner recognized our SFA application as an industry leader and our customer service application as visionary, we added two powerful new applications -- salesforce content and salesforce ideas -- and our strategic partnership with Google yielded one of our most successful new products in our history -- salesforce group addition featuring Google Ad Works.
The AppExchange ecosystem grew to include more than 800 applications, establishing itself as the foremost marketplace for On Demand applications.
Our development community now includes more than 700 partners and the VC community is taking notice.
Total venture capital funding for AppExchange partners now exceeds $425 million.
And finally we also achieved some pretty amazing financial milestones in fiscal year '08.
We broke through the $600 million, the $700 million and the $800 million annual revenue run rate levels during the year.
And today, we are confirming Outlook for our first ever $1 billion revenue year.
These milestones are not just remarkable achievements for salesforce.com, but further proof that the past year represents an important inflection point for the software service industry.
Organic growth in the software industry is increasingly coming from a new generation of On Demand companies, led by salesforce.com.
Nothing demonstrates this fact more than our incredible fourth quarter.
Now I'd like to briefly review our financial performance for the fourth quarter.
Revenue for the fourth quarter was approximately $217 million, an increase of 50% from the year ago quarter.
For the full year, revenue rose by 51% to approximately $749 million.
When you factor out the pending acquisition of BEA by Oracle, salesforce.com is now the 14th largest market cap software company in the world.
That is amazing in just our ninth year.
And as fast as revenue is growing, profits and cash flow are growing even quicker.
Our GAAP operating margin of 4.9% for the fourth quarter was up more than 6 points year over year, and was our best performance ever.
That fueled $0.06 of GAAP earnings per share for the quarter and GAAP EPS of $0.15 for the year.
Even more incredible was our cash generation.
Operating cash flow in the fourth quarter was $81 million, an increase of 112% from a year ago.
For the full year, we generated more than $204 million of operating cash.
And we now have roughly $670 million in cash and marketable securities on our balance sheet.
By any measure, the fourth quarter was amazing.
The driver of this financial performance was the most incredible quarter of customer success in our history.
We are winning business in virtually every industry vertical and all geographies at some of the most influential companies in the world.
As we announced on our last call, Citigroup got our fourth quarter off to a fast start by signing with us in early November.
They are developing a new wealth management desktop to enhance their client adviser relationships and salesforce.com beat Oracle to be a core piece of that strategy.
In all more than 30,000 wealth managers and loan professionals at Citibank will soon be enjoying the benefits of salesforce.com.
I am also excited to announce today that Aon has become our seventh customer to top the 10,000 subscriber threshold with more than 11,000 subscribers.
Also a direct win against Oracle, Aon was a pioneer by becoming one of the first enterprise customers to deploy salesforce.com at scale.
And today they remain one of our most sophisticated customers.
It has been exciting to watch them grow.
But our success in financial services was not limited to Citi and Aon.
During the fourth quarter Thrivent Financial selected salesforce.com over Oracle and First Citizens Bank and Trust chose salesforce.com over Microsoft.
We also won significant new opportunities at Lincoln Financial, Genworth Financial and as we announced last month at AIG Casualty.
And some of our largest financial services customers grew even larger this quarter with subscriber addition or upgrade activity at Mizuho, Sampo, Wells Fargo, Thomson, Hartford Life, GMAC, AmeriCredit and Allianz to name a few.
In the telecommunications market we are winning on a global scale with large new deployments at Avaya in the United States, COLT Communications in Europe and Chubu Communications in Asia.
The Avaya win was a 9000 subscriber Siebel replacement for Partner Management making them one of our top 10 subscriber deployments in the world.
These companies joined other telecommunications giants like Nokia, Motorola, QUALCOMM, Sprint and Bell Canada already using salesforce.com.
And as we mentioned last month, Comcast joined the salesforce community during the fourth quarter with 1200 subscribers.
We also won add-on business during the quarter at another cable giant, TimeWarner.
We are also creating success in the health care, Pharma, and biotech markets.
I am thrilled today to announce that Genentech and IMS Health have both become top 50 subscriber customers in the quarter.
And Hospira has become a top 100.
In media, NBC Universal, Reader's Digest and Dow Jones joined our ranks in Q4 adding an already long list of media companies using salesforce.com.
And our already strong technology vertical got even stronger this quarter.
