賽富時 (CRM) 2010 Q2 法說會逐字稿

Good afternoon.

My name is Marcello and I will be your conference operator today.

At this time, I would like to welcome everyone to the Salesforce.com Q2 fiscal year 2010 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).

Thank you.

I will now turn the call over to Mr.

David Havlek, Vice President of Investor Relations.

Sir, you may begin your conference.

Thanks, Marcello, and welcome, everyone, to today's call.

Joining me today from San Francisco headquarters to discuss our second quarter fiscal year 2010 results are Chairman and Chief Executive Officer, Marc Benioff, and Graham Smith, our Chief Financial Officer.

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

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

Today's call is being live webcast.

The dial-in replay will be available shortly following the conclusion of the call until September 10, and a webcast replay will be made available for approximately 90 days.

To access the press release, the additional 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 stated.

In addition, at 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 on future calls.

Let me make this call official with a quick, brief Safe Harbor.

The primary purpose of today's call is to provide you with information regarding our second quarter fiscal year 2009 -- I'm sorry, fiscal year 2010 performance.

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

These statements are subject to risks, uncertainties and assumptions.

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

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

Please also 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 purchase our services should make their purchase decisions based upon features that are currently available.

Following some of our brief comments today from Marc and Graham, we'll open things up to your questions, because we have plenty of analysts in our call queue; and as a courtesy to others, I ask that you please limit yourself to one question.

Thanks in advance for your cooperation and with that, let me turn things over to Marc.

Thanks, David.

I am pleased to report salesforce.com's second quarter financial results.

Revenue was approximately $316 million, an increase of 20% from a year ago.

Salesforce.com remains the very fastest growing software company of its size in the world today.

GAAP earnings per share was $0.17, an increase of more than 110% from a year ago -- that's more earnings than we achieved in all of fiscal 2008, and our first-half earnings per share of $0.32 is nearly equal to what we achieved all of last year.

Operating cash flow was $46 million for the quarter, translating into roughly $0.36 per share of cash generation.

And I'm very excited to say we've achieved another milestone this quarter by exceeding the $1 billion mark for cash and marketable securities that translates into more than $8.00 per share cash and equivalents.

Powering all of this financial success was another very solid quarter of customer success.

During the second quarter, we added approximately 3,900 net new paying customers, matching the pace we saw in the first quarter.

Over the past 12 months, we've added nearly 16,000 net new customers to bring our total global community of customers to more than 63,000.

This represents a year-over-year increase of 32% and positions us well for future growth.

Let's take a look at some of our major wins this quarter.

Highlighting our second quarter were three Marquis transactions.

First, I'm thrilled to announce that another leading insurance broker and risk management company, Marsh, has selected salesforce.com for sales and marketing automation in a win against Oracle and Microsoft.

Marsh is driving higher employee productivity and greater customer satisfaction by fully integrating their salesforce.com CRM and third-party newsfeeds and account contact information.

With an initial deployment of roughly 2,500 subscribers, Marsh plans to grow their salesforce.com deployment to over 10,000.

Insurance has become the second pillar of our success in financial services.

Marsh joins a long list of insurance brokers and providers using salesforce.com, including Aon, A.J.

Gallagher, [Alliance], AIG, Lincoln, Liberty Mutual, Chubb, and as we announced last quarter, Japan's leader, Sompo.

Our tremendous success in Japan continued in the second quarter with a huge win at the Japanese government's Ministry of Economy, Trade and Industry, METI.

Salesforce.com is being used by the Japanese government to implement the nationwide eco-point program.

Consumers get points for buying eco-friendly appliances and receive credits that they can use towards future purchases.

Built on our new Force.com Site service in just three weeks, this new application is expected to serve more than 8 million consumers.

METI joins a long list of Japanese customers using salesforce.com, including the Japan Post, MTT, Mizuho, Canon, Shinsei Bank, Hitachi, and as I mentioned, Sompo.

And finally, I'm excited to welcome back SuccessFactors to the salesforce.com family.

SuccessFactors dropped Oracle On Demand, after the application failed to deliver, and sales reps pleaded to return to salesforce.

When sales teams are demanding your application to support their own success, you know that you've got a superior service; and certainly, that was a factor.

SuccessFactors joins a long list of customers who failed with Oracle On Demand and then signed with salesforce.com, including Motorola, Axiom, SunPower, GTSI, Xerox, and Barclays -- and really, that's just to name a few that have switched off of Oracle's service.

Overall, our win rate against Oracle, both in service and in software, continues to be very strong.

In addition to the Marsh and SuccessFactors deals I just mentioned, we won large deployments in the second quarter against Oracle at Comcast, Thomson Reuters, NCR, AT&T, Abbott, Waste Management, Capital One Services, BBVA Bancomer, The Frank Russell Company, and Developers Diversified Real Estate.

