賽富時 (CRM) 2010 Q1 法說會逐字稿

Good afternoon.

I will be your conference operator today.

I would like to welcome everyone to the salesforce.com Q1 fiscal 2010 financial results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be question-and-answer session.

(Operator Instructions).

I would now like to turn today's call over to David Havlek, Vice President of Investor Relations.

Sir, you may begin your conference.

Welcome everyone to salesforce.com's first quarter fiscal year 2010 earnings conference call.

Joining me today from our San Francisco headquarters to discuss our results are Chairman and Chief Executive Officer Marc Benioff and Graham Smith our CFO.

Marc and Graham will offer some brief prepared remarks and then we will open it up to your question.

A full disclosure of our first quarter results can be found in press release issued about an hour ago as well as in our Form 8K filed with the SEC.

Additional financial information including historical financial detail beyond what is provided in the press release will also be available following today's call.

Today's call is being live webcast.

A dial in replay will be available shortly following the conclusion of the call until June 12th and a webcast replay will be made available for approximately 90 days.

To access the press release, the financial detail, the webcast replay or any of our SEC disclosures or simply to learn more about salesforce.com I encourage you to visit our Investor Relations website at Salesforce.com/investor.

All of our financial commentary today will be in GAAP terms unless otherwise specifically stated.

In addition to times in our prepared comments or in response to your questions we may offer certain metrics to provide a greater understanding of our business or our quarterly results.

Please be advised that we may or may not update these metrics in future earnings calls.

Before I turn it over to Marc, let me make this call official with a brief "Safe Harbor." The primary purpose of today's call is to provide you with information regarding our first quarter fiscal year 2010 performance; however, some of our discussions or responses to your questions may contain forward-looking statements.

These statements are subject to risks, uncertainties and assumptions, should any of the risk or uncertainties materialize or should any of our assumptions prove to be incorrect actual company results could differ materially from these forward-looking statements.

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

Lastly before I turn things over to Marc, please be reminded that any unreleased services or features referenced in today's call or other public statements are not currently available and may not be delivered on time or at all.

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

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

Thanks, David.

I'm pleased to share our first quarter results today.

Revenue for the first quarter was a record of roughly $305 million, an increase of approximately 23% from a year ago.

We exited Q1 at an annual revenue run rate of 1.2 billion.

We believe no enterprise software company of our size is growing faster than Salesforce.com.

GAAP earnings per share was also a record at $0.15, and was up 88% over the -- over the first quarter of last year.

This was well above our outlook and reflects strong cost controls.

Now, Graham will have more to say about some of the operational initiatives that contributed to our strong profitability in a moment.

We also reported our strongest cash quarter in Q1 ever.

Operating cash was a record 98 million, up 17% from a year ago.

This translates into roughly $0.78 per share.

Free cash flow rose by 42% from last year and was also a record at 85 million, or roughly $0.67 per share.

We finished Q1 with more than $980 million in cash and marketable securities on our balance sheet and no debt.

That's a great position to have in this environment.

During the quarter, we added roughly 3900 net new customers, up roughly 50% from the 2600 net additions we achieved in Q1 a year ago, and a record for Q1 new customer additions.

Over the past four quarters, we've added nearly 16,000 net new customers to bring our total global customer community to more than 59,000.

This strong growth in the number of new customers we're adding is strategic to our future, since every customer represents a future growth opportunity through add ons and upgrades, especially as the economy improves.

Although many of the 3900 net new customers we added this quarter are starting with small deployments, we hope they will become tomorrow's growth stories.

While our revenue and customer growth continues, there's no doubt the IT spending environment continues to be challenging.

The buying behaviors of our customers are indeed changing, as businesses look to manage their way through the challenging global economic environment, and as a result, our new business signings in the first quarter were slightly below where they were a year ago.

We define new business as incremental orders from new and existing customers, excluding renewals.

Because it remains unclear when IT buying patterns will return to more traditional levels, we are reducing our full year revenue guidance by 4%.

At this level, our projected revenue growth for our fiscal year 2010 is now approximately 17%.

In response, we have been implements and will continue to implement strong cost controls to deliver earnings growth.

In fact, I am pleased to announce today that because of these significant changes, we're raising our full year EPS guidance by roughly 9%.

This translates into earnings growth of approximately 70% in fiscal year '10.

Gram will cover some of the operational initiatives that we've already undertaken to make this increase possible when he discusses our financial performance and outlook in a moment.

While we're making these adjustments in the near-term, we continue to believe in the strong fundamental value of Enterprise Cloud Computing, the low cost, the low risk, and fast results.

That value proposition enabled to us to continue to build our customer base in the first quarter and sets the stage for potential future growth when IT spending returns to traditional levels.

Now let's take a look at some of the more notable customer wins in the first quarter.

The quarter was highlighted by two significant transactions in Japan.

First, in what we believe was the largest CRM transaction of the quarter for any vendor, Sompo, Japan's insurance leader chose Salesforce.com to deploy an additional 16,000 subscribers for 25,000 total internally of our unlimited edition, as well as an additional 350,000 partner subscribers to their brokers and dealers in 50,000 insurance offices throughout the country.