We beat Oracle to win substantial new business at storage leader EMC.
We also added new business at Compuware, Actuate, Advent, Canon and Fuji Xerox.
These great new technology customers joined other industry leaders like Cisco, Dell, Symantec and Adobe already using salesforce.
And finally I want to highlight our growing strength in Europe because I think it is important for you to see that the investments we have been making in that region are really paying off.
In addition to the COLT Communications deal I just mentioned, I am thrilled to announce the Danish trucking giant DSV has become our fifth international based customer to become a top 20 subscriber customer.
We also won large opportunities in Europe at Wartsila, Misys, Fortis and [Panda].
Steve will discuss the geography numbers in a moment, but Software as a Service is a powerful trend that is clearly gaining global momentum.
This momentum will be in full force at our Dreamforce Europe in London on May 7 and 8.
We are expecting 2000 attendees and fantastic keynotes from Wikipedia founder Jimmy Wales, and musician and Witness Chairman Peter Gabriel.
Please join us in London on May 7 and 8 for the unique mix of customer success and innovation that will define Dreamforce Europe.
In addition this quarter we added roughly 2900 new customers and approximately 11,000 customers for the year to end up at approximately 41,000 net paying customers.
Perhaps nothing demonstrates our success at those customers more than the growth in their deployments.
Two years ago our largest customer had roughly 5000 subscribers and we have built a handful with more than 1000 subscribers.
Today, we have 15 customers with more than 5000 subscribers and 86 customers with more than 1000.
The common thread in all of our customer success momentum is the force.com Platform as a Service.
I am often asked when our platform strategy is going to pay off.
The answer is today.
The platform is both winning deals for us in applications and creating new markets for us.
The platform enables us to deliver superior customer relationship management applications and enables our rapid innovation.
And it opens up huge opportunities for customers to develop and deploy custom applications.
That is why our customers are so diverse and why our win rates remain so high.
The big trend these days in information technology is cloud computing and salesforce.com is the leader in putting the cloud to work for business.
The force.com Platform as a Service is giving developers everything they need to develop, test, deploy and run apps as a service.
It starts with our secure, reliable, trusted, global infrastructure, now delivering an astonishing 130 million transactions daily at well under 1/3 of a second each.
This scalable infrastructure has served up more than 29 billion transactions over the past year.
On top of that, we offer Database as a Service capable of serving our over -- now capable of serving over 160,000 SQL statements per second to our customers.
Workflow is a service, powering more than 7 million customer created workflow rules.
Integration is a service, allowing deep integrations with everything from legacy applications to cutting-edge Web services.
Our API accounts for more than half our transactions which totaled nearly 9 billion in the quarter.
Logic is a service with Apex Code.
Since Apex Codes went live this fall, developers have written 1.1 million lines of Apex Code and 25 million transactions have already used this powerful service.
User Interface as a Service with Visualforce; already developers have seized the opportunity to create over 5800 unique interfaces with our service and as we launched just a month ago in San Francisco, our latest breakthrough Development as a Service with our Sandbox, metadata API and code-sharing capabilities, developers around the world now truly just an idea and an Internet connection to use the same powerful infrastructure that we worked so hard for nine years to create.
We think that this will forever solve the corporate application backlog.
For developers and ISVs, it means a new era of innovation not infrastructure.
For CIOs it's a chance to break away from client/server break [bricks drudgery] and add real business value and for competitors it is clearly the end of software.
The force.com Platform as a Service encompasses our cloud computing architecture, which gives business everything they need to build, test, deploy and run apps in the cloud.
And we are talking about a wide range of apps that those companies rely on every day to those that are infrequently used.
Just a month ago we introduced new utility pricing to encourage companies to develop those apps just $0.99 a log-in.
That is why more than 68,000 developers from around the globe are already finding new and innovative ways to use the force.com Platform as a Service.
Customers have already created a remarkable 64,000 apps on force.com.
That is amazing innovation and we are taking this message to a community that is hungry for innovation.
We just kicked off Tour de Force, our global developer roadshow in San Francisco.
And we will be coming to four cities in April.
Atlanta on the 8th, Chicago on the 10th, New York on the 16th and Boston on the 22nd.
I encourage you to join us for these phenomenal events.
The final element of our force.com Platform as a Service is the AppExchange.