We also continued to be successful against Microsoft, with head-to-head wins at Fujitsu, Progressive Media, Bain Capital, Reed Exhibitions, Gannett Supply, Saveology, and e-Tech.

And while we're seeing SAP quite a bit less these days in the CRM marketplace overall, we recorded solid wins against them at Cardinal Health, Thomas Cook, and Lenovo.

As most of you know, our enterprise cloud computing strategy today consists of three main businesses -- the sales cloud, which includes our core salesforce and marketing automation services; the service cloud, our solution for customer service and support call centers and self-service Web portals; and the custom cloud, our Force.com cloud platform for developing and running custom applications.

Our sales cloud was once again recognized as a leader in Gartner's Magic Quadrant for sales force automation.

In fact, we dramatically extended our leadership of both vision and ability to execute; and for the very first time, we've put ourselves in the very highest top of the upper right-most position, higher than all other vendors in the leader quadrant.

And while our sales cloud continues to be our flagship product, our service and custom cloud businesses are both delivering impressive growth as well.

In Q2, our service cloud and custom cloud services once again represented more than 25% of new business signings.

The service cloud logged another record quarter in Q2, with business in the quarter up more than 175% from a year ago.

This service cloud let companies join the conversation where the consumer is -- phone, chat, email, or increasingly on social networks, like Facebook and Twitter.

There's no better way to run customer service and build enduring relationships than in salesforce.com's service cloud.

The custom cloud got a big boost in the second quarter when Force.com's Sites went live.

Force.com Sites gives our customers around the world the ability to share any kind of data or application in real-time with anyone directly on the web as a website, or as a portal, or as an Internet site.

And it's deeply integrated with our core services.

More than 500 customers, as I mentioned, including METI, are already using Force.com Sites, and we have served up more than 20 million pages since we unveiled it at Dreamforce last fall.

Force.com Sites is an exciting new and very differentiated capability for Force.com as well as our sales and service clouds.

In all, customers have now created more than 123,000 custom applications on the Force.com cloud platform.

For customers, the benefits are clear.

The Force.com platform lets them develop apps five times faster and at half the cost of traditional platforms.

For salesforce.com, the benefits are also clear.

Customers who build and customize on our platform tend to have the highest levels of loyalty and adoption.

That's a key reason why we announced Force.com Free Edition during the quarter.

We told our customers -- your first app is on us.

And customers have responded with an amazing 8,000 sign-ups since launch.

Crescent Healthcare is using Force.com to develop seven custom applications on our platform to monitor key aspects of patient care, from intake through pharmacy needs.

Chicago's Rasmussen College, building on their success with the service cloud, is using Force.com to develop a custom app for a student enrollment portal, which cuts a three-week paper-driven process down to a couple of days.

And finally, we recently invested in Practice Fusion, which you can find at practicefusion.com, enabling them to port their electronic medical records system to the Force.com platform.

During the quarter, we also continued to make important investments in the Force.com cloud infrastructure.

First, I'm thrilled to announce that our Singapore data center is now online and fully operational.

Together with our two data centers here in the United States, we now have three global production data centers with complete data mirroring.

Second, I'm also excited to report that our transition from proprietary UNIX servers to open standard Dell servers is yielding some pretty amazing efficiency improvements.

Today, all of our application servers and roughly half of our database servers are now running on Dell, and they're delivering price performance improvements of roughly 20x versus our previously-installed Sun Solaris service.

It's incredible what Dell is doing for us today.

And even as we are making these improvements to our data center, we still managed to deliver our best uptime performance in our history -- 99.997% planned availability, which you can track at trust.salesforce.com.

We believe this performance sets the standard for the cloud computing industry.

And I'd like to congratulate all of our technology teams here at Salesforce for making the Force.com data center infrastructure a key competitive advantage.

And customers are putting that infrastructure to good use.

During the quarter, we delivered some pretty amazing numbers -- 15 billion customer transactions, up 30% from a year ago.

Sub-300 millisecond response time for the third quarter in a row.

81 million lines of Apex code and 312,000 custom Visualforce pages, both up ten-fold from last year.

And our customers have now built an amazing 576,000 custom database objects and 245,000 custom workflow rules, both roughly double last year.

That's simply amazing growth in Force.com, which is really setting the stage for what cloud computing application development and deployment is all about.

It's really taking Platform as a Service to a new level; and now with these statistics, we can see the tremendous adoption by our customers of this important and strategic technology.

During the second quarter, we continued to take our cloud computing message around the world, with more than 150 events from Singapore to Seattle, reaching more than 20,000 attendees.

And at virtually every stop throughout the globe at user events in Europe, and Asia, and here in the US, customers continue to tell us that they are losing patience with their high-maintenance, low-return, inflexible and outdated enterprise applications and platforms.

That's one reason why we plan to turn up the volume with a series of announcements this fall leading up to Dreamforce.

For those of you in our West Coast analyst community, please join us for a special event on Wednesday, September 9, where we'll be announcing a major new salesforce.com service.