The deal is a result of an extended pilot with Sompo proving our capabilities at scale in the Japanese market.

It is also a dramatic example of our ability to win in accounts that are also dominated by oracle and Microsoft.

Our second large transaction in Japan was with our long-standing customer, the Japan post.

Japan post added roughly 10,000 platform subscribers that will push their total deployment to more than 75,000 subscribers in 25,000 offices throughout the country.

The agreement will allow Japan Post to manage more than 20 force.com custom applications that they have built that they are now using for the privatization of their business.

Globally, we had a long list of wins against our three main competitors, Oracle, SAP, and Microsoft.

Our wins against Oracle included Sompo and Japan Post as I mentioned, GE Capital, the J.M.

Smucker Company, Standard Bank, Pfizer, Broadcom, Cannon USA, Iron Mountain, Barclays, Sanyo, Beckman Coulter, Kroll, P&G, Sony and others.

In our wins against SAP included Pratt & Whitney, McKesson, Nokia, Nexis, Mindray, Sonar, Punch Graphix, Inverness Medical, Integris and P&H Mining.

Now in the mid market, we also had competitive success against Microsoft with wins that included Sunlight Philippines, Booz Allen Hamilton, Western Union, Barco, Rewards Network, (Savlick), SKE, Guardian Alarm, Comp TIA, the Singapore Airport, Coveynance and Radian.

There's another area of growth that we're particularly proud of, now 6,100 non-profit organizations run their service on our products for free or at greatly reduced cost.

This quarter we added many new non-profit organizations to our special non-profit program including US Green Building council, center for missing and exploded children, and the environmental defense fund.

Customer success we are celebrating in any environment, but in these challenging times our communities depend on the success of our philanthropic customers more than ever.

There continues to be great interest in our vision for Enterprise Cloud Computing and we're taking full advantage of it.

Nowhere is that more evident than the huge crowds that we continue to draw at our Cloud Force events across the globe.

In all, more than 8900 people attended salesforce events in Q1 from London to New York to Tokyo and are planning more than one event per business day in the second quarter.

These customers are responding to the strongest, most complete portfolio of products in Enterprise Cloud Computing.

The Sales Cloud, Service Cloud, and Force.com platform.

We call our core salesforce automation service the Sales Cloud, the most complete CRM service available.

And our latest version includes Sales Genius, an idea we really found in Apple's iTunes which helps your sales teams find similar opportunities in your organization so they can repeat winning sales strategies, and our integrated content library lets you find and edit content in the Cloud as well.

No other competitor can match these capabilities.

Our service Cloud is catching on to businesses today, because it helps companies engage their customer where they are exchanging information today in the Cloud.

The Service Cloud harnesses the power of those conversations and helps companies build stronger more responsive brands.

This new vision is paying off.

In fact, in the first quarter, Gartner named our Service Cloud a leader in its CRM Magic Service and support Magic Quadrant, a first for our Company.

Finally, our Force.com platform is the fastest way to build applications today.

In fact, Nucleus Research says that developing Apps on Force.com is five times faster than Dot Net or Java, and every native application built on our platform runs on the Force.com Cloud Computing infrastructure, the most scalable, reliable, and secure infrastructure in enterprise Cloud Computing.

Customers are clearly not waiting for another proof point.

They continue to put the Force.com platform to work with deeper customizations and new applications, all built faster and at far lower cost on Force.com.

Some of the Force.com key statistics that demonstrate this momentum include 110,000 custom applications, twice the number of a year ago; 45 million lines of Apex Code, up more than 25 times from a year ago; 180,000 custom visual force user interfaces, up 15-fold from a year ago; and 200,000 custom work flow rules, twice the number from a year ago.

Nearly 150,000 developers are now building on Force.com, up a hundred percent from a year ago.

And we delivered all of this success while executing more than 13.5 billion transactions in the first quarter, an increase of 33% year-over-year, with 99.99% reliability.

No Cloud Computing company is doing more to deliver scalability, performance, and reliability than Salesforce.com.

We believe that the adoption of these new Cloud Computing technologies show that customers and ISVs are embracing our vision for Enterprise Cloud Computing.

Customers are investing in our platform with clicks and code, not capital, and the method of this adoption reinforces our belief that we have the right products for times like these.

As we mentioned earlier, we're in a challenging IT spending environment, but we listen to customers and prospects around the world, it's clear, they are moving, and more willing than ever to question the conventional client server wisdom of major software, hardware, and data center purchases.

We continue to believe that this environment is opening minds and markets for us, so even as this environment presents obvious challenges, it presents unique opportunities and we intend to exploit them fully and efficiently.

To close, I would like to thank our employees and our partners, for helping more customers achieve more success than ever, and while delivering record profits for our shareholders.

Now here is Graham to tell you more about the details of our first quarter financials, as well as our outlook.

Thanks Marc and good afternoon to everyone joining us today.

In the first quarter, solid execution and effective cost controls enabled us to deliver record revenue, EPS, and cash generation.

As Marc noted, Company revenue $305 million was up approximately 23% year-over-year.

In constant currency terms, growth was 3 points higher at roughly 26%.