The AppExchange is providing the ISVs a marketplace to connect with our 41,000 customers.
Roughly one in four salesforce.com customers have already deployed an application from the AppExchange and the total number of installations now exceeds 42,000.
During the quarter we also enhanced our outstanding management team by adding two great new executives.
First I'm thrilled to welcome Polly Sumner to salesforce.com.
Polly joined us last month as president of Platform Alliances and Services with more than 30 years in the industry with leaders like Oracle and IBM.
Polly is the right person to take our platform and partner initiatives to the next level and her experience managing the customer experience will be invaluable in our service-based culture.
We are also very fortunate to welcome Graham Smith in his new role as Executive Vice President and Chief Financial Officer designate.
You'll be hearing from Graham in a moment.
He is a veteran of the software industry with more than 20 years of experience, most recently a CFO of Advent software.
Like Polly, Graham also spent many years at Oracle.
He has been working with Steve Cakebread to transition into his new role since joining us in December.
And I am thrilled that after the CFO transition is complete, Steve will continue to use his experience and leadership to spearhead some of our strategic growth initiatives in his new position as President and Chief Strategy Officer of salesforce.com.
Our management team has never been stronger.
Before I close, I want to congratulate all of our employees on an amazing year.
All the success was the direct result of your hard work and execution and while we achieved a lot of milestones in FY '08, I am looking forward to the biggest milestone in our history, expected next year.
$1 billion in revenue.
The first software service company to achieve that goal.
With that now let me turn things over to Steve and Graham for a closer look at the numbers.
Steve Cakebread - CFO
Thanks, Mark.
Good afternoon, everyone.
Q4 was a great quarter.
It is tremendously gratifying to see all of our hard work the past few years show so clearly in our performance.
Let me begin with a brief review of the P&L.
Revenue for the fourth quarter was $216.9 million, an increase of 50% from a year ago and up 13% sequentially.
For the full year, revenue increased by 51% from the prior year to $748.7 million.
While growth was strong in all regions of the world, growth was particularly strong internationally.
In Europe, Q4 revenue grew 70% from the year ago quarter to $38.4 million.
At this level, Europe is running at an annual revenue run rate of roughly $150 million.
In Asia, Q4 revenue of $20 million grew even faster at 85% year over year.
While our investments in infrastructure and awareness building internationally continued to pay off, the overseas opportunities still remains largely untapped.
Finally for the fourth quarter revenue in the Americas rose 43% from a year ago finishing at $158.5 million.
For the full year, we did more than $0.5 billion of business in the Americas alone.
That is more than we did all globally in FY '07.
With more than 90% of our business being subscription and support it is no surprise that the growth for that business was essentially the same as the Company as a whole.
Q4 subscription and support revenue rose 196.5 -- revenue of $196.5 million rose 49% year over year and 11% sequentially.
For the full year subscription and support revenue topped $680 million, an increase of roughly 51% versus the prior year.
Our outstanding customer satisfaction levels continued to result in excellent customer retention.
For the fourth quarter our attrition rate was once again less than 1% of net paying subscribers per month.
Our Professional Services business also had an outstanding quarter, growing revenues by 68% from a year ago quarter and 24% sequentially to $20.4 million.
While our training business continues to grow relatively in line with the overall company, our consulting business grew more rapidly this quarter.
Part of that gross was a recognition of EITF 00-21 -- related deferred revenues -- and part was the simple fact that we are starting to grow into the large amount of capacity that we've added in recent quarters.
One final comment on revenue.
While we are winning big deals like never before, our mix of revenue between small, medium and large businesses continues to remain at roughly 1/3, 1/3, 1/3, just as it has been since we went public nearly four years ago.
We continue to believe that this diversification is strategically important, because it expands our addressable growth opportunity while reducing our risk.
Company GAAP gross margin for the fourth quarter was approximately 78%.
This is up nearly 1.5 points from Q3 and up a full 2 points from last year.
While service delivery gross margins were up a bit from Q3, they've remained essentially flat year over year.
The biggest driver of gross margin improvement both sequentially and on a year-on-year basis was the improved performance in our consulting business that I mentioned earlier.
For the full year, our gross margin performance of roughly 77% was up a full point from fiscal year '07.
Operating expenses continued to grow more slowly than revenue and as a result Q4 operating expenses as a percentage of revenue fell to 73%, down 4.5 points from the year ago quarter.