Contact David Havlek to reserve your seat now for this important announcement on September 9.

And, if you haven't already done so, please mark your calendars now for Dreamforce 2009 from November 17th to the 20th here in San Francisco.

We're expecting more than 10,000 attendees at what will be our biggest and most exciting Dreamforce event ever, and we have some tremendous, exciting, and amazing new surprises for you there.

As we all look forward to the economic recovery to come, each business has to ask -- do we want to spend the next five years creating better products?

Delivering better service?

Selling more?

Having higher productivity?

Being more successful and delighting our customers?

Or, do we want to buy more software from Oracle, SAP, and Microsoft?

Salesforce.com's vision of enterprise cloud computing offers the lowest risk, lowest cost, and fastest results to help every type of business thrive in the months and years ahead.

That's why our growth continues to outpace the software market and why we were able to deliver such a solid quarter.

Now, let me turn it over to Graham.

Thanks, Marc.

Good afternoon to everyone joining us today.

Solid execution and tight control, together with a somewhat stabilizing demand environment, allowed us to record excellent financial results in Q2.

With strong revenue, earnings, and cash performance, our second quarter also continued to demonstrate the resilience and in the inherent leverage in our recurring revenue business model.

Let me begin with a brief review of the P&L.

As Marc noted, revenue for the second quarter was $316 million.

Recorded growth was 20%, but in constant currency terms, it was 2 points higher at approximately 22%.

Revenue was a bit higher than our projection entering the quarter, primarily because of slightly better linearity and a weakening US dollar.

Subscription and support revenue rose by 22% year-over-year to roughly $293 million, while our professional services businesses declined by 3% to $23 million.

International revenue accounted for approximately 28% of revenue, unchanged from Q1.

Americas revenue was $226 million, a year-over-year increase of 20%.

In Europe, Q2 revenue was $56 million, a growth rate of 13%.

However, in constant currency terms, Europe grew 28% after allowing for a roughly 15 point currency headwind.

Second quarter revenue for Asia was $34 million; that's an increase of 35%, but we did get a benefit from a weaker dollar versus the yen, as constant currency growth was 27%.

Our overall attrition rate, as measured in dollars, ticked up again in Q2 and is now in the high teens, but remains within the planning assumptions that we've used from the start of the fiscal year.

The trends we've seen over the past few quarters continued, with most of the attrition increase in our SMB accounts rather than in our enterprise accounts, where attrition has remained relatively stable.

It's also important to note that when we talk about attrition rates, we're not including any add-on or upgrade activity that takes place within an account.

We're simply comparing a set of contracts from a year ago to the same contracts in the current quarter.

We make this distinction because we count add-on and upgrade activity with our installed base as new business, which I will touch on later.

Gross margin for the quarter was 80%.

That's flat with Q1, but up almost a point from a year ago, primarily because of the mix shift towards subscription and support revenues.

GAAP operating margin was just over 9% for the quarter; that's down a bit from Q1 but up more than 300 basis points from Q2 of last year.

Year-to-date, we're well ahead of the 250 basis point improvement target we set at the beginning of the year, and that's helping to drive higher earnings.

Stock-based compensation was roughly $21 million or 7% of revenue for the quarter.

Excluding that expense, our operating margin was roughly 16%.

During the second quarter, we continue to apply strong headcount and cost controls.

We added 46 people in key areas across the Company, to bring total global headcount to roughly 3,650 people.

During the first half of fiscal 2010, we've added less than 100 people versus more than 400 we added in the first half of last year.

We believe the capacity we've added over the past 18 months positions us well for growth when the demand environment improves.

Our tax rate for the second quarter was 39%, roughly 4 points lower than we projected entering the quarter, primarily as a result of improved profitability in Europe.

The net benefit of the rate reduction versus our expectation was to improve GAAP EPS by $0.01.

GAAP EPS for Q2 was $0.17 -- that's more than double the $0.08 we reported a year ago.

Our reported GAAP EPS result includes amortization of purchased intangibles expense of roughly $2.2 million, and also includes the roughly $21 million in stock compensation I just mentioned.

Fully diluted shares outstanding were approximately $126.5 million for the quarter.

We were particularly pleased with second quarter operating cash flow of approximately $46 million.

First, as we mentioned on our last call, we collected $20 million in Q1 that would normally have dropped into Q2.

So we started the quarter with a bit of a deficit on the collection side.

And second, we made estimated income tax payments of $17 million in Q2 versus just $1 million in the second quarter last year.

Capital spending for the second quarter was roughly $19 million, mostly related to leasehold improvements and capitalized software purchases to support our business.

We expect CapEx to be flat to down in Q3.

Free cash flow, defined as operating cash less capital spending, was roughly $27 million, or roughly $0.27 per share.

For the first half, free cash flow of roughly $112 million translates to approximately $0.88 per share.