Subscription revenue grew 25% year-over-year, while professional services and other revenue grew just 4% over the same period.

For the first quarter international revenue accounted for approximately 28% of revenue, that's unchanged from Q4.

America's revenue was $220.6 million, that's a year-over-year increase of almost 24%.

In Europe, Q1 revenue was $51.6 million, a growth rate of just 14% -- or just over 14%.

However, in constant currency terms, Europe was our strongest revenue performer with growth of 34% after allowing for a 20-point currency headwind.

First quarter revenue for Asia was $32.7 million, that's an increase of 36%.

We did get a benefit there from a weaker dollar versus the Yen, as constant currency growth was 30%.

Gross margins were essentially unchanged on both a sequential and year-over-year basis at roughly 80%.

Operating margin for the first quarter was 9.9%, an increase of more than 3 points from a year ago, and up more than 4 points from Q4.

Operating income increased by 95% year-over-year, and 87% sequentially and remember we achieved our Q1 GAAP operating income while absorbing nearly $22 million in stock-based compensation.

Excluding that stock-based compensation, our operating margin was 17% for the quarter.

The key driver behind our earnings leverage continues to be our operating expense categories.

Where we have taken several specific actions to reduce costs.

First, and most importantly, given our capacity increase last year, we scaled back our hiring in Q1, adding people in only a few selected areas such as service delivery, customer support and development.

After adding nearly a 1,000 people in fiscal '09, and 250 people in the fourth quarter alone, we added just 40 people in Q1.

Total headcount now stands at approximately 3,600 full time employees.

Until we see clear signs of an improved IT spending environment, we expect to be hiring at greatly reduced levels compared with last year.

Second, as we mentioned on our last call, we have adjusted our approach to both external customer events and internal meetings.

A recently held London customer event was held as a single day Cloud Force to help minimize traveling expenses for our customer, which also reduced our own cost.

Similarly reduced the cost of global sales kick off meeting by using real-time video conference technology by substituting several regional events.

These actions helped reduce several expense line items to below their year ago level.

Including T&E, marketing and outside contractors.

While we haven't made draconian restrictions, we are asking employees to be more judicious in their travel plans.

The biggest impact on these cost control measures was on the sales and marketing line where the effects of reduced hiring and lower T&E marketing costs contributed to a significant expense reduction as a percentage of revenue.

Compared with Q1 last year, sales and marketing as a percentage of revenue declined by roughly 4 points to approximately 46% of revenue.

R&D was 10% of revenue in the first quarter reflecting continued investment in our products, while G&A at 14% of revenue was down more than a point year-over-year.

As Marc mentioned, Q1 operating cash of 98 million was a Company record.

That's up approximately 17% from a year ago.

This translates into roughly $78 per share -- I'm sorry, $0.78 per share.

Turning to capital expenditures as a reminder, we lease our data centers and almost all of the related equipment and as a result, capital expenditures are primarily driven by lease hold improvements with lesser amounts from software purchases and capitalized development costs.

Most of the $13 million in Q1 CapEx related to lease hold improvements in San Francisco and in the European location.

The reduced hiring we anticipate over the next few quarters will allow us to significantly slow our rate of office expansion, which in turn will help lower our CapEx run rate this year.

This should have a corresponding beneficial impact on free cash flow.

Free cash flow, which we define as operating cash flow, less CapEx, was approximately $85 million.

That's an increase of 42% from a year ago.

In per share terms, this translates into roughly $0.67 per share of free cash flow, or roughly the same amounts we earned in our entire fiscal 2007.

Turning to the balance sheet, as a result of this strong cash generation, our cash and marketable securities balance ended the quarter approximately $984 million, that's up more than 30% from a year ago.

At this level, we have $7.85 per share in cash and marketable securities on our balance sheet.

We believe, having this financial strength, is an important asset to our customers, prospects, shareholders, and, of course, our employees.

As is typical in Q1, our receivables balance fell significantly, as we collected against our seasonally strong fourth quarter invoicing.

While revenue grew by 23% year-over-year, and deferred revenue rose by 17%, our receivables balance grew just one percent.

First quarter DSO was 43 days.

That's a reduction of nine days from a year ago.

While I'm always pleased to see us executing well on collections, we did exceed our targets in Q1 by approximately $20 million.

Which will have an impact on our Q2 operating cash flow.

Deferred revenue finished the quarter at $549 million, that's an increase as I just mentioned of 17% from the prior year.

If we compare the balance in constant currency terms, deferred revenue would have been $12 million higher at $561 million, or an increase of just over 19%.

As we have discussed in the past, in addition to foreign currency movements, four business factors can affect deferred revenue in any given quarter.

First, average invoice duration, second, invoicing seasonality, third, attrition rate, and fourth, new business signed in the quarter.

I'm going to discuss each in turn.

So first, average invoicing duration in Q1 was almost unchanged from a year ago, so this had no impact on our Q1 deferred revenue balance.

Second, as we have discussed before, seasonal invoicing patterns and growing revenue amortization continue to have a pronounced effect on quarter to quarter deferred revenue fluctuations.

We believe that the seasonal pattern of new business that has driven an increasing proportion of our invoicing into Q4 will cause these fluctuations to become more pronounced over time.