For the full year, operating expenses fell almost 2.5 points to finish at approximately 74%.
The biggest driver of the Q4 improvement continued to be sales and marketing where expenses have fallen 3 points as a percentage of revenue compared with the prior year, and R&D finished the quarter at the year roughly 8% of revenue, and continues to be well within our target range of 8% to 10%.
And finally G&A was down more than 0.5 point as a percentage of revenue versus a year ago quarter.
This reflects continued operational efficiencies.
On headcount, we finished the year with roughly 2,600 full-time employees.
That is up 145 from Q3 and for the full year, we added more than 530 net full-time employees across all functional areas.
GAAP operating margin for Q4 was 4.9%, up 170 basis points sequentially and up more than 600 basis points from Q4 of last year.
For the full year, operating margin was 2.7% up 340 basis points from fiscal year '07.
And remember we achieved these fourth quarter results while absorbing roughly $16 million in stock based compensation and roughly $1.3 million in amortization of purchased intangibles.
For the full year, our GAAP results included approximately $55 million in stock based comp, and roughly $5 million in amortization of purchased intangibles.
Operating margins are really starting to show the benefits of scale and the leverage potential in our business.
We continue to deliver outstanding revenue growth and solid operating margin expansion at the same time.
Our effective GAAP tax rate was approximately 48% for Q4 and approximately 51% for the full year.
GAAP net income for the fourth quarter was $7.4 million, our best performance ever, since implementing FAS 123R.
For the full year we delivered more than $18 million of GAAP net income and a diluted GAAP EPS of $0.15.
Operating cash generation for the fourth quarter was $81 million, an increase of 112% year over year.
Not only was this an all-time high for the Company but it beat the previous high that we achieved just last quarter by an amazing 55%.
While expanding profitability continues to be a strong catalyst for cash generation, we also recorded record collections of more than $250 million during the quarter.
And I want to thank the field operations and collections team for making this happen.
For the full year, operating cash flow was approximately $204 million, an increase of 84% from fiscal year '07.
Net of approximately $8.4 million in capital spending, free cash flow generation for the fourth quarter was approximately $72 million, up 69% sequentially and 137% year over year.
For the full year, free cash was approximately $161 million, up 80% from fiscal year '07.
All of the cash generation pushed total cash short- and long-term marketable securities to approximately $670 million.
That is an increase of nearly $100 million from Q3 and an increase of more than $250 million from a year ago.
Despite our excellent collections during the quarter, receivables increased by 80% from Q3 to $220 million.
In addition to the normal seasonality associated with a large number of renewals this time of year, our strong new business in the fourth quarter added to these receivables.
The strong demand also resulted in short- and long-term deferred commissions on the balance sheet.
Before I move over to the liability side of the balance sheet, I want to mention yet another financial milestone for Q4.
Total assets are now more than $1 billion for the first time in our history -- an exciting achievement for salesforce.com and another first for On Demand industry.
Now on to the liabilities.
Strong new business pushed total deferred revenue to $480 million, an increase of 41% sequentially and an increase of 69% year over year.
As importantly, our unbilled revenue off balance sheet continues to be larger than the billed deferred revenue on the balance sheet.
And together our billed and unbilled deferred revenue now exceeds $1 billion for the first time in our history.
This is a tremendous milestone and gives us a very solid foundation heading into next year.
This was an amazing year in virtually every way.
Q4 was a perfect way to close out the fiscal year '08.
We delivered unprecedented results, excellent execution, rock-solid financials; and I am looking forward to taking on my new responsibilities and contributing even more amazing fiscal '09.
With that I will turn it over to Graham to talk about next year.
Graham Smith - CFO designate
Thanks, Steve.
Good afternoon, everybody.
I'm really excited to have joined salesforce.com.
Obviously the CFO role here is a great opportunity, but ultimately my decision to join the Company was based on a very few important factors.
First there are two camps in software today, the consolidators and the innovators.
And I want to be on the side of innovation.
I've seen what we can do for customers with Software as a service and Platform as a Service and I believe we are only beginning to see the scale of the opportunity here.
Next, salesforce.com has been and continues to be the leader in both vision and execution in this exciting market.
Finally I have known Mark for close to 15 years and there is no more passionate leader in our industry.