Our strong cash generation pushed total cash and marketable securities on the balance sheet to more than $1 billion for the first time in our history.

Over the past 12 months, we've added more than $200 billion to this balance; and on a per-share basis, we now have over $8.00 a share of cash and marketable securities.

Having strong liquidity in challenging times is a huge asset to our customers, our employees, and to our shareholders.

Receivables increased by just under $23 million from last quarter, and we continue to execute really well in the collections area; our aging is in great shape, and our second quarter DSO was at 49 days -- a reduction of two days from a year ago.

Total deferred revenue increased by approximately 14% from a year ago and was flat sequentially to finish the quarter at $549 million.

This result included a currency benefit of roughly $6 million from Q1 and a headwind of roughly $7.5 million from Q2 a year ago.

As we've discussed in the past, because of the quarterly invoicing variability, driven by new business seasonality across the quarters, deferred revenue follows a cyclical pattern with a large increase in the fourth quarter, a significant decrease in the first quarter, and relatively flat or slightly downward movements in the second and third quarters.

So, our second quarter deferred revenue result was in line with this pattern, which we expect to continue.

Last quarter, we discussed three factors that affected our new business, and all three factors were present in Q2.

First, longer sales cycles across most of our business, as customers are delaying purchase decisions; second, smaller initial deployment sizes, as customers move ahead with cloud computing, but balance the benefits of innovation with tighter financial constraints; and third, customers are not adding subscribers or upgrading their service levels at the same rate they have in the past -- they look to control their expenses.

However, new business in Q2 was generally in line with our expectations entering the quarter, so we feel the level of predictability improved versus Q1.

And as Marc noted, we added 3,900 net new customers.

This is really encouraging and it gives us confidence that our competitive value proposition continues to be strong, and will hopefully provide additional future business opportunities when the IT spending environment improves.

Let me close with our outlook.

While we are encouraged by some signs of demand stabilization and by our execution in Q2, our second half outlook seems no change in the IT spending environment.

We're not expecting better or worse; just more of the same.

From a foreign exchange point of view, the dollar has weakened 2% to 3% since we gave full-year guidance three months ago.

With that context, we now expect fiscal year 2010 revenue in the range of $1.27 billion to $1.28 billion -- that's up from our prior guidance of $1.25 billion to $1.27 billion -- and GAAP EPS of approximately $0.60 to $0.61.

That's an increase of $0.01 on the range.

2010 GAAP EPS projection also includes the following assumptions -- approximately $86 million of stock-based compensation; approximately $9.3 million of expense related to the amortization of purchased intangibles for previously-announced acquisitions; a GAAP tax rate of 42%; and approximately 127 million average fully diluted shares outstanding.

More immediately, we expect revenue for our third fiscal quarter to be in the range of $323 million to $324 million.

We anticipate hiring a few more people in Q3 than we did in Q2, and therefore, expect expense growth to be a little higher.

We project third quarter GAAP earnings per share to be approximately $0.15 to $0.16.

This estimate includes the following assumptions -- roughly $20 million of stock-based compensation expense; approximately $2.2 million of expense related to the amortization of purchased intangibles; GAAP tax rate of 42%; and expected average fully diluted share count of approximately 127 million shares.

On the cash front, after a strong first-half performance, we now expect operating cash flow to grow this fiscal year.

This is in spite of the cash taxes headwind we are experiencing, due to the fact that we have now absorbed all of our federal tax loss carryforwards.

We expect the deferred revenue will be slightly down in Q3 -- that's from the Q2 level.

I'd also like to remind everybody that our Dreamforce Global Gathering event in Q4 will have a significant impact on earnings in that quarter, which is why we are projecting a sequentially down GAAP EPS number in the fourth quarter.

So, to close, Q2 was a very solid quarter.

We executed well; delivered a very good financial quarter; have raised our outlook for the full year.

I look forward to discussing our Q3 results with you in late November, and I'm now going to turn the call back to the Operator so he can take your questions.

(Operator Instructions).

Thomas Ernst, Deutsche Bank.

Thanks for taking my question.

Marc, not that you ever speak softly about the competitive situation, but your commentary on the customer wins and the take-backs from some of the competition seemed even more emphatic than typical.

I'm curious, given the commentary out of the competitors citing their increased competitiveness, what are you actually seeing in terms of competitive win rates?

Have there been any shifting?

And specifically, if you can talk as well -- because they're focusing as investors on their willingness to price-compete.

What's been happening to your price umbrella?

Is it -- are you still able to get as big a premium, bigger premium, in terms of pricing?

Thank you.

Well, I think at the top level, you really have to look at the numbers.

That's the number one thing.

And we've added 16,000 net new customers in the last year during this quote/unquote competitive situation, to bring our total customers to more than 63,000.

I don't know how many customers these competitors have, because they won't say.

They won't say how many net subscribers they have.