Third, attrition.

In Q1, our subscriber attrition rate continued to be less than 1% of net paying subscribers per month, in line with historical levels.

On our last call, we mention we had seen a slight uptick in attrition in Q4, and we saw another slight uptick in Q1.

When we compare the dollar value of contracts from last year to this year, the annual dollar attrition rate is running in the mid-teens.

Of course the overall value of our install base continues to increase as we sign a lot more new business each quarter than we lose in terms of attrition.

Although we've seen this slight upward trend in both subscriber and dollar attrition rates over the last couple of quarters, attrition remains within the planning assumptions incorporated in the guidance we gave at the beginning of our fiscal year.

Finally, as Marc mentioned earlier, new business signed in the first quarter was lower than our expectation, was down slightly compared with Q1 of last year.

There were three main factors that affect new business.

First, as we said last quarter, we continued to see longer sales cycles across most of our business, as customers are delaying purchase decisions.

Second, we're seeing smaller initial average deployment sizes than in the past.

We believe customers want to move ahead with Cloud Computing initiatives, but they need to balance the benefits of innovation with tighter financial constraint.

And, third, many of our existing SMB customers are not adding subscribers or upgrading their service levels at the same rate as they have in the past, as they look to control expenses.

To recap, invoicing seasonality, our attrition rate and new business, all affected the deferred revenue balance at the end of Q1.

Turning to our outlook, it's quite possible that the three factors affecting new business trends in Q1 that I just discussed, that's closed cycle, deal size, add on, and upgrade activity, could continue into Q2 and later quarters this fiscal year, which would affect the level of new subscription business signed, and in tandem there would likely be an commensurate effect on our professional services bookings as well.

In light of this uncertainty surrounding the IT spending environment, we have reduced our fiscal year 2010 revenue estimate to between 1.25 billion and 1.27 billion.

We expect professional services revenue to be approximately flat with fiscal 2009 with all of the growth coming from subscription revenue.

At the same time, however, we believe our business model provides good visibility, enabling us to control hiring and spending, which in turn will allow us to show increased earnings leverage and strong cash performance.

As a result, we have raised our fiscal 2010 GAAP EPS estimated range to $0.59 to $0.60.

Our EPS estimate assumes a GAAP tax rate of approximately 43%, and an average fully diluted share count of roughly 127 million shares.

It also includes approximately $90 million of stock-based compensation, and $9.3 million for expense related to the amortization of purchased intangibles.

In addition, we continue to believe that operating cash flow will be essentially flat with fiscal 2009, due in part to the utilization of our federal net operating losses we talked about on the last call.

Turning to Q2, we expect revenue in the range of 312 to $313 million, and GAAP EPS in the range of $0.14 to $0.15.

The year-over-year FX impact from a stronger dollar is a reduction of approximately $10 million to revenue, or roughly 4% on the growth rate.

We're projecting Q2 operating cash flow to be down significantly from last year's level, primarily due to the collections over achievement that we saw in Q1, and I mentioned earlier.

And for reasons outlined earlier, again, we expect deferred revenue to be flat to slightly down sequentially.

These estimates assume a GAAP tax rate of 43% and an average fully diluted share count of approximately 126 million shares, and include approximately 22 million in stock-based compensation and 2.2 million in expense related to the amortization of purchased intangibles.

So, in closing we think we executed well in a tough environment we are very pleased to be able to demonstrate the earnings leverage in our business model and also to maintain strong cash flow performance.

We look forward to discussing progress on our Q2 call in August.

With that, let me turn the call back to the operator and we will take your questions.

(Operator Instructions).

And our first question comes from Kash Rangan with Merrill Lynch.

Hey, thank you very much.

Graham, I appreciate the drivers behind the deferred revenues, but drilling into a couple of those factors, seasonality, new business, and attrition, if I take your reported revenue in this quarter and just run rate it, and that would represent barely 3% growth from that run rate to your projection for revenue, the new guidance for revenue, the mid-point of your range, so I would assume that you're factoring in almost next to nothing, maybe very bare minimum growth rate to your bookings and deferred revenue in order to get to this guidance.

Looks like it's a little bit on the conservative side.

Can you just walk us through your thinking there?

Are you just assuming that things are going to get worse?

And, also, a follow-up for you, Marc, on customer service, if you can quantify the percentage of bookings in the quarter from customer support and over non-SFA related products, that would be great.

And also the outlook for that business and how that should shape your growth profile going forward as we come out of this cycle.

Thanks.

Okay.

Well, we talk about new business, which does not include renewals.

So I just want to be clear that when we talk about new business, it's just incremental business we sign in the quarter.

And clearly, you know, we -- our Q1 result was less than our expectations, and as we mentioned, slightly down from last year, so I think given that back drop of uncertainty, we just felt, you know, that it was appropriate, you know, to make an a adjustment to our guidance.

I'm not going to characterize it as conservative or otherwise.

I think it's appropriate and basically what we feel comfortable with having just finished Q1 as we have.

So I wouldn't characterize it as seeming things are getting worse or better.

We just kind of assumed things carry on as they are.

Marc, do you want to take the second question on the Service Cloud?