I joined the Company in December and I've been working with Steve on a seamless transition of the CFO responsibilities.
Steve has built a great team and I'm really looking forward to working with them and with all of you in the years ahead.
With that, let me discuss our outlook for fiscal '09.
Customer enthusiasm and demand for our services has never been better.
This strong demand, together with salesforce.com's brand, customer success and best-in-class software and Platform as a Service offerings continue to position us very well, heading into the new year.
In that context I'm very pleased that my first formal communication with you today is to raise our full year revenue outlook for fiscal '09.
For the full year, we are now expecting revenue in the range of $1.030 billion to $1.035 billion.
Because growth and leadership are our top priorities we will continue to invest across all areas of our business in the year ahead.
This includes continued hiring in many key areas, adding a new data center in Asia and growing the infrastructure necessary for continued market leadership.
At the same time we expect to achieve roughly 300 basis points of operating margin improvement during the year, resulting in an estimated fiscal '09 diluted GAAP EPS of approximately $0.32 to $0.33.
This estimate assumes that our tax rate remains unchanged from the fourth quarter at 48% and assumes an average fully diluted share account of 125 million shares.
It further assumes approximately $82 million in stock based compensation and $5.3 million in amortization of purchased intangibles.
For the first quarter, we expect revenue in the range of $233 to $235 million, and diluted GAAP EPS in the range of $0.06 to $0.07; tax rate of 48%; approximately $17 million of stock based compensation and approximately $1.3 million in amortization of purchased intangibles.
We expect average fully diluted shares outstanding to be roughly 124 million shares in the first quarter.
Before we close, I would like to update you on our plans for subscriber reporting in the year ahead.
With services that range in price from $5 to $250 per user per month to $0.99 a log-in, the subscriber metric is no longer as meaningful as it once was.
However because the size of our growing global community continues to be part of our growth story, we plan to provide periodic milestone updates just as we did in December, when we passed the one million subscriber milestone.
We also plan to provide an update at the end of our fiscal year.
In closing, the fourth quarter was a great way to wrap up a tremendous year for salesforce.com.
I cannot imagine a better time to join the Company.
We've built a very solid foundation for the future and I look forward to describing our progress towards $1 billion of revenue in the quarters ahead.
This concludes our prepared remarks.
So let me turn the call back to the operator so that she can open things up to your questions.
Operator
(OPERATOR INSTRUCTIONS) Kash Rangan from Merrill Lynch.
Kash Rangan - Analyst
Looking at the bookings growth rate, it certainly looks like we've not hit this kind of growth rate of 70%, 71% in almost two years now.
I'm curious, Steve, or anybody on the call, can you give us some insight into what drove that?
Are we seeing a bigger percentage of your new contracts for longer contract [lends] or are we seeing any large deal activity that just happened to fall into the bookings number that might explain why that number came in well above anybody's expectation?
Marc Benioff - Chairman and CEO
Well, as you know we had a great quarter and you can see that in our GAAP results which is what we are talking about on the call.
We are not really, we are not putting color around bookings.
We never have and we don't ever plan to.
It was an astonishing quarter by every measure and every metric that we have to manage our business in the fourth quarter was green for the quarter.
So we are really excited.
Kash Rangan - Analyst
So maybe Marc, then I understand you don't want to get into the details of what drove that.
Perhaps you could talk about how you are planning sales capacity for the forthcoming year and the pipeline management?
How is the capacity coming along and how is the learning curve of the new sales reps to be productive, etc., and maybe you could talk about that and help us get some comfort behind the assumptions for fiscal '09?
Thanks.
Marc Benioff - Chairman and CEO
As you know, we don't release information on our distribution capacity or the size of our sales organization.
We never have and again we don't plan to.
What I can tell you, however, is that we are just having a tremendous success in the market.
You are familiar with many of our large wins, that we have been able to take on the largest software companies in the world and beat them.
And primarily our ability to execute whether it's in distribution, in marketing or through the technology is spectacular and now we are off and on to a fast start for our fiscal year.
Kash Rangan - Analyst
Right, then, I should not even ask you about the Microsoft competition etc.
Maybe we will just save time on the call.
Thanks a lot.
Operator
Laura Lederman from William Blair.
Laura Lederman - Analyst
Thanks for a great quarter everybody.
Just a few quick questions.
One is -- it is sort of strange to ask this question given how great your numbers were.