They won't say their revenue levels, their growth rates.

And so, they can make -- from a competitive standpoint to you, Tom, they're making these broad generalizations without the facts.

Where's the numbers?

And specific to that point, where's the quality of service?

We see over and over again that customers may, in fact, sign with a competitor because of a quote/unquote low price or something like that; of course, that's true in every industry.

But time and time again, we see those customers come back to us.

And as I mentioned, specifically in this quarter, one of their biggest, most visible marquee customers said the product didn't work.

And not just them, but many of those customers say the product doesn't work; that it stops; that the reliability isn't there.

Of course, we don't know any of these things, because there's no transparency.

There is no trust site for any of these competitors.

There is no performance benchmarks; it's all kind of strange hearsay.

So, we've been sending video crews around the country and around the world, and it's been very powerful to get all of these customers to be making all these comments.

And we just roll these videos for these prospects.

And it's very impressive, believe me, when they're sitting there and they're saying, yes, well, this competitor said this, or they said that.

And then when it actually turned out -- oh, they only have one data center.

Oh, their -- actually, their analytics are on-premise.

Oh, their disaster recovery strategy is that you buy a server and you put it behind your firewall.

Oh, the system just stopped for three days and we couldn't use the report writer for two weeks.

And, you know, that's the competitive situation, is that we have a great product.

We have a high quality of service.

We have transparency in our numbers and in our product, but occasionally, customers are fooled or they think that it's some kind of a commodity service, and so they're going with a low price -- and till they find out something very, very different by looking at what they can do in sales, and -- or in the service cloud, where we have a tremendous lead in marketshare now, as well as in the custom cloud, where none of these competitors even have the concept of a platform, where we're running, as I've mentioned now, the millions of lines of code on our servers, the Visualforce pages, the sites pages -- none of -- this isn't part of any competitor's strategy.

So, at the end of the day, we have strong technology differentiation.

We have customers with marquee names who speak very, very strongly about the poor quality of our competitors' services and why they had to move to us.

And no one is more successful in the enterprise marketplace than our customers with the success.

So, that's really my -- that's really how I look at it right now.

Yes, just to follow-up specifically, Tom, we didn't see any material change in our price per seat this quarter versus other quarters in the last couple of years.

Next question, please.

Kash Rangan, Merrill Lynch.

I suppose I will not ask a question on the competition, but, Marc, I'm just curious -- on the last quarter call, you mentioned that for the first time, new business bookings dipped a little slightly compared to your earlier quarter.

And I was wondering, maybe not so much to quantify it, but are you seeing that rate of change get a little bit better?

Because nobody's calling for a big turn or anything, but directionally, any sort of improvement you're seeing on the new business side?

And also a tertiary question, if you have the time to talk about it at all -- I was wondering how you're planning to staff up and grow the customer support business.

We all, I think, remember that before Siebel sold themselves to Oracle, they had probably a larger business in customer support, a larger installed base.

And when I look at your business, certainly, it's a much smaller portion of your revenue stream.

And in some sense, it could be an opportunity.

I'm just wondering if I could get your thoughts on that aspect of your growth strategy as well.

That's it for me, thanks.

Well, let me take that second question first, which is that -- we really see this kind of very strong product strategy that we have in our three clouds -- our sales cloud, which is our marquees sales force automation service -- this essentially great new business that we have, which is our service cloud, and you're going to see us make some very exciting announcements around that product between now and Dreamforce.

And we have some great new technology that we've built.

A lot of these call centers and contact centers are really old and their software is really old, and the cost structures are completely out of date and they need to get revised.

And that's what we saw such tremendous growth with so many customers and -- in the platform.

We're seeing this platform strategy pay off, where you see deals like METI, which is a tremendous win in the Japanese government.

And so many others, as you know -- custom applications appearing in all of our -- throughout all of our customers, really.

So, that's, I think, the product strategy -- there's three pillars to the stool and it's really holding together.

And, of course, it's all the same integrated code also.

It's not three different servers or three different pieces of software or three different CDs; that part's very different about our business.

This is one integrated service that lets you run all of your sales, all of your service, all of your customer portals, all of your custom applications all out of the same environment.

Now, in regards to your first question, as you know, since we've been public, we really do not like to profile bookings on a quarter-to-quarter basis.

And I really -- before I answer this question, I really want to reiterate that we don't intend to give an update on bookings every quarter.

It's not good for us and it's not good for you, because things can be -- things can have different changes and different flavors.

So, really in the first quarter, we indicated that we expected new business for the full year to be flat to slightly down year-over-year.

If you remember, that's what I said on the call.

And at the halfway point for this year, we continue to believe that this is really the case.

And if we see a material change, Kash, I'm going to update you on that.

But we didn't really see anything materially different in the second quarter.

So I hope that answers the question.

Next question.

Brendan Barnicle, Pacific Crest Securities.

Marc, just following up a little bit on that bookings question.