Well, in addition to the Service Cloud, Kash, as you know, we really have put a big emphasis on to it in the last 5 months so we launched it at the beginning of the year, and we've been touring it around with our Cloud force tour.

I think, you know, it's hard not to highlight the biggest and most important thing for that product in the quarter was to be selected by Gartner as a leader for their Magic Quadrant.

They profiled all of the products, and we are now one of the top 3 that are in that leader Magic Quadrant, and we were just incredibly excited about.

The relevance of that is that as customers look to make those decisions this year, they tend to look into the leader Magic Quadrant, so we're getting a tremendous amount of activity around that product.

We're making very good progress in diversifying our revenue overall, Service Cloud is certainly part of that.

I don't know, I don't think we mentioned it, but our non-SFA business was once again more than 25% of new business in the first quarter, and our platform business is more than 5% of business in new business, and I mentioned Japan Post now has more than 20 customforce.com apps, but so many customers are moving to look at that product and expanding with that product, extremely exiting.

In regards to the Service Cloud products, we closed a lot of deals in the first quarter.

We closed one with the GSA, which was extremely exciting, with Thompson Reuters, with Qualcomm, with Starbucks, with Moellis, Inverness Medical, RealPage, I mentioned Punch Graphix, against SAP.

All were Service Cloud wins, and we continue to see tremendous activities around that product wherever we go, and I'm really excited about moving into this call center customer service space, and I think we have a very compelling product, great vision, and now ranked as one of the top three in the industry.

Our next question comes from Laura Lederman with William Blair.

Thank you for taking my questions.

Wondered can you talk a little bit about pricing pressure?

Was there more pricing going on than you've seen in recent quarters?

Number two, given the guidance for not much growth as Kash mentioned in new business, is this pipeline weak, or are you just more concerned about close rates?

And the third question, where was the business weakest -- enterprise, middle market, small business, across the board, any sense of where we're stronger versus weaker?

Thank you.

We, as you know, track our pricing, we talked about it on the last call.

I would say our price per subscriber across our different offerings in general was very similar to Q4.

There are a couple of different additions of our product that saw slightly lower pricing in Q1, but nothing that would cause us concern.

As we mentioned in terms of average deal size, we did see some reduction there, because our sense is people are being more cautious, and, therefore, going with fewer subscribers on average in terms of new business.

In terms of the mix across -- and obviously Marc can chime in, I don't think there was any particular area, you know, across the Company that was super strong or super weak.

I think we saw a general worsening.

We did -- I mentioned, sorry, that add on business on our SMB space was less than we expected this quarter, so that's probably maybe marginally weaker than in Q4, but Marc any other color you want to add to that?

Well, I think our activities, activity levels, are in many cases at -- at a record.

I mean, especially in some core industries, like financial services, and high technology.

Now, that said, let me just tell you that there's just much longer sales cycles going on, and when transactions are getting done, they're getting done in a smaller construct representing customers' own concern about the environment that they are operating in, and, of course, as we mentioned, traditionally a significant part of our new business in the quarter is what we called add-on business, and add-on business is our approximately 60,000 customers adding on, adding new seats, or upgrading, or updating, or whatever it is, and we've really seen a lot less of that happening as this environment has kind of wrapped the customer, and that -- those are really the things that have really changed.

But getting back to the fundamental value proposition, I mean customers want low risk, they want low cost, they want this elasticity that we offer.

These are the reasons that Cloud computing works in this environment and customers are taking advantage of that, and we're very supportive and proud of that.

Our next question comes from Heather Bellini with UBS.

Hi.

Thanks, Marc.

I was wondering if you could talk a little bit about the market strategy, the go to market strategy for Service Cloud.

I was wondering, over time, what you expect to have a separate sales force overlay for that area?

And then a follow-up question would be, you guys mentioned that average invoicing duration didn't change in the quarter.

I was wondering if you could parse that between renewals and new deals, given there's a lot of talk about this in the market.

For example, on new deal signings, are you seeing the customers wanting to sign up for shorter duration deals than new customers were signing up for last year.

Thank you.

Let me answer the Service Cloud part and I'll pass it over to Graham.

So we are very excited.

We are basically entering this new market that started with this Service Cloud launch.

It is a very compelling demonstration of technology.

If you've seen it, it really shows that customers are kind of locked into these call centers, which deliver a tremendous amount of myopia to them, and this intermediates them from what's happening on the Internet, on Google, on Facebook, on Twitter, on other aspects of the new environment where their customers are participating, and our customers recognize that, and they are looking for ways to depart from their old client server call centers and move to new, more modern technology.

We made that case to Gartner, they gave us the rating.

We've now been touring the product.

Customers have been extremely excited about it, and, yes, we have added a -- a -- what we would call an overlay type sales force, as well as added and specifically focused on incremental training for our systems engineers and account executives on a global basis.

We have done acquisitions in this area, as you know, InStranet late last year, and others.

We're continuing to make investments in this area.

We will continue to do new things to focus on this area.

We think that our competitors in this area are way behind, and that we have a great opportunity here and we want to execute on it.

Heather, in terms of invoice duration for new customers and existing customers, and also the length of contracts that they're signing up for, we haven't seen any significant changes.