But are you seeing any economic (inaudible) in any vertical market at all?
Secondly, can you talk a little bit about the data center that is going up in Asia?
When that is expected to be up and running and where you are putting that?
Separately, are you seeing a business by design at all or Microsoft hosted product in any sales cycle?
Thanks.
Three questions in one.
Marc Benioff - Chairman and CEO
Okay.
Steve.
Steve Cakebread - CFO
First of all in terms of the economy, you know or in a specific vertical market or sector, we had a great quarter and I think our results speak for themselves here.
In regards to future data center implementations, especially in Asia, we have not yet made any specific announcements regarding when or where we will have additional data centers implemented.
But we are evaluating how we grow our business internationally and the requirements to have data centers in different markets.
And we hope to have some very exciting announcements in the near future.
And, finally, in regards to SAP and Business by Design, I have not personally seen them in any competitive situations.
And I hope that one day we will.
We are looking forward to the whole market and the whole industry being On Demand and everybody playing to the terms that we've set.
But as of right now we see very little On Demand from the traditional software companies as I'm sure you know.
Operator
Brent Thill from Citigroup.
Brent Thill - Analyst
Marc, with the maturing of the AppExchange can you just give us a sense of how you are seeing initial customers signing up?
Are they willing to sign up for more?
Are they taking more components of the Exchange and thus, helping with the stickiness of the world platform?
Can you just give us a sense as to what's happening there?
Marc Benioff - Chairman and CEO
As you know the AppExchange ecosystem grew to include more than 800 applications; and this quarter it really established itself as the foremost marketplace for On Demand applications.
Our development community now includes more than 700 partners and the VC community also has made some major investments as I'm sure you know in AppExchange partners.
In addition to ISVs who are on the AppExchange we of course also have a lot of ISVs now, who are developing who are not necessarily on the AppExchange.
If you attended our Tour de Force event, you saw some of that happening.
And of course our customers are really making substantial gains with using force.com applications inside their own companies.
And I believe there is now over 63,000 custom force.com applications inside our customer base.
So we are very excited with how the AppExchange is going as well as the overall force.com initiative.
Brent Thill - Analyst
Just a follow-up.
I think I missed to Kash's question on the contract, what contract link, can you just refresh us where you stand today?
Steve Cakebread - CFO
You know we haven't really talked about contract links.
Suffice it to say there's -- we've seen no noticeable changes in our core metrics like 1/3, 1/3, 1/3.
Less than 1% attrition.
This model you guys know as it gets bigger gets more stable.
I think you just need to consider that.
Marc Benioff - Chairman and CEO
Yes, and I would just put some color around that and say that fundamentally whether it is in contract link or the other metrics that Steve mentioned, we have not seen any material changes.
Operator
Brendan Barnicle from Pacific Crest Securities.
Brendan Barnicle - Analyst
Two quick ones.
First, Marc, when you think about your businesses specifically and think about On Demand more generally, is this a business model that less resist -- or comes under less pressure in a recession than sort of traditional software models?
And then second as force.com continues to take more share, who is the biggest negative impact?
Who is the biggest loser from that change?
Marc Benioff - Chairman and CEO
I think that, first and foremost, On Demand is the right time for On Demand whether it's economic conditions or business conditions or technology conditions, any way you slice it, it's a Perfect Storm for the software companies, and it's a great opportunity for salesforce.com to continue to execute well.
As we continue to roll out force.com, we see the individual companies that we'll be taking share from are really the traditional application development and deployment companies, whether it is Microsoft or even the traditional application server companies like BEA.
We are really seeing interest from their traditional customer bases in looking at force.com to build and deploy applications.
Brendan Barnicle - Analyst
Great and then, Steve, other income was a little bit higher than what we have had the last couple of quarter.
Should we model that type of a level going forward?
Steve Cakebread - CFO
We keep increasing our cash balances so it is going to grow with that obviously, although interest rates are changing.
So you need to consider that as well, but as you know we don't give any guidance to those numbers.
Operator
Nathan Schneiderman from Roth Capital Partners.
Nathan Schneiderman - Analyst
I have a few questions for you.
One is, I was hoping you could discuss the renewal experience in a little more detail.
I was curious when your customers are renewing their contracts, are they tending to buy a lot more than their initial contract or keeping those renewals fairly stable or anything you can say about that?