In the past, you've given us a little bit of a breakdown of Force.com and some of the non-CRM products in the bookings category, since we haven't seen it yet materially in the revenue category.

I was wondering if you could give us a quick update there.

And then also just a quick update on what's going on in the channel as it relates to Force.com.

Thanks a lot.

I'll just jump in and take the first one, Brendan.

This is Graham -- hi.

We saw in Q2 a similar level of success with both the custom cloud and the service cloud.

They were approximately 25% of our [ACB] on new business in the quarter.

So that's been a pretty similar -- that's a pretty similar trend to what it's been the last few quarters.

So we're very happy.

Particularly, service cloud was very strong in Q2.

So we're happy with the way those newer products are going.

Marc?

Yes, in regards to Service Cloud, it's been, I think, over a year now since we bought InStranet.

And that is really what the catalyst for us to really gain a new level of confidence in customer service and support and knowledge base.

And a lot of that technology has come online, as you know, and more of it will be coming online.

And we expect to continue to make that product even more competitive and more outstanding.

And the Service Cloud did log another great quarter in the second quarter, with new business in the quarter up more than 175% from a year ago.

We see that as a huge multi-billion-dollar marketplace that we're now participating in fully.

Our salespeople really have a lot of confidence in selling that product.

We have the technical credibility, the success stories.

And then in the platform, on the custom side, we continue to see strong support with these customers building all kinds of really exciting applications.

We've talked about so many of those applications, whether it was the huge win that we had at Avon; the Japan Post; and now we're going to start talking about METI, which is a huge government agency in Japan that's building in this application entirely on the platform.

Obviously, they don't have a Salesforce at the Ministry of Technology in Japan, that they need requirements to manage their information and share their information in a much lower cost, much lower risk, and in a much easier way than the way they've traditionally done it.

And they're using Force.com.

And I think by the time we get to Dreamforce -- and as you talk to our customers at Dreamforce, which I know you're going to do -- I think it will be hard to find a customer who's not working with and planning to deploy serious Force.com applications.

Laura Lederman, William Blair.

I'd like to follow up on the turn.

And you mentioned the small business -- is it small business failures?

Firing people?

Do you have a sense of what's happening there?

And also on the subject of hearsay, what Oracle says, they're talking about having one net app and McAfee away from you; wanted to know what happened there.

And final question -- if you look at the pipeline going into Q3 for big deals, does the pipeline in general for big deals look better than it did for Q2?

Thank you.

Well, I'll take the first one.

So, yes, we saw another similar kind of small uptick in attrition.

As I mentioned, it's within what we'd assumed at the beginning of the year, so we feel good about our planning assumptions.

I think roughly -- [this] very rough analysis, sort of 50% of the attrition is coming from churn in the actual accounts where customers are -- particularly smaller accounts, smaller customers are going out of business.

And then certainly the other roughly half is coming from customers reducing the level of subscribers they have as they come up for renewal, because of, obviously, having to lay people off, unfortunately.

So, we think that this is entirely sort of predictable in terms of what's going on in the overall economy.

And I expect that at some point when the economy turns, we'll see some improvement here; but not any sign of that yet.

Yes, and in regards to the competitive situations, Laura, as I mentioned, of course, we're in a competitive environment and we see a lot of unusual competitive situations.

I'm not going to address any one particular, but we are seeing our competitors do just about anything to try to win a deal from us.

You can expect them -- if there was a large software vendor and maybe they've bought a lot of software from that vendor at that time, there could be all kinds of unusual characteristics.

We saw that with Siebel towards their demise as well, increase that rate.

But in terms of the specificity, I think the most important things that I can say to you is that we have a tremendous growth in our core customers that I mentioned.

We have some great wins and history of customer success.

And I really think that the customers, at the end of the day, are going to tell the tale and the numbers will speak for themselves.

Adam Holt, Morgan Stanley.

Excellent.

Thank you.

This is actually Keith Weiss sitting in for Adam Holt.

I wanted to ask you guys for a little bit more color on your hiring plans.

Graham, you said earlier in the call that -- you were talking about the capacity that you guys had from the hiring that you've done over the previous 18 months giving you good capacity for [one] growth does return; but then later in your comments, you were talking about how headcount or hiring should pick up in Q3 versus Q2.

Can you help us put those comments on, perhaps, where the hiring is going to occur, where you do have that official capacity where you don't help us with our modeling out of how hiring should take place over the next couple of quarters?

Sure.

Well, first, I think it's important to put it in perspective.

As I mentioned, we hired 100 people in the first-half versus over 400 last year.

And certainly, I would expect our second-half hiring to be significantly below where it was for the second-half last year.

And I think -- you know, we have to think about the future.

You know, we have a very long-term view of our business and it takes awhile to ramp up salespeople and then it takes awhile for that revenue to come through from the new business bookings.

So, we're thinking about what we need to do, in terms of adding distribution capacity in some markets for next year.