It's quite remarkable.

We kind of slice that data a lot of different ways, and year-over-year, Q1 versus Q1, there's basically no change.

Next question, please.

Our next question comes from Brent Thill with Citi.

Thanks.

Marc, I was wondering if you could comment any linearity during the quarter, what you saw.

I think a lot of us thought February was a tough start.

Can you give us a sense of how it progressed through the quarter?

Was it weak the whole quarter, or did you see any pick up in demand later in the quarter?

Well, you know, I think that in terms of -- we don't normally profile our business on a month by month basis, which is kind of what you're asking me to do.

The quarter certainly, I would just say certain months were not as amazing as other months, and in one month, you know, we delivered these two mega transactions with Japan, which was extraordinary, and I think you can probably correlate and look at the overall market and see that -- and kind of, come to your own conclusions around that, but, I feel most comfortable really just delivering these aggregate results right now.

Okay.

And Graham, can you just touch base on plus off balance sheet deferred.

Last quarter you said it was 1.3 billion.

Can you update us on that figure for the first quarter?

Yes, I think it was it was actually -- the total was almost flat quarter over quarter, so despite the deferred on balance sheet went down.

Total deferred including off balance sheet was roughly flat, because these two big transactions were multi -- one of them was a substantial length and that adds a fair amount of dollars into the off balance sheet bucket.

Our next question comes from Brendan Barnicle with Pacific Crest Securities.

Mark, you guys have had some good progress on force.com and you highlighted that it was more than 5% of new business.

Is it at a level now where you can break-out sort of a revenue contribution, and is there any way to characterize its growth relative to the SFA business or other parts of the business?

Well, you're right.

We have had a lot of action with force.com.

It has been great for us.

I guess in a couple of areas that we're really focusing on, we first, as you know, I think we had about 50 native apps available on force.com from ISVs when we had Dream Force last year.

I think the number now is about 150, so that's been extremely exciting.

Our customers are very comfortable building on this platform.

They see tremendous advantages both in speed of development, as we highlighted with this kind of independent nucleus study, but now there's actually multiple independent studies who have come along to say that we are a tremendously productive development environment, as well as a very low cost environment to build in, and, in addition to that we're having conversations and discussions with the largest and most important ISVs in the world, and we hope and anticipate that we'll be seeing that move as well for the platform.

Customers, of course, well, they're doing more with the platform than ever before.

I'm personally having conversations with the people who I think are the largest and most important CIOs in the world about building more aggressively on the platform, as well as the systems integrators as I mentioned.

It was more than 5% of new business in the first quarter.

It's, of course, growing much faster than the SFA business, which is a much larger base, and I anticipate that for this year we're going to continue to see a lot of exciting action for the platform.

In regards to the Gartner Magic Quadrant, I didn't mention this, but it's the only service that's on the Gartner MQ, and it's on the top right-hand side of the Visionary Magic Quadrant which was issued about a year ago.

And Brendan, just to follow up on your question about revenue, I think overall in terms of our revenue base, it's still in aggregate perhaps not that material, but certainly it's growing quickly, and you've got to remember obviously we've got 10 years of history here that we're adding on to, so hopefully it will get to be a material part of the revenue base in the next few (multiple speakers).

And Graham, we didn't mention this, but also during the quarter, we introduced our new mobile light which takes any force.com app and mobilizes it to your BlackBerry or iPhone or Window CE and we are offering that at no charge to our customers to get them to experience the power of mobilization.

Next question, please.

Our next question comes from Philip Rueppel with Wachovia Securities.

Yes.

Thank you very much.

Last quarter you talked about reducing a layer of sales management, and of course it was Q1 where there was new territories and quotas.

Was there any -- was the disruption any more than normal there, and did that contribute to some of the lack of new business?

And then as corollary you mentioned that attrition was ticking up slightly, deal sizes were going down slightly.

What -- what gives you confidence that you have reached a point where you can predict stabilization going forward?

Thanks.

Well, we have brought the sales managers closer to me, and that's been extremely important.

We want to, as we talked about before, reduce that kind of additional layer of management to kind of bring our senior sales executives, which is myself, as well as, our two co heads of worldwide sales, closer to the -- what we call our Senior VPs, both in our corporate sales, and our field sales functions.

That's been a very successful reorganization.

In terms of speed of launching the first quarter, I think, in my experience in the software industry, over 30 years, whenever you enter a new fiscal year, doesn't matter what company you are, you're always going to have some level of disruption because you're putting in new comp plans and new territory assignments, and new quotas, and on and on and on and on, and so it's hard to give a relative comparison.

That's just the reality.

Graham, do you want to add anything to that?

Yes.

Well, in terms of your question on attrition and deal size, clearly this is an environment where it's just difficult to predict where we're going.

So we can -- we've made our changes to revenue guidance based on what we've seen in the first quarter and what we think is going to play out in the remaining quarters of this year, but as Marc said, we're still very optimistic about our business, but we -- I don't want to comment in detail on whether we think -- our guidance is based on sort of things not getting worse, not particularly getting better.

Our next question comes from Sarah Friar with Goldman Sachs.