Marc Benioff - Chairman and CEO
I don't know how much -- I don't really know how much I can say because I don't know how much information I have here specifically.
But what I can tell you is that typically when a customer comes around for renewal, at that point our job at salesforce is to make sure that that renewal is kind of fait accompli.
That is, that we have worked hard over the contract period to make sure that that customer is successfully implemented, to make sure that that customer is -- also has a high what we call total log-in percentage, that adoption has occurred inside the customer.
And then when we come into the renewal period it's mostly -- and what we hope for it to be is an automatic process.
And I think Graham wants to add some additional color there as well.
Graham Smith - CFO designate
I think as we look at the business this year versus last year we are just definitely seeing more revenue, higher revenues per customer.
So I think renewals are happening.
We have disclosed the attrition rate, which is unchanged.
It is very healthy, but also we are seeing add-on applications, new subscribers, and so on.
So revenue per customer is definitely increasing.
Nathan Schneiderman - Analyst
That's great.
Graham, when you -- you laid out the expectation of a 300 basis points operating margin improvement.
When you think about the longer-term financial model, are you thinking this is about the right level as we go forward or do you think you see accelerating improvements in margin?
Then, finally, for Marc, there have been some rumors out there that you are getting bored.
I was wondering and (inaudible) I was wondering if you care to comment?
Graham Smith - CFO designate
So, we give guidance one year at a time and I think we feel for -- at fiscal '09 300 basis points or thereabouts is the right kind of goal for this year.
I don't think we want to go out any further than that.
I think it's important that we balance the continued high growth of the Company with that operating margin improvement.
So I don't think we would want to call where it is going to go after '09.
Marc?
Marc Benioff - Chairman and CEO
As you know, I founded salesforce about nine years ago and since then, we have now grown it to over an $850 million annual revenue run rate.
And this year we plan to exceed $1 billion in revenue.
We've also defined the entire Software as a Service industry and created the ecosystem that we think is the future of software itself.
So I can tell you that it is anything but boring.
But I appreciate the question.
Operator
Richard Baldry from Canaccord Adams.
Richard Baldry - Analyst
Could you talk about the partner ecosystem maybe in terms of whether you see them bringing more new customers to you or whether they are really cross selling into existing customers of salesforce to get deeper into those?
And maybe also frame that in terms of your own newer product offerings like the content offering and/or the ideas?
Thanks.
Marc Benioff - Chairman and CEO
Well, we've worked hard as you know to move beyond just a salesforce automation provider to have a full range of applications and today we offer sales applications, marketing applications, call center applications, partner relationship management, mobile applications, content management and also our Idea Management Technology that I am sure you have been on place on the -- seen on the public Internet at ideasforum.com.
And on top of that we now have a complete platform for delivery of your own software service applications, whether you are an ISV or a customer.
And that is our global trusted secure infrastructure, our Database as a Service, our Integration as a Service, our Logic as a Service, our User Interface as a Service and our Application Exchange.
So the combination of both the Application family that I walked through and the Platform family really has taken salesforce.com to become a multi-application, multi-category company.
And that is very much where our focus is and this year we think we will continue to be an extension and an expansion of that core strategy.
Operator
Philip Rueppel.
Wachovia Securities.
Philip Rueppel - Analyst
As you broaden the product line, the average revenue per subscriber, the calculation at least we could do becomes less meaningful and certainly as you aren't going to be giving us subs going forward, could you -- it is going to be difficult to calculate.
Could you give us some color on the pricing environment out there whether it is on an apples to apples basis, whether there's competitive pressures or anything?
Is pricing remaining stable or are you seeing any changes there?
Marc Benioff - Chairman and CEO
Well from our perspective, the pricing environment has been mostly stable.
We've kind of created our own pricing environment honestly and we control that pricing environment through a tiered product strategy.
I walked through the products, but then we also tier those products up from our group edition capabilities to our professional edition, to our enterprise edition, to our unlimited edition products and we are really the only On Demand provider that provides this kind of ability for a customer to start small and grow up over time.
And we've also recently added our Platform edition and also per log-in pricing for the platform, so this really gives us the ability to control the pricing environment for the customer.
Every customer needs a price that is appropriate for them, which is why through our direct sales organization we are able to directly negotiate and create the price for that customer.