But I think we're also very concerned about making sure that our customers still feel very well-supported in this environment; so we'll be adding support people to support the new business we add.

And then, certainly, we're looking to aggressively expand our marketshare through continuing to have leading products.

So, we'll be adding developers -- continue to add developers, I should say, really, in the second-half as well.

Excellent.

Next question, please.

Karl Keirstead, Kaufman Brothers.

-- taking my call.

I just would like to get some clarity on the [demand-back crop].

It seems the message you're conveying is that new business was roughly in line with what you thought heading into the quarter; yet you've raised your full-year guidance.

You mentioned that demand is stabilizing.

On the deferred revenue line, instead of being sequentially down, it's more flat.

So, unless most of that is currency, it feels like something upticked during the quarter, and I'm wondering if you might add some color.

Thanks.

You know, I think when we characterized the demand environment as stabilizing, I think it's because of some of that predictability, the fact that we had a level of expectation going into Q2.

We basically were able to achieve that expectation, whereas Q1 was much more of an unpleasant surprise, I think, that happened over the course of the quarter.

So, I think that sort of really -- that doesn't necessarily imply things are getting better.

And I was very clear in my guidance remarks to say that we're sort of assuming the same for the rest of the year.

Marc talked about our overall feeling of new business being, for the whole year, flat to slightly down.

So, clearly, yes -- currency also has a benefit, right?

We know the dollar has weakened a few points.

And so we've tried to reflect some of that in our guidance.

Sarah Friar, Goldman Sachs.

Graham, could you speak just to payment terms?

Are you seeing any changes -- either maybe an improvement now as the economy is beginning to bottom out, in terms of whether customers are willing to pay upfront for kind of a year-plus?

Or are they moving to shorter-term contracts?

Any particular shifts there?

Yes.

The distribution of our invoicing cycles between sort of a small number who pay monthly on credit cards, a slightly bigger number who pay quarterly, and then the largest component who pay annually, that distribution or allocation has remained almost unchanged.

It's almost uncanny every quarter we look at it, and sort of sometimes early on, I've been expecting it to move and it really hasn't moved at all over the last eight quarters.

So, there's been no real perceptual change in any direction around the billing cycle in terms of payment terms, whether it's 30, 45 days -- maybe a marginal increase in requests to move from 30 to 45 days, but that's really at the margin.

And as you can tell from our collections and our success we've had in reducing our DSOs in this environment, we feel very happy about where our overall cash collections, billing cycles are.

Philip Rueppel, Wells Fargo Securities.

Graham, you mentioned the predictability of the business is getting a little bit better, yet attrition is still ticking up.

You gave us some color about what happened last quarter.

As we look forward, within your expectations, are we likely to see it to continue to tick up slightly?

Or are you seeing any signs that that might start to stabilize?

I don't think I can predict that, Phil.

I'm sorry; I wished I could.

But all I can say is that what we've seen to date has been within our planning assumption, I think at least we -- what we assumed was a sensible assumption.

But in terms of trying to predict that, I don't want to try and do that.

Sorry.

Mark Murphy, Piper Jaffray.

[It] appears that a big chunk of your customers believe that Force.com could become as important as Java and Dotnet over time, but there isn't really much transparency into the revenue contribution of some of those older platforms to try to assess the opportunity.

Is there any way that you can help us understand how the platform bookings should ramp?

Or perhaps when you think it would reach 10% or 15% of your new business?

Well, we're very reluctant to give those numbers, as you know.

And -- but let me say that we're seeing tremendous growth.

I mean, you did that survey of our customers and you saw the empirical data as well as qualitative data from them.

I think that, as I mentioned, by the time we get to Dreamforce, you're going to find a lot of our customers, if not most of our customers, using our platform.

Now, that can mean a lot of different things.

It can mean that they're building their own discrete custom applications.

Certainly, that's true with major ISV's who are doing work on our platform; that can be for customers like METI, as I mentioned, and so many others.

And then also it can be deeply customizing our sales and service applications as well, which give us tremendous amounts of stickiness in regards to the quality of the implementation -- and also tremendous differentiation against our competition, as well.

We just aren't at a point today where we're ready to start to break out Force.com specifically as revenue.

And (multiple speakers) --

We've talked about it (multiple speakers) --

(multiple speakers) We've talked about it but we're just not ready.

(multiple speakers) -- our new business some quarters, but we have not sort of wanted to necessarily give that, as Marc's talked earlier, we haven't necessarily wanted to give a lot of characterization about our new business every quarter.

So -- but think of it certainly as being in that 5% range.

We're obviously very excited to be one of the leaders in this market.

And when we've talked to the major analysts at Gartner and other places, we continue to get very positive feedback that, in terms of Platform as a Service, we are the technology leader.

Robert Breza, RBC Capital Markets.

Thanks for taking my questions.