Hello?

Can you hear me?

Yes.

Hi, Graham, when we've spoken in the past about your sales and marketing spending, you've always pointed out how important it is for you to spend ahead of demand generation, so as you look out, because clearly at some point things are going to recover, should we assume that you begin to spend, when you start to see any turn the bookings growth?

Or is there a reason why you would stay fairly cautious and kind of ramp up the discretionary costs a little bit more in arrears?

Just trying to understand that dynamic.

Well, Sarah, I think, our goal, certainly, over time is to, as you know, improve profitability, and if you look at the line items that can affect that, most significantly, it's sales and marketing and NG&A.

We want to continue to invest in development at roughly the rate we are.

There may be some improvement of gross margin, but probably not a whole lot over the next few years.

So I think, I think we'll certainly be in this environment we absolutely will be appropriately balanced in the way we spend into our sort of pipeline creation activities and Cloud force events and dream force and all of those things, but, at the same time, over time, we recognize we have to get more efficient, so hopefully as we have a slightly slower period of growth in terms of new business here, we can look to create some real efficiencies around our activities.

And I would add that over the last several years we've certainly talked to all of you about the tremendous investment that we've been making in building a worldwide distribution channel and marketing capacity, and that has been a huge focus for the Company to be able to put this big net in place to be able to capture any opportunity that we (technical difficulty) is possible on this global stage, and now we really can, you know, take advantage of that, and work to develop the efficiencies with that, and the productivity in that, and all of those things we have not been able to focus on because we've been focused strictly on the growth of that capacity.

So this is a very, very exciting opportunity for us to be able to kind of take that investment that we've made, and now get it to work at an even higher level for us.

Next question, please?

Our next question comes from Nathan Schneiderman with Roth Capital Partners.

Hi, thanks very much for taking my questions.

Two questions for you.

You laid out that new business signings were down a little bit year-over-year.

I was hoping you could give us, what was the percent decline?

Could you also give us the Q4 and Q3 number, just so we have some perspective there?

And then secondly, I was hoping you could talk to the considerable strength in Europe on a constant currency basis, and how does that jive with macro conditions there that seem like they are getting increasingly bad, and how do you see that playing out going forward?

Yes, Nathan, I don't want to -- we haven't traditionally discussed new business, because I think we've done that because we didn't want to become just like every other software company that's judged solely on the current quarters bookings, and puts us in that situation of having all those crazy quarter ends and behaviors that go with that, so when we say slightly, hopefully you'll get a sense that it's down, certainly a -- a single-digit percentage.

It's nothing that we considered alarming or concerning in that regard, but we felt since it was unusual that, you know, it was worth calling out, making sure people knew what was going on, and clearly has an impact on deferred revenue and those kind of things that was worth helping people make the connection with.

The second part of your question was?

About Europe.

About Europe.

And I think -- I don't think -- I mean, I think they had a strong Q4, and that obviously comes through in terms of the revenue, but otherwise I don't think we saw anything, unusual on the plus or the minus side, particularly, in Europe.

Clearly they're growing from a smaller base.

We have a big opportunity there, but I don't think there's any other significant things to mention.

We saw a lot of activity in Europe, and of course we had Dream Force Europe.

I mentioned kind of in the roll call of deals against Oracle, one of the more significant transactions in Europe, actually was Barclays, which was a multi-thousand user win against Oracle and an account where they're traditionally very strong, and we continue to focus in that area.

We have actually put some new management in place in Europe that we're extremely excited about, and we're -- we'll continue to make some big marketing and distribution focus on that geography over the next year.

All right.

Next question.

Our next question comes from Peter Goldmacher with Cowen and Company.

Hi, guys.

Hey, Marc, you had talked a couple of questions above go about building out that global distribution capacity, and Graham, you and I had talked about in the past, sort of a segment profitability analysis on the small, medium, and large business segments.

Can you -- are you able to share the results of that segment analysis, and how you all think about profitability in those three segments of your business?

Well, I think our global -- as Marc said, we hired a lot of sales capacity.

Last year across the board, both in enterprise and in --

Really in the past two or three years.

Yes particularly we added a lot last year, and I think as Marc says, we're really looking to, you know, keep hiring to a low level if we see these continuing challenging IT spending conditions extend, so I think we have this significant amount of capacity that we can really get to work.

In terms of the profitability of the various segments, you know, I think we certainly haven't completed our analysis on that, nor do I think we would want to share that in a lot of detail.

You know, I think there are different reasons for having, you know, business and enterprise, small and medium sized businesses.

They all have different profiles, and certainly growing our customer base, and having that as a future source of growth within that customer base, remains very up important.

So I think we would always want to concentrate on customers across the board in all different sizes.

And I would just add that I guess I would like to just emphasize two things or three things.

First of all, we continue to see success in so many regions and so many sectors around the world, and especially the interest in our model and just the sea change in Cloud Computing, but number two, we have made this big investment, and we've really never had the opportunity, because of just being locked in kind of that tornado, to be able to say, okay, now here is all of these people, all of these professionals, all over the world.

Are we completely maximized in each and every area, and by even being able to step back in the last few months, we've been able to find some areas that we want to focus on that we've kind of said, gee, well, we kind of forgot about this, or here is a great opportunity.