And we are very -- we've been very satisfied with our ability to do that.
Philip Rueppel - Analyst
Great and, Steve, you had mentioned that the attrition rate or the churn rate has remained very stable.
You know, there are fears out there that if the U.S.
does slow significantly that the churn rate in areas that are more economically hurt would increase.
Have you seen it?
Steve Cakebread - CFO
Well, through this -- through the end of Q4, like I said, our metrics have been pretty much rock solid and we had a great Q4 that was -- keep in mind November, December, January.
So, our customers I think as Mark said, we're entering an era where On Demand is really important and taking hold, regardless of the economic circumstances here.
It is a technology shift and you don't want to be left behind that shift.
Operator
Derrick Wood.
Pacific Growth Equities.
Derrick Wood - Analyst
Deferred revenue is up really big.
It was $128 million sequentially and that was basically double the dollar increase from a year ago and, yet, your employee count's only risen 25%.
So there is clearly a trend going on here with new business that's signed in the quarter.
Can we infer that the deals are clearly getting bigger or that the productivity is going up significantly?
And then if you could comment on any maybe large deals that might have closed in the quarter that might have contributed to that spike?
Marc Benioff - Chairman and CEO
Really it is none of those things.
It's -- we've made investments over the last nine years substantially in our technology, and our data center infrastructure, as well as in our ability to distribute our product on a global basis.
Of course, we have talked about that now on every conference call since we've been public.
The substantial investments that we have been making to build our Company and to create a foundation for our future.
And on this call we've also talked about additional investments that we are going to be making and, really, when you look at the fourth quarter, we are reaping the harvest of a lot of investments that we have made in the past.
So it is just very exciting for us to be able to deliver these numbers to our shareholders, because this is what we have been -- this is what we have been focused on.
And whether it is our application strategy and Software as a Service, or platform strategy with Platform as a Service, both of them are -- it's the right place at the right time for this type of technology.
And we are the worldwide market and technology leader in the most important change in the software industry.
So that's -- we think that that is what you're seeing today.
Operator
Peter Goldmacher from Cowen & Company.
Peter Goldmacher - Analyst
Steve, I wanted to follow up on a comment you made.
You said that you didn't see any material change in any business metrics.
Because as I go through your financials, I noticed for the first time you've got a long-term portion of deferred revenue.
So that implies to me that your invoice duration is getting a little bit longer, which means you should be able to collect more cash up front which certainly seems like that is the case when you look at the really solid numbers this quarter.
Can you give us a little more information around what kind of contracts you're able to get terms for over a year?
And any sort of incremental color on that would be very helpful.
Thanks.
Steve Cakebread - CFO
As you know the small business folks usually take one year contracts with quarterly billings and the large corporates take multi-year agreements with typically annual billings.
The breakouts in some of the deferred long-term are just because they are getting larger as a portion.
So there is nothing really fundamental changing in our business.
We've had rock solid business in the large corporates that Marc went through on the script as well.
You know we don't talk about our small and medium business, but it remains that 1/3, 1/3, 1/3.
The fundamental metrics of this market and this Company are really solid.
We had -- attrition remained as we've had in the past year.
It's a couple of years actually below a percent of our net subscriber base on a monthly basis.
So we feel pretty good about all of those numbers.
And I don't see any fundamental changes there.
Just people realizing On Demand is where they need to be.
Marc Benioff - Chairman and CEO
And I would just add that and I think what Steve has said and I think that if you talked to anyone here at the table, we have not made any material changes to our business model now for quite some time.
And the numbers you're seeing are really all about our ability to execute.
And that is what is really going on.
We are just able to deliver this execution.
And to that -- to those facts, I would just point you to the GAAP numbers which we think speak most clearly to the direct financial performance of the Company.
Steve Cakebread - CFO
Thanks, Peter.
David Havlek - VP - IR
Yes, I want to thank everybody for joining us today.
That concludes our call.
I want to remind everybody that tomorrow, Marc Benioff will be appearing at the Pacific Crest On Demand Conference here in San Francisco.
He will be giving a 12 noon keynote and I encourage all of those of you locally to try to attend.
We will also be having a webcast of that event on our web site.
Again, salesforce.com/investors.
Thank you very much for joining us today and have a good day.
Operator
Ladies and gentlemen, this concludes today's conference.
You may disconnect at this time.