Marc, I was wondering if you could talk a little bit about as you look out across the geographies, where you see the, I guess, the biggest potential growth opportunities?

If maybe you could just qualitatively kind of rank them for us.

I mean, obviously, you're doing very well in Japan, but any kind of color as you look across the world I think would be helpful.

Well, we continue to see the Americas as a huge opportunity.

I mean, this is a huge IT marketplace right here.

And we are really only scratching the surface of what is probably one of the largest and most important shifts in technology as we know it, from these kind of on-premise systems into cloud computing.

So, right here in the United States, I have to say that I still have a lot of emphasis in this market and its opportunity going forward, especially when the economy recovers.

I also -- I'm a big believer in success in Japan.

Japan represents -- I believe it's still the second largest IT market outside of the United States.

It's something that we've put a decade of work into; it takes a lot of time.

And that's been very, very important for us in Japan.

And we have the very top and most important companies in Japan, de facto, all endorsing us and having tremendous success -- much greater success, I think, than any enterprise software that they've ever had from an American software company or a European software company.

And then, after that, I would rank probably Europe and then India, and then everybody else.

And that's kind of how we think about our business.

We're very excited about the markets we're in today, and we continue to think that they're going to continue to give us some good solid growth, as we've seen in the last couple of quarters.

All right.

We have time for one last question, Operator.

So, if you'd give us our last caller, that'd be great.

Yes, sir.

Our last caller is from the line of Phil Winslow with Credit Suisse.

Please go ahead with your question.

Most of my questions have been answered, but I just had a question about going-forward sales cycles.

When you look at your traditional Salesforce automation sales cycles and think about moving into the service and sort of support landscape, and growing your bookings momentum there, how should we think about the sales cycles and sort of just the amount of direct touch that's required there, versus -- and traditional asset-based sale?

Thanks.

Well, I think the way you have to look at it is that we're a very diversified portfolio of customers, as you know.

And we're in small business; we're in medium; we're in large; we're in extra-large.

And perhaps we're really one of the only enterprise software vendors that has ever attempted to go after every possible business.

And because of that, it's hard to answer your question because the sales cycle for every company is different.

So the sales cycle for your company, for example, is a lot different than for a small company.

And it takes just a lot of time to build the relationships and expand and grow.

I mean, this -- working -- we've talked about METI several times already on the call.

You know, it's taken years building relationships and spending time with them, and confidence and trust, and respect in Japan to be able to consummate a transaction with them.

So, that's an extreme.

And then you'll find small businesses that are willing to do a deal with us in a couple of days.

So, it's hard to answer that question.

I guess when I look out over all of what's happening with us today, the thing that I'm most excited about is, of course, we've made our name in salesforce automation, and we've done a great job in commanding and controlling that marketplace and transforming it to cloud computing.

But now we really see the potential and possibility, and it's within our grasp to do that with the customer service and support and portal -- customer support portal market, and then this custom application development and deployment market.

And because of this trifurcation in our business -- and you see it; if you just go to our homepage, you'll see the three clouds and the ability to dive down in three directions.

Or if you go to any event we have anywhere in the world, you'll see the breakouts into these three directions.

This has just given us diversification that we've moved into a multi-product company.

And that is what is exciting for us, that we can really see that we're not just about sales any more, and that we are much, much more; and not just for any particular business or any particular geography, but for all businesses and for all locations that we serve around the world.

And when you look at a quarter like this -- or really, if you look at the last year in aggregate, it's been a great year for us and it's been a great year for cloud computing overall.

And it's because of the low risk and low cost solutions that we're able to provide.

And at the end of the day, we're making customers more successful than they were with Oracle or SAP or Microsoft solutions, which for the most part, are on their shelves and have never been installed and have turned into kind of high-risk fiascos.

And no one will ever say that about our services or our technology.

We really are one of the most successful companies of our class in enterprise software because of this new model.

And I think that you're going to find that as more companies move to cloud computing, that the total level of success that they achieve will be higher with technology than ever before.

And we're going to be fighting a lot less about on-premise versus cloud.

And we are going to be fighting head-to-head against every software company in the world, because this is going to be the dominant model.

But fortunately for us, we are the number one supplier in the world of enterprise cloud computing today.

And if the world moves to cloud computing, that's a damn good position to be in.

That's probably a great note to end on, Marc.

So, thank you very much for that.

I just want to remind everybody of the two events that Marc mentioned in his comments -- September 9 here in San Francisco, we will be hosting an event.

For those of you on the West Coast or who would like to travel to the West Coast, please contact me and we'll certainly get you involved in that event.

Also, please do mark your calendars for Dreamforce, November 17 through 20 here in San Francisco; should be a great event and a pretty darn good time as well.

So, mark your calendar for that and you'll be hearing from Investor Relations on that.

With that, thank you very much for joining us and have a great day.

Ladies and gentlemen, this does conclude today's conference call.

You may now disconnect.