So we have the opportunity to maximize and focus on this investment in what I believe is the very first time.

And then the third thing is this Company is extremely unique in that we have so many customers that are large and important, as I mentioned so many of them today on the call, but we have so many customers that we really don't talk about, but who we have a tremendous relationship with, who are small customers, or medium customers, and having that small, medium, and large base has turned into a tremendous asset for us, both in terms of a primary gain of the distribution of the revenue spread, and the profitability spread, but also in a secondary gain in kind of how they move throughout the market, and how that's turned into an opportunity for a global brand.

So all of those things have worked really well for us.

Unfortunately we only have time for one more question, and I see there's still a list in the queue of double digit number here, so I want to apologize to those of you we're not going to get to.

Operator, go ahead and take our last question of the day.

Our final question comes from Mark Murphy with Piper Jaffray.

Yes, thank you.

Graham, I think you commented that deferred revenue for Q2 should be sequentially flat to slightly down.

Just wondering, are you looking at that as typical seasonality, or more of an unusual seasonality because of the environment?

And also for Marc, I think the number of AppExchange applications is running a at level that is fairly consistent with a year ago.

I'm assuming the revenue trend through AppExchange is still up pretty nicely.

Wondering if you can comment on that, and also should you expect that at this level of about 800 applications would spend some time here, or do you think that's go going to be trending higher in the coming quarters.

So, Mark, to answer your question, I think we've said in the past, there's a lot of moving parts we went through it in detail at our analyst day.

There really are a huge number of things that contribute to our deferred revenue balance in a particular quarter, but I think the big macro themes that affected are, obviously FX, and we talk aid pout FX being a headwind in Q1, and it will it will almost certainly continue to be a headwind in Q2, so that has some impact on my at least directional guidance for Q2, the fact that new business in the first quarter wasn't as strong as we thought it would be, and so that's clearly going to have an impact in terms of the quarterly billings that get invoiced in Q2.

And then, yes, just generally we've, like I said, we've lowered our revenue guidance and as a result clearly that will have an impact on deferred revenue.

So really those three factors lead us to give that best directional guidance that we can.

In terms of the AppExchange and the platform, we're extremely committed and excited to be not only a provider of applications, but a provider of this platform of Cloud Computing which we see as not only a fundamental growth driver of the business, but also a fundamental differentiator of our applications, since our application competitors have not built a platform.

We have continued to see growth on the AppExchange of about 869 apps today, versus is 813 a year ago, but you probably, or maybe you don't know that we aggressively go in and prune those apps, and if we see problems with companies, or ISVs who don't commit to our standards, or stay at our level, we remove them, and that's extremely important to us, and so while the net number is important, we're also very focused on the overall quality.

Now, to that extent, let me also say that, and I misspoke earlier when I said there's -- we have moved from 50 native apps at dream force to 150.

There's actually now over 200 native apps available today on the AppExchange, and the reason why we're putting such a huge emphasis on that is because when those applications are built natively, they take on our security model, our reliability model, our availability model, and they take on our data centers.

And that is very, very powerful for our customers, because they have to worry a lot less than, you know, working on other platforms, or in a mashup environment, and so we put a big focus on that, as well, so it's not just the number of apps on the AppExchange, but also the quality of those apps and the number of native apps we are focused on and we're also focused on customers who are taking those apps and putting them into their own implementations or derivatives of those apps into their own implementations.

Today that's 110,000 apps, as I mentioned versus 65,000 apps about a year ago, so that's extremely exciting to us to see customers, you know, really adding their business process, their work flow, their code, their user interfaces.

As you know, we are getting ready to GA our sites capabilities.

Have already seen customers do tremendous work with our sites.

We think that will be another catalyst for growth on the Force.com platform, and as we look out and as I've toured around the word as I've done these presentations personally, and whether it's Chicago, or New York, where this -- this quarter we hit a record number of attendees in a seminar, we -- many of you were there when we packed the rooms, and we had to turn people away, or in Europe, the same thing, in London for our Cloud Force where we had -- I think we had 2500 or 2700 people in a room, more than we anticipated for that day, that we see so much interest and so much power in this model and customers thirsty for these alternatives from their -- from their work in client server or computing, or in traditional enterprise software, and they want to move to these models.

They're looking for the opportunity to move to these models.

And we're working hard to show them how to do that both with our Sales Cloud, with our Service Cloud, as well as with the custom application developments that you're asking about with Force.com, and we -- we fully anticipate that this is the right direction for the whole industry, not just for this Company, and that we're going to continue to see these interest levels grow and activity levels, and we want to be the provider that continues to be the most important in this industry.

That's all the time we have.

I just want to remind everybody over the next several weeks, several of our executives including Graham, Marc, Polly Sumner, and Parker Harris will be appearing at financial events and I encourage you to explore those, you can read about them on our website, and hopefully we'll be able to come out and talk with all of you.

With that, we look forward to seeing you and catching up with our Q2 call in August.

Thank you, and have a good day.

This concludes today's salesforce.com Q1 fiscal 2010 financial results conference call.

You may now disconnect.